Republic of Madagascar
Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criteria, Modification of Performance Criteria, and Augmentation of Access-Staff Report; Staff Supplement and Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Republic of Madagascar
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International Monetary Fund
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Publication Date:
16 Jul 2008
eISBN:
9781451825466
Language:
English
Keywords:
ISCR; CR; growth facility; staff appraisal; authority; food price inflation; excl. MDRI capital transfer; MDRI flow debt-service saving; central bank recap; flow debt-service saving; Credit; Imports
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This paper discusses key findings of the Fourth Review Under the Poverty Reduction and Growth Facility (PRGF) for Madagascar. Program performance has been generally good. The authorities have continued to implement sound fiscal and monetary policies that have resulted in good macroeconomic outcomes. They met all of the quantitative performance criteria (PCs) for end-January 2008, but missed two structural PCs. The international reserves cover is expected to deteriorate markedly, prompting the authorities to ask for an augmentation of 15 percent of quota, a request that IMF staff supports.

Abstract

This paper discusses key findings of the Fourth Review Under the Poverty Reduction and Growth Facility (PRGF) for Madagascar. Program performance has been generally good. The authorities have continued to implement sound fiscal and monetary policies that have resulted in good macroeconomic outcomes. They met all of the quantitative performance criteria (PCs) for end-January 2008, but missed two structural PCs. The international reserves cover is expected to deteriorate markedly, prompting the authorities to ask for an augmentation of 15 percent of quota, a request that IMF staff supports.

I. Introduction

1. The Board concluded the second and third reviews of the PRGF–supported program on January 30, 2008. Directors stressed the need to strengthen revenue mobilization, further develop the financial sector, and reform the energy sector.

II. Recent Economic Developments

2. Madagascar was hit by two cyclones during the first quarter of 2008, which affected some 240,000 people and damaged infrastructure and crops. Humanitarian aid needs amount to US$36 million, for which donors have pledged emergency support of US$ 15 million to date. The public reconstruction costs are estimated at US$ 109 million.

3. Economic growth has been strong and inflation has abated (Tables 1 and 2, and panel chart). The construction of two large mining projects has provided a continued impetus to growth. Overall inflation has declined, owing to a deceleration of food prices to date (notably rice prices, see Box 1) that has more than offset a pick up in nonfood inflation.

Table 1.

Madagascar: Selected Economic and Financial Indicators, 2006–10

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Sources: Malagasy authorities and IMF staff estimates and projections.

IMF Country Report No. 08/66, Republic of Madagascar–Staff Report for the Second and Third Reviews Under the PRGF.

Growth in percent of beginning of period money stock (M3).

Year–on–year growth.

Includes MDRI capital transfers in 2006.

Program definition: see Table 3a,footnote 7.

Definition changed in new DSA template and not comparable to previous DSA.

Table 2.

Madagascar: National Accounts and Savings–Investment Balance, 2006–10

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Source: Malagasy authorities.

IMF Country Report No. 08/66, Republic of Madagascar–Staff Report for the Second and Third Reviews Under the PRGF.

Includes non–inputed banking services.

Includes MDRI capital transfers in 2006

uA01fig01

Madagascar: Consumer Price Index, June 2006–April 2008

(Annual percent change)

Citation: IMF Staff Country Reports 2008, 232; 10.5089/9781451825466.002.A001

Source: Malagasy authorities.

4. Budget execution has been essentially on–track. Tax revenues in 2007 and in the first quarter of 2008 were well above target (Tables 3a, 3b, and 4) owing to substantial payments of property tax and (refundable) VAT by a large mining company, and strong customs revenue performance. Concurrently, lower than programmed expenditures resulted in net domestic financing well below the program ceiling. The Council of Government granted a few case–by–case customs duty exemptions for upscale hotel construction prior to the 2009 African Union Summit, but then suspended this measure.

Table 3a.

Madagascar: Government Financial Operations, 2006–10

(Billions of ariary, unless otherwise indicated)

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Sources: Ministry of Economy, Finance, and Budget; and IMF staff estimates and projections.

IMF Country Report No. 08/66, Republic of Madagascar–Staff Report for the Second and Third Reviews Under the PRGF.

The fiscal program only incorporates foreign financed expenditure for which financing has been identified.

After MDRI debt relief from 2006 onward.

Includes annexed budgets of quasi–public entities (i.e. port authorities, post office, government printing office, civil service, retirement funds, and correspondent accounts of local authorities).

Total revenue minus expenditure, excluding foreign interest payments and foreign–financed capital expenditure.

Difference between committed and paid expenditure.

Program definition: banking system, nonbanking system, Treasury correspondent accounts, privatization receipts, float, and variation in arrears, excluding capital transfer flowing from MDRI assistance from IMF via central bank in 2006, transfers to recapitalize the central bank in 2007, interest payment on central bank recapitilization bond in 2007, and transfers to the central bank to defray sterilization costs in 2008 (TMU, ¶13).

Spending of education, health, agriculture, public works and tranport, justice, environment, energy and mining ministries.

Table 3b.

Madagascar: Government Financial Operations, 2006–10

(Percent of GDP, unless otherwise indicated)

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Sources: Ministry of Economy, Finance, and Budget; and IMF staff estimates and projections.

Foreign grants and loans, less debt service (excluding MDRI capital transfers in 2006).

Table 4.

Madagascar: Quarterly Government Financial Operations, 2008

(Billions of ariary, cumulated since the beginning of the year)

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Sources: Ministry of Economy, Finance, and Budget; and Fund staff estimates and projections.

Rice Developments in Madagascar

Rice is the staple food in Madagascar, amounting to about 15 percent of the consumption basket and 55–70 percent of the daily caloric intake of households. While being the second largest rice producer in Africa, the country is not yet self–sufficient and about 10 percent of consumption is normally imported; rice exports are negligible.

Domestic rice prices have exhibited a distinctly seasonal pattern, decreasing during the harvest season (April to June) and then rising towards international prices as imports supplement the drawdown of domestic stocks. However, the 2007 cyclone season led to a sharp increase in domestic rice prices to well above international levels in early 2007 (chart). It is currently estimated that the 2008 cyclone season did some damage to the early domestic rice crop, though the government’s prompt action to secure some offsetting imports (in some cases at preferential prices) helped prevent shortages and hoarding. To further dampen speculation, the government imposed a suspension of rice exports in April 2008 (a measure that, in the staff’s view, the authorities ought to remove expeditiously). The government also intends to propose a temporary lowering of the VAT on rice during the second half of 2008. An important concern is the eventual exposure to high international prices in late–2008, once imports are needed to supplement the domestic crop. Meanwhile, the government is actively promoting productivity enhancements in rice cultivation, including support for a second annual harvest, with the goal of becoming a net exporter over the medium term.

uA01bx01fig01

Domestic and International Prices of Rice

(US$ per tonne)

Citation: IMF Staff Country Reports 2008, 232; 10.5089/9781451825466.002.A001

uA01fig02

Madagascar: Recent Economic Developments

Citation: IMF Staff Country Reports 2008, 232; 10.5089/9781451825466.002.A001

Source: Malagasy authorities, WEO data, and IMF staff estimates.

5. Reserve money exceeded the 2008 first quarter target owing to strong private sector credit demand and scaled–down sterilization by the BCM (Tables 6 and 7). Declining real interest rates and strong economic activity have stimulated private sector credit demand (panel chart 4). Meanwhile, slower than expected FDI inflows in the first quarter led to a lower BCM foreign exchange accumulation than programmed. The scaling down of sterilization operations led to an overshooting of the reserve money target. Indicators of banking sector soundness were adequate at end–2007, despite minor problems in asset quality (Table 8).

Table 5.

Madagascar: Balance of Payments, 2006–12

(Millions of SDRs)

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Sources: Central Bank of Madagascar, Ministry of Finance, IMF Finance Dept., and IMF staff estimates and projections.

IMF Country Report No. 08/66, Republic of Madagascar–Staff Report for the Second and Third Reviews Under the PRGF.

After MDRI debt relief from 2006 onward.

Other official grants less payments due to scholarships and contributions to international organizations.

Includes impact of MDRI in 2006.

After HIPC and MDRI debt reliefs.

Table 6.

Madagascar: Monetary Survey, 2006–10

(Billions of ariary, unless otherwise specified)

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Sources: Central Bank of Madagascar (BCM) and IMF staff estimates and projections.

IMF Country Report No. 08/66, Republic of Madagascar–Staff Report for the Second and Third Reviews Under the PRGF.

Projections include estimates for valuation gains/losses, increased capital of banks, and errors arising from: seasonality, NFA accumulation, BTA sales and purchases, and accumulation of government deposits.

Table 7.

Madagascar: Balance Sheet of the Central Bank, 2006–10

(Billions of ariary)

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Sources: Central Bank of Madagascar (BCM) and IMF staff estimates and projections.

IMF Country Report No. 08/66, Republic of Madagascar–Staff Report for the Second and Third Reviews Under the PRGF.

Excluding transfers from government, but including estimated valuation effects and gains/losses.

Excluding MDRI.

Excluding any treasury bills used for monetary policy operations.

Table 8.

Madagascar: Bank Soundness Indicators, 2002–2007

(end–of–period)

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Sources: Banking and Financial Supervision Commission, Central Bank of Madagascar (BCM).
uA01fig03

Madagascar: Weighted Average T–Bill Yield and Inflation, and Credit to Private Sector, January 2005–May 2008

Citation: IMF Staff Country Reports 2008, 232; 10.5089/9781451825466.002.A001

Source: Malagasy authorities and IMF staff estimates.

6. In 2007, the overall balance of payments remained in surplus and foreign reserves rose, thanks to large inflows of FDI (Table 5, panel chart 6). The current account deficit reached 14 percent of GDP, mainly reflecting higher imports of goods and services for the large mining projects. Despite the substantial appreciation of the currency over the past two years, exports of goods (notably clothing) have grown briskly. The large inflows of FDI allowed gross official reserves to increase to about 3.3 months of imports (net of large mining project imports).

uA01fig04

Madagascar: Real and Nominal Effective Exchange Rate and Relative Prices, December 2002–March 2008

(Index, June 2004=100)

Citation: IMF Staff Country Reports 2008, 232; 10.5089/9781451825466.002.A001

Sources: INS and IMF staff estimates.

III. Program Performance Through end–May 2008

7. Performance under the PRGF arrangement was generally good (MEFP Tables 1–3). All quantitative PCs for end–January 2008 were met but two structural PCs were missed. The authorities implemented the structural PC related to strengthening customs control of the main port exit with a 5–week delay. The authorities missed the structural PC on the submission of an export promotion law to parliament at end–May 2008, due to the need for a more extensive consultation process. The authorities reiterated their commitment to the prompt elimination of the EPZ regime in a communication to the Council of Government and intend to move promptly towards submission of the export promotion law by October 2008, once the second parliamentary session of the year opens. They have requested a waiver for the nonobservance of these PCs. At end–March 2008, preliminary data indicate that all but the two quantitative indicative monetary targets were met (¶5), two benchmarks were observed, and another benchmark was delayed by three months.

8. Staff have confirmed the existence of a multiple currency practice (MCP) and related exchange restriction during the period from January 2007 to January 2008, which has given rise to a new case of misreporting. 1 The multiple currency practice and the exchange restriction arose from a BCM practice of offering foreign exchange at a discount (of under two percent, according to the authorities) to food importers, from January 2007 to January 2008, in an effort to contain the inflationary impact of rising international food prices. 2 The MCP and the exchange restriction caused the nonobservance of the continuous PCs against: (i) the introduction or modification of an MCP and (ii) the imposition or intensification of restrictions on payments and transfers for current international transaction. The nonobservance of these PCs gave rise to two noncomplying disbursements in connection with the second and third reviews. The authorities have ended this practice and requested a waiver for the nonobservance of the PCs underlying the noncomplying disbursement.

IV. Economic and Financial Policies

A. Macroeconomic Outlook

9. The economy is adjusting to the rise in world energy and food prices, the damage done by the cyclones, and the global slowdown (Table 1). Oil price increases, by about 40 percent in US$ terms through 2010 compared to the Fall 2007 WEO assumptions, are expected to modestly reduce GDP growth in 2008–09 and raise inflation. As the prices of food imports are also expected to increase significantly by end–2008, inflation would follow a shallower downward trajectory towards the goal of 6.5 percent by end–2010. Import cover of international reserves would decline in 2008 but bounce back to about 3.6 months of imports (net of large mining imports) by end–2009.

Madagascar: Selected Macro–Economic Indicators 2006–09

(In units indicated)

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Sources: Malagasy authorities and IMF staff estimates. see Tables 1–7.

10. The authorities have requested an augmentation of access under the PRGF arrangement to cope with the external shocks resulting from the rise in world energy and rice prices and the severe cyclones. The authorities have requested an augmentation of 15 percent of quota (SDR 18.3 million) to cover part of the balance of payments impact and to maintain a prudent level of international reserves coverage. Other donors, including the World Bank, the European Union, and those responding to the flash appeal have already provided additional support. The remaining financing gap in 2008 will be covered by Fund disbursements (including an augmentation of SDR 13.7 million). In 2009, Fund disbursements of SDR 20 million (including a SDR 4.6 million augmentation) will cover part of the projected SDR 67 million financing gap. Additional donor support is expected but is not yet identified.

B. Fiscal Policy and Reforms

11. A modest tightening of the fiscal stance will help ease some of the inflationary pressure(Tables 3 and 4). In spite of tax cuts and new spending measures to alleviate the shock of food and fuel prices on the population (Box 2), the authorities propose to implement a slightly tighter fiscal program than originally budgeted for 2008. This stems mainly from the proposed upwards revision of the tax revenue target (by 0.3 percent of GDP) in 2008, owing to greater effectiveness of customs administration reforms and a large unanticipated property tax payment by the nickel mining company. Externally financed capital expenditure was revised downwards because of the appreciation of the domestic currency.

Madagascar: Measures to Mitigate the Fuel and Food Price Shocks for the Population

In order to alleviate the consequences of the sharp rise in fuel and rice prices for the population, the government intends to implement the following measures during the second half of 2008 (MEFP, ¶12 and 13):

  • temporary VAT exemption on rice and VAT exemption on lighting fuel (revenue loss of about 0.3 percent of GDP);

  • freeze of electricity prices until October, necessitating additional budgetary transfers (0.2 percent of GDP) to the electricity company;

  • targeted transfers to the poorest, such as food for work and school children nutrition programs (0.1 percent of GDP); and

  • subsidy for a second annual rice harvest and for urban transport (0.2 percent of GDP).

Madagascar: Fiscal Indicators, 2007–08

(Percent of GDP) 1

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Sources: Ministry of Economy, Finance, and Budget; and IMF staff estimates.

Aggregates may differ from the sum of components due to rounding.

12. Progress achieved with the 2008 tax reform needs to be consolidated. To further simplify the tax code, there have been extensive consultations on the closing of the Export Processing Zone (EPZ) regime to new firms (while grandfathering existing firms) and the government intends to include this measure as part of an export promotion law to be submitted to Parliament by October 2008 (PC,Table 3). The authorities have agreed to rein in tax exemptions (proposed new benchmark, MEFP Table 3 and ¶16), as their proliferation has been a challenge to revenue performance.

13. Continued progress in tax and customs administration is essential to achieving the program’s revenue objectives (MEFP,¶17–22). The authorities are implementing the priority action plan to strengthen administration of large and medium–sized taxpayers, and are speeding up reimbursement of VAT credits to exporters. They are strengthening customs procedures, including with a new system to tighten inspection of goods leaving ports, collection of the unpaid taxes and duties identified by the recent independent audit of import operations, 3 and regular audits of customs operations. Furthermore, they will review the deferrals for the payment of duty and taxes allowed by the Customs Code, with a view to tightening their scope.

14. The public financial management (PFM) agenda aims to strengthen budget execution (MEFP ¶53–26). The May 2008 Public Expenditure and Financial Accountability (PEFA) report highlighted progress in revenue administration but noted persistent weaknesses in monitoring and controlling budget execution. To address these weaknesses, the authorities will exploit the full potential of the computerized information system, SIGFP, to track budget execution (structural benchmarks, MEFP Table 3) and overhaul the financial control exercised by the Ministry of Finance and Budget. The authorities are studying measures, to be reflected in the 2009 Budget Law, to close the deficit of the pay–as–you go civil service pension fund (estimated at about 0.8 percent of GDP annually).

C. Monetary, Exchange Rate, and Financial Sector Policies

15. Monetary policy will continue to aim at maintaining single digit inflation while avoiding excessive volatility of the exchange rate (Table 7 and MEFP¶27–28). The monetary authorities intend to hold monetary growth close to the original program to contain second–round effects of fuel and food price increases. Despite a lower than envisaged reserve accumulation, some intervention in the foreign exchange market for smoothing exchange rate volatility will likely be needed. To strengthen the effectiveness of monetary policy, the statutory advances of the central bank to the treasury will be reduced.

uA01fig05

Level of Reserve Money

(in billions of MGA)

Citation: IMF Staff Country Reports 2008, 232; 10.5089/9781451825466.002.A001

Source: Malagasy authorities and staff projections.

16. Broader financial sector development is gaining momentum (MEFP ¶29– 30). The authorities are actively implementing their financial sector strategy with donor support. Key areas of emphasis for the next year include: the payments system, a credit information system, microfinance institutions, and pension funds. Furthermore, building on MCM’s technical assistance, the BCM will strengthen foreign reserve management, improve efficiency of the foreign exchange market, monetary operations, accounting standards, and cost control. An updated national financial strategy will be finalized by September 2008.

D. External Sector

17. Trade policy is being shaped by preferential agreements and recent tax reforms. While the authorities have ruled out moving towards a single uniform tariff (MEFP, ¶31), trade liberalization on a preferential basis continues in 2008 within the Southern African Development Community (SADC) and with the implementation of the interim Economic Partnership Agreement (EPA) with the European Community (MEFP,¶32).

18. Madagascar’s risk of public debt distress remains low. An updated joint Bank/Fund debt sustainability analysis (DSA) confirms that identified donor commitments would hold key debt indicators comfortably below the threshold for a medium performer such as Madagascar (Supplement II). However, additional borrowing in support of the MAP would need to be prudent to maintain a low risk of debt distress.

E. Structural Policies

19. Progress in electricity sector reform is critical to sustained economic growth. To help alleviate the fuel price shock for the population, the authorities have decided to postpone tariff increases until October 2008, which will delay the return of the state utility company JIRAMA to profitability and necessitate budgetary transfers equivalent to 0.5 percent of GDP in 2008. Nevertheless, the authorities remain committed to tariff increases (with smaller increases for the poor) to bring prices to cost recovery, subsequent implementation of an automatic pricing formula, and transfer of the management of JIRAMA to the private sector (MEFP ¶34).

20. The government is implementing a national statistics development strategy and will submit a draft law governing the national statistics system to Parliament by end–2008 (MEFP ¶38).

V. Program Monitoring and Targets

21. The arrangement will be reviewed semi–annually. The program sets revised quantitative PCs for end–June 2008, based on changes to the macroeconomic framework resulting from the identified exogenous shocks, quantitative PCs for end–December 2008, and revised indicative targets for end–September 2008 (MEFP Table 2). A new structural benchmark has been proposed for July 31, 2008.

VI. Risks

22. Madagascar’s capacity to repay the Fund remains adequate despite risks to the program. Stress tests show that debt indicators remain well below the thresholds of the joint Bank–Fund DSA and that, should there be higher borrowing, debt sustainability would depend critically on stronger tax revenue performance. However, Madagascar remains vulnerable to exogenous shocks related to terms of trade, cyclones, and external capital inflows, as well as delays in rehabilitating the electricity sector, and pressure for tax incentives.

VII. Staff Appraisal

23. Program performance has been generally good. Strong macroeconomic policy performance has kept the economy growing strongly, contained inflation, increased foreign exchange reserves, and increased tax revenue. However, delays in structural reform implementation and a second instance of misreporting point to weaknesses in administrative capacity.

24. The overlapping exogenous shocks of food and fuel price increases, the recent cyclones, and the global slowdown present an important challenge for the authorities. The measures being implemented by the authorities will help alleviate the impact of these shocks on the poor, though the temporary rice export ban ought to be lifted expeditiously.

25. Monetary and exchange rate policy is appropriately geared towards containing inflation and preventing excessive volatility of the exchange rate. Monetary policy should aim to minimize second–round effects from fuel and food price inflation. Concurrently, the authorities should continue to smooth exchange rate volatility in the context of a managed float. Recent performance suggests that exports remain competitive at the current exchange rate. The banking sector appears sound, but broader financial sector development is important.

26. The revised fiscal stance is well aligned with the program’s objectives. The envisaged temporary VAT exemptions on rice and lighting fuel and specific targeted transfers will alleviate oil and food price shocks for the poor. The continued relevance of VAT exemptions should be reassessed when elaborating the 2009 budget. It will be important to close of the EPZ regime for new firms as it will further simplify the tax system. Furthermore, securing the tax revenue objectives requires continued implementation of the priority action plan for tax and customs administration.

27. Weaknesses in public financial management are complicating budget execution and argue for a major overhaul of financial control mechanisms. To address the persistent weaknesses in public financial management (as highlighted in the recent PEFA report), the authorities need to launch a comprehensive reform of financial control.

28. More progress is required to advance long–delayed reform of the electricity sector. The authorities need to raise tariffs to cover operational costs and to prepare the ground for a more fundamental reform of the electricity sector that will require significant financing.

29. The risks to the program remain manageable. The risk of external debt distress is low at present and would be maintained to the extent that additional borrowing in support of the objectives of the MAP is prudent.

30. In view of the authorities’ achievements in macroeconomic management and the remedial actions taken to address slippages, the staff recommends that the requested waivers be granted and that the fourth review under the PRGF arrangement be completed. Given the pressures on the balance of payments and the need to maintain a prudent level of international reserves cover, the staff supports the authorities’ request for an augmentation of access under the PRGF arrangement by 15 percent of quota.

Table 9.

Madagascar: Indicators of Capacity to Repay the Fund, 2007–2016

(In millions of SDRs unless otherwise specified)

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Sources: Malagasy authorities; and Fund staff estimates and projections.

Assumes two–tranche disbursement of augmentation with the first tranche of SDR 13.75 million disbursed in July 2008 and the second tranche of SDR 4.58 million disbursed in January

Including IMF repurchases and repayments in total debt service.

Table 10.

Madagascar: Tentative Work Program Under the Three–Year PRGF Arrangement, 2008–09

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Table 11.

Madagascar: Millennium Development Goals

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Source: World Bank.

Appendix I Madagascar: Letter of Intent

Antananarivo, Madagascar

June 17, 2008

Mr. Dominique Strauss–Kahn

Managing Director

International Monetary Fund

Washington, DC 20431

Dear Mr. Strauss–Kahn,

1. The Executive Board approved the three–year arrangement on July 21, 2006, for a total amount of SDR 55.0 million to support the government’s economic program for 2006–08 and the activation of the Trade Integration Mechanism (TIM). On December 20, 2006 the Executive Board of the International Monetary Fund (IMF) completed the first review, and on January 30, 2008 it completed the second and third reviews under this arrangement.

2. The government of Madagascar requests an augmentation of access under the PRGF arrangement to cope with the external shocks resulting from a severe cyclone and the rise in world fuel and food prices. These shocks have raised import costs and limited reserve accumulation The government requests an augmentation of access amounting to 15 percent of quota (SDR18.33 million), of which SDR 13.75 million would be disbursed with the fourth review and SDR 4.58 million would be disbursed with the fifth review, bringing the total access under the PRGF arrangement to SDR 73.3 million (60 percent of quota).

3. The attached memorandum of economic and financial policies (MEFP) reviews the macroeconomic and financial performance and the implementation of economic policies through May 2008. It also updates the program of economic policies and structural reforms that the government of Madagascar will implement in 2008.

4. All quantitative performance criteria (PC) at the test date for the fourth review (end of January 2008) were met.

5. Two structural PCs were not observed through end–May 2008. The system of customs inspection for goods leaving the port was implemented with a 5–week delay owing to administrative delays. Given the limited length of the delay, we are requesting a waiver for the nonobservance of this PC. The consultations within government and with the private sector on the export promotion law took longer than expected; as a result, the structural PC for submitting to Parliament a draft export promotion law that would close the EPZ regime for new firms by end–May 2008 was not observed. We have reiterated our intention to undertake this measure in a recent communication to the Council of Government and are committed to do so by end–October 2008, as the consultative process runs its course. We are requesting a waiver for the nonobservance of this PC.

6. We also recognize that the CBM had inadvertently created a multiple currency practice (MCP) and a related exchange restriction through its practice of offering foreign exchange at a discount to food importers, in an effort to contain the inflationary impact of rising international food prices. This practice was not recognized as an MCP at the time of the second and third reviews, as the deviation from the market rate was well below two percent. Although the practice was immediately halted when the problem was explained to us, the MCP and the exchange restriction caused the nonobservance of the continuous PCs against (i) the introduction or modification of an MCP and (ii) the imposition or intensification of restrictions on payments and transfers for current international transaction. The nonobservance of the PCs gave rise to two noncomplying disbursements in connection with the second and third reviews. We are therefore also requesting waivers for the nonobservance of these performance criteria.

7. The government of Madagascar believes that the policies and measures set forth in the attached memorandum are adequate to achieve its program objectives. However, it will take any further measures that may become appropriate for this purpose. It will consult with the Fund on adoption of such measures in advance of revisions to the policies contained in the MEFP, in accordance with the Fund’s policy in such consultation.

8. To facilitate the attainment of the objectives and implementation of the policies described, the government of Madagascar hereby requests completion of the fourth review and disbursement of the fifth loan under the current arrangement, including augmentation, in an amount equivalent to SDR 21.606 million.

9. The government of Madagascar intends to carry out the fifth review by the end of December 2008 and the sixth review by end of June 2009. Inter alia, the fifth review will discuss the fiscal impact of reconstruction costs arising from the cyclone, the measures needed to eliminate the deficits of the civil servants’ pension funds, priority measures to further strengthen public expenditure management, including the efficient use of the SIGFP system; and discussion of the future strategy for the state utility company JIRAMA.

10. The government of Madagascar consents to publication of this letter, the MEFP, the attached Technical Memorandum of Understanding, and the report of Fund staff on the fourth review of the program.

Sincerely yours,

/s/

Haja Nirina Razafinjatovo

Minister of Finance and Budget

/s/

Frédéric Rasamoely

Governor

Central Bank of Madagascar

Attachments: Memorandum of Economic and Financial Policies

Technical Memorandum of Understanding

Appendix I—Attachment I Madagascar: Memorandum on Economic and Financial Policies for 2008

I. Economic Trends and Program Implementation in 2007 and as of May 31, 2008

1. In 2007, economic growth proved to be more sustained (6.2 percent) than in 2006 (5 percent), owing to the good performance of exports and foreign direct investments (FDI) related to the start–up of two large mining projects. The deceleration in nonfood prices (particularly housing costs) brought inflation down from 10.8 percent in 2006 to 10.3 percent in 2007.

2. Growth in the money supply during the period was in line with the program’s objectives. Base money also kept pace with the program, except for a temporary acceleration in December 2007. The impact of the increase in foreign exchange reserves on monetary growth was lessened by open market transactions. Recent prudential indicators show that the banking system remains sound, although the number of bad debts rose slightly at the end of 2007.

3. Tax revenue was significantly higher than the program target (by an amount equivalent to approximately 0.5 percent of GDP), owing to the progress made in tax and customs administration and to the income from VAT and property tax related to the construction of the large nickel exploitation project. Moreover, spending on domestic financing remained below the program target, owing largely to the favorable trend in interest rates. Consequently, net domestic debt (as defined by the program, excluding the recapitalization of the Central Bank of Madagascar) remained below the ceiling authorized by the program.

4. The overall balance of payments showed a surplus in 2007. The current account deficit was contained at 14 percent of GDP, well below the 19 percent initially projected. While construction delays in one of the large mining projects led to limited growth of imports, exports were dynamic, despite the rise in the value of the ariary. The current deficit was more than covered by capital inflows, which allowed accumulated reserves to reach SDR 148 million. At end–2007, official reserves covered 2.9 months of imports (3.3 months if imports for the large mining projects are excluded).

5. All the quantitative performance criteria at January 31, 2008 and all but two indicative monetary targets at March 31, 2008 were met (Tables 1 and 2). The central bank missed its foreign exchange reserves target owing to lower mining foreign direct investment inflows than programmed. And the central bank exceeded its ceiling on domestic assets because some banks had a temporary liquidity need, requiring use of the central bank refinancing window, and the BCM conducted less sterilization open market operations than programmed.

Table 1.

Madagascar: Quantitative Performance Criteria and Indicative Targets for the PRGF Arrangement, 2007–January 2008 1

(Billions of ariary, cumulative change from January 1, 2007, unless otherwise indicated)

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Sources: Malagasy authorities; and IMF staff estimates and projections.

See Technical Memorandum of Understanding (TMU) for definition of variables and adjustments.

IMF Country Report No. 07/7, Republic of Madagascar: First Review Under the Three–Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver and Modification of Performance Criteria.

IMF Country Report No. 08/6, Republic of Madagascar–Staff Report for the Second and Third Reviews Under the PRGF.

To be observed on a continuous basis.

Program exchange rate for accounting purposes, used to monitor performance criteria and indicative targets.

Table 2.

Madagascar: Quantitative Performance Criteria and Indicative Targets for the PRGF Arrangement, 2008 1

(Billions of ariary, cumulative change from the beginning of the year, unless otherwise indicated)

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Sources: Malagasy authorities; and IMF staff estimates and projections.

See Technical Memorandum of Understanding (TMU) for full description of variables and adjustments.

IMF Country Report No. 08/66, Republic of Madagascar–Staff Report for the Second and Third Reviews Under the PRGF.

To be observed on a continuous basis.

Excluding transfers from governement.

6. At the structural level, control of goods leaving the port of Toamasina, the country’s main port and the only one where the Tradenet information system is operational, was enhanced five weeks later than required (structural performance criterion; PC,Table 3). This delay was caused by technical problems during installation of the Tradenet system. As the enhanced control has been implemented at the port of Toamasina, the government requires a waiver for not complying with this PC. The introduction of a draft export promotion law to Parliament eliminating the duty free zone and enterprise regime (régime des zones et enterprises franches) while grandfathering existing enterprises in the regime did not take place by end–May 2008, owing to the need to further consult with all stakeholders (¶35). As the Minister of Economy, Commerce and Industry has already sent a formal communication to the Council of government on how to proceed on the submission to parliament of the draft export promotion law by end–October 2008, the government requests a waiver for not complying with this PC. Two structural benchmarks have been met, although one, the production of treasury account balances with the budget information system SIGFIP, was delayed owing to technical problems (¶24).

Table 3.

Madagascar: Structural Performance Criteria and Benchmarks for the PRGF Arrangement, 2008

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7. The Central Bank of Madagascar sold foreign exchange to a trader at the minimum market rate for imports of essential goods (rice, wheat, and edible oils) in 2007 and during the early weeks of 2008, through the interbank foreign exchange market, without realizing that this would give rise to a multiple currency practice and a related exchange restriction. As soon as they became aware that this practice was in conflict with the commitments made within the context of the program, the monetary authorities put an end to this practice. In a note dated May 8, 2008, the Central Bank of Madagascar communicated to the banks participating to the interbank foreign exchange market that, in line with Madagascar’s commitments under the Articles of Agreement of the International Monetary Fund (including Article VIII, Section 3), it would abstain from introducing multiple currency practices or imposing exchange restrictions. The MCP and the exchange restriction gave rise to the nonobservance of the PCs in the PRGF arrangement against the imposition of exchange restrictions and/or the introduction of MCPs in the context of the second and third reviews. The authorities are now requesting waivers for the nonobservance of these PCs.

II. 2008 Program Update

A. Implementation of the Madagascar Action Plan

8. The Madagascar Action Plan (MAP) is the development plan for the period 2007–11, which serves as the reference for annual budget programming and the framework for medium–term expenditures. The framework for its implementation will henceforth include the following:

  • the MAP, which describes the commitments, strategies, and actions;

  • the sectoral programs, which indicate the strategies for the various sectors, the actions to be carried out each year, the unified monitoring and evaluation system, and the cost of the activities, as well as indicating the financing that has already been acquired and the additional financing that must be sought;

  • programming at the regional level, including activities not included in the sectoral programs that will be funded from the regional budget;

  • the annual program (or General State Policy), which will be drawn from the sectoral programs and will coincide with the budget process;

  • establishing an assistance coordination entity that will be attached to the Prime Minister’s Office.

9. In order to expand the dialogue on the resources to be brought into play, the government has decided to hold an annual conference and a number of sectoral meetings. The first Partners’ Round Table, held in Madagascar on June 9 and 10 2008, provided a forum for dialogue and exchange of views on programs and resources to meet the challenges identified in the MAP.

B. Macroeconomic Framework

10. The acceleration of growth from 6.1 percent in 2007 to 7 percent in 2008 can be explained by the increased investments made by mining companies, and takes into account the impact of the cyclones at the beginning of the year. The inflation rate has been revised upward (from 8 to 9.7 percent), reflecting the increase in the price of rice and oil on the international markets. These developments, along with the slowdown in the world economy, will lead to an increase in the current deficit, which is expected to reach 23 percent of GDP. Despite the expected inflows of foreign direct investment, gross international reserves cover is projected to decline markedly to 3.1 months of imports (net of large mining project imports).

C. Economic and Financial Policies
Fiscal policy and reforms
a. Fiscal policy

11. The government has decided to allocate MGA 30 billion out of the MGA 45 billion budgetary reserve approved in the 2008 budget 1 to the reconstruction costs caused by the cyclones.

12. The good tax revenue performance in 2007, the upward revision of imports, and the continued implementation of tax and customs administration reforms have led the government to increase its tax revenue target (by about 0.3 percent of GDP) compared to the one announced in the 2008 budget, in spite of the temporary VAT exemption on rice and the VAT exemption on lighting fuel contemplated to alleviate the oil and food price shock for the poorest. In addition, nontax revenue were also revised upwards owing to proceeds from the public auction of illegally logged rose wood (about 0.1 percent of GDP) during the first quarter. Moreover, the update of donor commitments revealed an increase of budget grants (by about 0.3 percent of GDP) and of budget loans (by about 0.3 percent of GDP) compared to the 2008 budget, to address the food and oil price shocks. In addition, the lower net domestic borrowing in 2007 and the lower level of interest rates during the first quarter of 2008 have led the government to revise the interest payment downwards (by about 0.3 percent of GDP) compared to the 2008 budget.

13. In light of these developments, the government will propose the following measures in a supplementary budget to be introduced to parliament:

  • temporary VAT exemption on rice from July 1, 2008 to alleviate the impact of higher international prices on the poorest citizens (budgetary cost: MGA 30 billion or 0.2 percent of GDP); the government will adopt additional measures to increase domestic rice production and therefore reduce reliance on imports;

  • VAT exemption on oil for lamps, to alleviate the impact of higher international prices on the poorest citizens (maximum budgetary cost: MGA 12 billion or 0.1 percent of GDP);

  • targeted measures to alleaviate the food price shock for the poorest (budgetary cost: MGA 40 billion, or 0.2 percent of GDP): countercyclical rice production (MGA 15 billion); urban transport subsidies (MGA 10 billion); cash for work (MGA 5 billion); and school nutrition program in poor neighborhoods (MGA 10 billion);

  • increase of the budgetary credits for current expenditure, in order to pay overdue electricity bills of ministries and universities to JIRAMA (¶34) and cope with rise in oil prices (budgetary cost of, respectively, MGA 32 billion and 3.6 billion, or about 0.2 percent of GDP);

  • increase of domestically financed capital expenditure (MGA 51.5 billion, or 0.3 percent of GDP), mainly in the agriculture and energy sectors, as well as in infrastructure, including VAT on externally financed capital expenditure;

  • increase of the payement of accumulated arrears to the telecom company (TELMA) before July 1, 2006 (budgetary cost: MGA 38.5 billion or 0.2 percent of GDP); and

  • other expenditures: recapitilization of the state airline company Air Madagascar (MGA 16.2 billion, or 0.1 percent or GDP); increase in transfers to communes (MGA 10 billion); preparation of the African Union Summit that will be held in Madagascar in July 2009 (MGA 5 billion); increase in the wage bill of civil servants (MGA 5 billion); increase in credits for goods and services for the National Assembly (MGA 3.1 billion); and increase in credits for embassies in Ethiopia, India and the United Nations (MGA 1 billion)..

14. It is the government’s priority to avoid accumulating any new arrears and to pay off the arrears accumulated by the State before the start of the program. To this end, the government will give priority to executing the appropriations entered in the 2008 budget law to pay the VAT due on externally financed capital expenditure, and to paying these expenditures within 60 days of the date on which the required documents are received. The Ministry of Finance and Budget will monitor the execution of these payments through the recording of operators’ invoices on its website. Moreover, as indicate above (¶13), the government will include MGA 38 billion of supplementary appropriations in the supplementary budget law to pay off the arrears accumulated before the start of the program.

b. Tax policy

15. Tax policy remains shaped by the implementation of the major simplification of the Tax Code adopted in the 2008 budget law, which establishes a simple and equitable tax system that encourages growth. 2 In the 2009 budget law, the government will introduce changes in the Tax Code so that taxes due by taxpayers whose turnover is less than MGA 20 million ($12,000) will also be based on self assessment.

16. The government reiterates its commitment not to grant any exemption or suspension of taxes and/or customs duties other than those provided for in the Customs Code, international treaties or agreements, and those explicitly determined by the Government Council in exceptional circumstances such as disasters, the public interest, or reasons of state (continuous PC, Table 3). In order to be completely transparent in applying this policy, the government is committed to publish each month on the website of the Ministry of Finance and Budget, a list of the firms that benefited from an exemption or suspension decided by the Government Council since the beginning of the year, the reason for these exemptions and/or suspensions, and the corresponding loss of revenue to the Treasury (new structural benchmark proposed, Table 3). The monthly list will be published beginning on June 15, 2008 and will cover the period from January 1, 2008 to the end of April 2008. Subsequent lists will be published within 30 days after the end of the reported month.

c. Reform of the tax and customs administrations

Tax administration

17. According to the strategy for reform of the tax administration (2007–11), the measures for rehabilitating the management of tax files will be extended from the Large Enterprises Department to the other high–potential tax centers, beginning with the Regional Enterprise Services in Antananarivo and Toamasina. 3

18. Another priority will be to improve the performance of the VAT. To this end, the government will reimburse, within a maximum of 60 days of the date on which the duly completed request is received by the Directorate General of Taxes or the Directorate General of Customs, the VAT credits to exporters, and both the petroleum tax credits and the VAT credits on oil products to distributors of oil for refueling for international shipping and airline travel. The Directorate General of Taxes (DGI) will treat the requests for reimbursement differently based on a risk analysis: it will process the refunds within 15 days for enterprises that have a good tax payment track record, and limit ex ante controls to credits that present an important risk of fraud.

Customs administration

19. Introduction of the Tradenet electronic platform linking all the economic actors involved in foreign trade is a customs administration priority for 2008.

20. In addition, the Directorate General of Customs (DGD) is committed to reforming the customs regulations that authorize the suspension of import duties and taxes. To this end, it will review the scope of suspended tax payments in light of best international practices and will propose a revision of their scope if needed. The DGD is developing an additional functionality for the SYDONIA++ software in order to automate monitoring of the payment of duties and taxes benefiting from suspension. The target is to have this functionality operational at the port of Toamasina beginning on January 1, 2009 and at all the other ports during 2009.

21. The DGD will attach particular importance to implementing the recommendations on strengthening the collection of duties and taxes by the customs administration, issued by the audit firm that reviewed customs operations during the last quarter of 2007: 4

  • Of the unpaid duties and taxes revealed by the audit amounting to MGA 8.047 billion ($4.8 million), MGA 2.725 billion ($1.6 million) had been collected as at March 31, 2008. The balance will be, as far as possible, collected in full by July 31, 2008.

  • The control of outgoing merchandise at ports was strengthened at Toamasina (¶7). Similar improvements will be made in Ivato beginning on June 1, 2008, and in Mahajanga, Diego Suarez, and Tulear beginning on September 1, 2008.

  • No later than June 1, 2008, the GasyNet company will begin checking on a continuous basis 10 percent of the import declarations (8 percent chosen on the basis of a risk analysis and 2 percent chosen randomly) in order to verify the value determined by the customs administration, the calculation of import duties and taxes, and the payment of these duties and taxes.

  • Beginning in January 2009, a specialized firm will conduct the first annual independent audit of the enforcement of the customs code and the procedures in force by the customs administration.

22. In order to effectively combat fraud, the DGD and DGI will intensify their exchange of information.

Fiscal management reform

23. The third independent evaluation mission under the Public Expenditure and Financial Accountability (PEFA) framework, carried out in February 2008, noted the tangible progress made by Madagascar in improving tax performance thanks to the fundamental reforms implemented by the DGD and DGI. On the other hand, the mission noted that there were still some problems with the monitoring of expenditure, particularly the reporting of budget execution, as well as the internal and external mechanisms for monitoring budget execution.

24. To resolve these problems, the government will use the potential offered by the fiscal management information system (SIGFP) to enhance the monitoring of budget execution:

  • production of monthly reports on committed expenses with the help of the SIGFP, including the number of rejections and reasons for these rejections by the Directorate General of Financial Supervision;

  • monthly production of the account balances of all the treasury divisions linked to the SIGFP, which are used to prepare the Treasury general operations table (this benchmark was postponed by three months because of technical problems,Table 3); and

  • monthly publication on the website of the Ministry of Finance and Budget beginning in June 2008 of a table showing all commitments, payment orders, and payments since the beginning of the year, by budget headings, for all the ministries where the SIGFP is operational.

25. Finally, the Ministry of Finance and Budget will develop an action plan and schedule of priority measures to fundamentally enhance the effectiveness of the Financial Control Department, modeled on the strategies that are beginning to bear fruit at the DGD and DGI. This strategy will be developed in close cooperation with the development partners who coordinate to provide budgetary assistance (World Bank, European Commission, African Development Bank, France, and Germany) by September 30, 2008.

26. The reform of the pension system for government employees will start to be implemented in the 2009 Budget Law in order to reduce its structural deficit estimated at 0.8 percent of GDP by a recent actuarial study. On the basis of this study, which has been approved by human resources management and the staff representatives of the ministries, public establishments, and decentralized local governments, the Minister of Finance and Budget will submit a proposal for revising the parameters of the system to the Government Council. Management of the civil service pension system will be turned over to a new Pension Department at the Ministry of Finance and Budget beginning on January 1, 2010.

Monetary and exchange policy

27. The Central Bank (BCM) reaffirms its determination to adopt a monetary policy designed to contain inflation under the bar of 10 percent, reduce volatility and prevent an excessive appreciation of the exchange rate, and achieve its goal for accumulating foreign exchange reserves. To meet these goals, the BCM will continue its policy of sterilization in the money market. To enhance the management of its foreign exchange reserves, the BCM will develop a strategic investment plan with technical assistance from MCM.

28. In addition, if it becomes necessary to exceed the net foreign asset position anticipated in the program, the BCM will carry out additional sterilization operations aimed at maintaining the targeted level for base money. The government agreed to cover the cost of sterilization operations, beginning in 2008, by means of quarterly transfers to the BCM. In order to minimize monetary financing of the State, the government has decided to reduce statutory advances of the BCM to the Treasury from 15 to 5 percent of the Treasury’s budget revenues, and the Treasury has decided to use this facility only in case of absolute necessity.

Policy on financial sector development

29. The government will finalize a national financial strategy with the assistance of the World Bank, the IMF, and other partners by September 2008. On the basis of this strategy and a new financial services project conducted by the World Bank (in progress), the government’s objective will be to enhance the legal framework and structure of the financial sector and the supervision of nonbank financial institutions, while increasing access to financing for small and medium enterprises and enhancing the diversity of financial instruments.

30. The authorities envisage creating a development bank with the assistance of the South African Development Bank and the German development bank KFW; this bank could draw on the private sector for its management and financing.

Trade policy

31. Madagascar’s trade policy continues to be guided by the principles stated in the MEFP of January 7, 2008. 5 In light of the study on the appropriateness of a uniform nonzero tariff, the authorities have concluded that such a system would go against the country’s international commitments and would be inconsistent with ongoing trade negotiations.

32. The authorities are pursuing trade liberalization at the regional level. Implementation of the plan to reduce tariffs within the framework of the Southern African Development Community (SADC), in effect since October 2007, has been continued in 2008 and the initial problems concerning the rules of origin, which affected certain exporting firms, are in the process of being resolved. Negotiations with the European Commission and other countries in the region are being held in order to reach an agreement on the aspects of the Economic Partnership Agreement (EPA) that were not covered by the interim agreement signed in 2007.

Debt management

33. The government’s policy remains focused on maintaining a sustainable level of debt, and only concessional loans are being considered. These principles are all the more important given that an increase in loans, particularly bilateral loans, is envisaged to help finance the MAP. In 2008, no bilateral debt cancellation agreement has been signed to date, but negotiations continue, particularly with the bilateral creditors that are not members of the Paris Club.

Reform of the electricity sector

34. Rising oil prices reinforce the need to improve the management of the electricity sector. However, in order to alleviate the oil price shock for the population, the government has decided to delay electricity price increases until October 2008. According to the overall strategy described in the MEFP of January 7, 2008,6 the government is taking the following priority measures:

  • a 15 percent average increase in electricity prices in October 2008 (with a smaller increase for the first bracket in order to reduce the impact on the poor), and another increase in April 2009 to fully align prices with costs;

  • implementation of a price indexing mechanism adjusting prices to cost and allowing a profit margin for investments, beginning in May 2009;

  • a budget transfer of MGA 54 billion to cover operational losses and finance the priority investments approved in the 2008 budget law, supplemented by a transfer of MGA 32 billion, to pay arrears owed by the public administration and universities (¶13), in the revised draft supplementary budget law, and to cover losses flowing from the decision not to increase prices in April in an adversarial oil price environment; and

  • an international call in September 2008 for tenders for a new five–year management contract, beginning on April 1, 2009; a consultant will be hired soon to prepare the international call.

Policies to facilitate private sector development

35. The government decided to postpone the submission to Parliament of a draft law for promoting exports from the spring to the fall of 2008 (by end–October 2008), owing to a slower than anticipated consultation process (PC,Table 3). Within the framework of this law, measures will be taken to stimulate all export–oriented enterprises and activities, irrespective of sector or type of activity, without granting any tariff or tax exemptions. As a result, the system of free zones and enterprises will be eliminated for new firms, while the enterprises already benefiting from the system will be grandfathered.

Governance

36. The government is committed to taking measures to ensure compliance with the Extractive Industries Transparency Initiative (EITI).

37. Madagascar intends to combat money laundering and large–scale financial crime. To this end, the Financial Information Service (SAMIFIN) is operational since May 22, 2008.

Statistics

38. In accordance with the MAP, the government intends to enhance its statistical apparatus and make data more easily accessible to the general public. In 2008, the BCM and the Ministry of Finance and Budget will begin publishing statistical data on their websites. Also beginning in 2008, the National Statistics Institute (INSTAT) expects to update the base year for the national accounts from 1984 to 2007. In 2008, within the framework of implementing the National Statistics Development Strategy (SNDS), the government prepared a draft law governing the national statistics system, which will be submitted to Parliament during the current year. Finally, in 2009, INSTAT expects to produce a quarterly index of industrial production.

III. Program Monitoring

39. The program supported by the IMF under the Poverty Reduction and Growth Facility (PRGF) will be monitored through half–yearly reviews and by applying quantitative and structural performance criteria and benchmarks, as well as the indicative targets mentioned in Tables 2 and 3.

Appendix I—Attachment II

Madagascar: Technical Memorandum of Understanding on Monitoring the Performance Criteria and Targets for the Program Supported by the Arrangement Under the Poverty Reduction and Growth (PRGF)

1. This technical memorandum of understanding (TMU) defines the variables used to establish the quantitative performance criteria (PCs) and indicative targets for the 2008 program, how they are calculated, and any adjustments that may be necessary. The quantitative objectives for June 30, 2008 and December 31, 2008 are performance criteria; those for September 30, 2008 are indicative targets. Unless otherwise indicated, flow variables are measured as cumulative from the beginning of the year. The measurement of the quantitative PCs for January 31, 2008 are measured as cumulative from the beginning of 2007 and explained in the previous TMU. 1

I. Quantitative Criteria
A. Ceiling on External Payments Arrears

2. These arrears consist of overdue debt–service obligations (i.e., payments of principal and interest) related to loans contracted or guaranteed by the government or the Central Bank of Madagascar (BCM). Debt service obligations (including unpaid penalties and interest charges) are overdue if they have not been paid by the due date or within a grace period agreed with, or unilaterally granted by, each creditor before the due date. They exclude arrears resulting from nonpayment of debt service for which rescheduling negotiations are under way or that are in dispute. This performance criterion should be observed on a continuous basis.

B. Ceiling on Nonconcessional External Borrowing
Definition

3. Nonconcessional external debt has a grant element of less than 35 percent. This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (IMF Executive Board Decision No. 12274–00/85, August 24, 2000), but also to commitments contracted or guaranteed for which value has not been received. Under the program, nonconcessional debt includes financial leasing and any other instrument giving rights to a current financial liability, under a contract or guarantee by the central government (CG) of Madagascar (defined in paragraph 12), but it excludes debt contracted under rescheduling agreements and normal import–related credits of less than one year. If the CG has a special need for external nonconcessional financing, discussions with IMF staff should take place in advance to consider including the request in the program.

Calculation

4. Calculation of the degree of concessionality of new external borrowing is based on the 10–year average of the OECD’s commercial interest reference rate (CIRR) for loans with maturities of 15 years or more, and the six–month average CIRR for loans maturing in less than 15 years.

C. Floor for Net Foreign Assets of the Central Bank of Madagascar
Definition

5. The net foreign assets (NFA) of the central bank of Madagascar (BCM) are defined as the difference between its gross foreign assets and total foreign liabilities, including debt to the IMF.

Calculation

6. The programmed change in NFA will be measured in SDRs, subject to adjustment for any shortfall or excess in net external balance of payments assistance as described below.

D. Ceiling on Net Domestic Assets of the Central Bank of Madagascar
Definition

7. The net domestic assets (NDA) of the BCM are defined as the difference between reserve money and the NFA of the BCM. It includes net credit to the government, credit to enterprises and individuals, claims on banks, liabilities to banks (including the proceeds of BCM deposit auctions—appels d’offres négatifs, and open market operations), and other items net. The program values for NDA exclude transfers from the government to the BCM to cover the cost of sterilization operations.

Calculation

8. The outturn for NDA will be adjusted for the variation of the actual versus the program exchange rate, applied to the stock of NFA of the BCM and the foreign exchange deposits held by the CG, as explained in Section III below.

9. The outturn for NDA will be adjusted by removing transfers from government to the BCM to cover the cost of sterilization operations.

10. The outturn for NDA will also be adjusted for the excess or shortfall in the net external budget support, as explained in Section III below.

11. The outturn for NDA will be adjusted for changes in the required reserve ratio, if the new reserve requirement has been in effect for at least one full calendar month.

  • a. For an increase in the reserve ratio, the NDA outturn would be adjusted downward by an amount equal to the percentage point change in the reserve requirement ratio times the average level of deposits held by the public with commercial banks for the month of the target.

  • b. For a decrease in the reserve ratio, the NDA outturn would be adjusted upward by an amount equal to the percentage point change in the reserve requirement ratio times the average level of deposits held by the public with commercial banks for the month of the target.

E. Ceiling on the Net Domestic Financing Requirements of the Central Government
Definition

12. The coverage of the CG, for the purposes of the program, corresponds to the scope of operations of the treasury, as shown in theopérations globales du Trésor(or OGT).

13. The net domestic financing of the CG is the sum of the components below.

  • a. the variation in net bank claims on the CG, plus

  • b. the change in CG debt to the nonbank system (domestic and nonresident), plus

  • c. the variation in net debt to treasury correspondents (correspondants du Trésor), plus

  • d. domestic or foreign receipts from privatization operations, plus

  • e. the variation in the level of CG domestic payments float (payments en instance), plus

  • f. the variation in domestic arrears,minus

  • g. government transfers to the BCM to defray the cost of sterilization operations.

14. The amount of CG domestic payments float is the difference between committed and paid expenditure (dépenses engagées et payées).

15. Domestic arrears are defined in paragraph 22 below.

16. Net bank claims on the government are measured by net credit to government in the monetary survey, which consists of BCM and commercial bank claims on the CG, including auctioned treasury bills (BTAs) and other securities and liabilities, net of CG deposits with the BCM and commercial banks, including foreign currency deposits. The authorities will inform Fund staff of any substantive changes in CG accounts with the banking system, which may affect the calculation of bank claims.

17. Nonbank claims consist of BTAs and other treasury bills (BTs) and bonds placed with nonbank institutions (domestic and nonresident) and the public.

Calculation

18. The net domestic financing outturn of the CG will be adjusted for the variation of the actual versus the program exchange rate, applied to the net external budget support and to the foreign exchange deposits held by the CG, as explained in Section III below.

19. For nonbank borrowing, the value of BTAs and other government securities should be recorded as the value received at time of issue (sale), that is, face value less discount.

20. Net domestic financing is subject to adjustment for the excess or shortfall in net external budget support, as described in Section III

F. Floor on Tax Revenue
Definition

21. Tax revenue includes all domestic taxes and taxes on foreign trade received by the treasury.

G. Ceiling on Accumulation of New Domestic Payments Arrears
Definition

22. Domestic payments arrears consist of: (i) all Treasury expenditures for which payment orders have been issued but not paid within three months (dépenses ordonnancées mais non–payées); (ii) VAT credits to exporters that are not reimbursed within 60 days of the receipt of a valid request by the Tax Directorate (Direction Générale des Impôts, DGI); and (iii) VAT and Tax on Petroleum Products (TPP) credit to oil distributors for VAT and TPP paid on petroleum supplied to airline and shipping companies for international transport (avitaillement), that are not reimbursed within 60 days of the receipt of a valid request by the Customs Directorate (Direction Générale des Douanes, DGD). This performance criterion will be observed on a continuous basis.

II. Monitoring Variables and Memorandum Items
A. Net External Budget Support
Definition

23. Net external budget support is defined as external budget support less cash debt service (Table 1).

Table 1.

Madagascar: Programmed Net External Budget Support, 2008

(in Millions of SDRs, cumulative since January 1, 2008, unless otherwise indicated)

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Cumulative since January 1, 2007.

IMF Country Report No. 08/66, Republic of Madagascar–Staff Report for the Second and Third Reviews Under the PRGF.

Net of HIPC and MDRI debt relief.

Rate used only for accounting purposes to set and monitor indicative targets and performance criteria.

Source: Malagasy authorities and Fund staff estimates and projections.

24. External budget support is defined as cash budget (i.e., not linked to projects) loans and grants, excluding debt relief under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC), that are provided as financing and result in funds available to the treasury. It excludes any disbursement of loans or debt relief by the IMF and assistance that gives rise to counterpart funds for the treasury with a delay of longer than one year.

25. Cash debt service is defined as the amount of external debt service the CG pays in cash.

Calculation

26. Programmed net external budget support is recorded in SDRs and converted into MGA at the program exchange rate. The outturn of the CG for net external budget support will be adjusted for the variation of the actual versus the program exchange rates and net external budget support as explained in section III below. Counterpart funds to assistance in kind are posted as budget support when deposited with the treasury.

B. Program Exchange Rate
Definition

27. For accounting purposes, program exchange rates have been set. Foreign exchange stocks and flows that affect performance criteria and benchmarks have been converted to MGA at the MGA/SDR program exchange rate (Table 1). Original amounts denominated in U.S. dollars and in euros have been converted into SDRs by applying the program rates of 1 SDR = 1.505 US$ and 1 SDR = 1.023 € for 2008.

III. Exchange Rate and Net External Budget Support Adjusters
A. Exchange Rate

28. In the fiscal and monetary tables, outturns for program variables in foreign currency are converted to MGA at the exchange rate occurring on the day of assessment for stocks and on the day of transaction for flows.

29. To compare actual outturns to program targets, actual outturns for program variables in foreign currency are converted to MGA at the program exchange rate.

B. Net External budget support

30. If there is a shortfall in net external budget support versus the programmed amount on any test date, the actual outturns of the following PCs and indicative targets will be adjusted by the amount of the year–to–date shortfall up to a cumulative maximum of SDR 15 million per year, according to the following method:

  • a. the BCM’s NFA outturn will be adjusted upward by an equal amount up to a cumulative maximum of SDR 15 million;

  • b. the BCM’s NDA outturn will be adjusted downward by an equal amount up to a cumulative maximum of SDR 15 million that will be converted into MGA at the program exchange rate; and

  • c. the CG net domestic financing outturn will be adjusted downward by an equal amount up to a cumulative maximum of SDR 15 million that will be converted into MGA at the program exchange rate.

31. If there is a cumulative excess of more than SDR 30 million in net external budget support on any test date, the actual outturns of following PCs and indicative targets will be adjusted by the amount of the year–to–date excess (above SDR 30 million), according to the following method:

  • a. the BCM’s NFA outturn will be adjusted downward by the excess;

  • b. the BCM’s NDA outturn will be adjusted upward by the excess that will be converted into MGA at the programmed exchange rate; and

  • c. the CG net domestic financing outturn will be adjusted upward for the excess that will be converted into MGA at the programmed exchange rate.

IV. Information and Data to be Supplied to Fund Staff

32. In addition to the information already specified in the Technical Memorandum of the first review 2 the authorities will provide the following information:

  • Transfers from the government to the BCM to defray the cost of sterilization operations.
1

Republic of Madagascar—Report on Noncomplying Disbursement and Recommendation for a Waiver of Nonobservance of Performance Criteria, forthcoming.

2

The standard for whether a measure results in an MCP is whether the measure has the potential to result in a spread of more than two percent between the buying and selling rates for spot exchange transactions.

3

As of end–March 2008, the authorities had collected about one third of the unpaid taxes and duties uncovered by the audit (MEFP, paragraph 21).

1

MEFP of January 7, 2008, paragraph 17.

2

see paragraphs 20 &21 of the Memorandum on Economic and Financial Policies (MEFP) dated January 7,2008.

3

see paragraphs 24 of the MEFP dated January 7, 2008.

4

see paragraphs 29 &30 of the MEFP dated January 7, 2008.

5

Paragraph 44 of the MEFP dated January 7, 2008.

6

See paragraphs 47–50 of the MEFP dated January 7, 2008.

1

Country Report No. 08/66, Republic f Madagascar–Staff Report for the Second and Third Reviews Under the PRGF;Appendix I, Attachment II.

2

IMF Country Report No. 07/7, Technical Memorandum ¶¶58–29.

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Cover IMF Staff Country Reports
Republic of Madagascar: Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criteria, Modification of Performance Criteria, and Augmentation of Access-Staff Report; Staff Supplement and 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 232
Publisher:
International Monetary Fund
ISBN:
9781451825466
ISSN:
1934-7685
Pages:
92
DOI:
https://doi.org/10.5089/9781451825466.002
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    Madagascar: Consumer Price Index, June 2006–April 2008

    (Annual percent change)

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    Domestic and International Prices of Rice

    (US$ per tonne)

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    Madagascar: Recent Economic Developments

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    Madagascar: Weighted Average T–Bill Yield and Inflation, and Credit to Private Sector, January 2005–May 2008

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    Madagascar: Real and Nominal Effective Exchange Rate and Relative Prices, December 2002–March 2008

    (Index, June 2004=100)

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    Level of Reserve Money

    (in billions of MGA)

Madagascar: Consumer Price Index, June 2006–April 2008

(Annual percent change)

Domestic and International Prices of Rice

(US$ per tonne)

Madagascar: Recent Economic Developments

Madagascar: Weighted Average T–Bill Yield and Inflation, and Credit to Private Sector, January 2005–May 2008

Madagascar: Real and Nominal Effective Exchange Rate and Relative Prices, December 2002–March 2008

(Index, June 2004=100)

Level of Reserve Money

(in billions of MGA)