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.
On behalf of my Malagasy authorities, I would like to thank the Executive Board and Management for their continued support to Madagascar’s reforms aimed at achieving sustainable growth and poverty reduction. I would also like to thank staff for their constructive dialogue and fruitful exchanges with the authorities during their recent visits in Antananarivo.
Madagascar’s performance under the PRGF remains positive, in spite of a number of overlapping shocks, including the rise in world energy and food prices, the global slowdown and two cyclones during the first quarter of 2008. Under the impetus of the Madagascar Action Plan (MAP), which serves as the anchor for economic policy for the period 2007–2011 and the reforms scheduled in the PRGF–supported program, the authorities continue to make progress in their efforts to stabilize the economy, reach higher levels of economic growth and reduce poverty. In this context, the economy has continued to perform well, with strong growth, declining inflation and limited government recourse to domestic financing. Fiscal and monetary policies remained on track, despite some delays in the implementation of structural reforms, stemming from weak institutional capacity. The authorities have taken strong corrective measures, whenever necessary to comply with the program objectives, including by forcefully addressing the issue of potential multiple currency practice for which a waiver is requested.
In order to expand dialogue on programs and resources needed to implement the MAP, the government held the first Partners’ Round Table in Madagascar on June 9 and 10, 2008. My authorities are grateful to donors for their pledges and hope they can continue to rely on the timely assistance of the international community to meet their development goals.
I. Recent Economic Developments
Madagascar was recently hit by two cyclones, which affected 240,000 people and damaged infrastructure and crops. Of the US$36 million needed for humanitarian aid, only US$15 million has been pledged by donors. Public reconstruction costs are about US$109 million. Economic performance was strong. Real GDP picked up to 6.2 percent in 2007 from 5 percent in 2006, owing to the good performance of exports and FDI related to the construction of two large mining projects. Inflation declined from 10.8 percent to 10.3 percent, due to a deceleration of food prices that more than offset a pick up in nonfood inflation. Budget execution has been generally on track, due to higher than expected tax revenue stemming from good customs performance, and substantial payments of property tax and VAT by a large mining company, combined with lower than programmed expenditures. As a result, net domestic borrowing fell below the program ceiling and growth in the money supply was in line with the program’s objectives. Base money also kept pace with the program and the impact of foreign exchange reserves on monetary growth was lessened by open market transactions and slower than expected FDI inflows. In spite of minor problems in asset quality, banking sector soundness remained adequate. In the external sector, the balance of payments recorded a surplus, as the current account deficit was more than covered by capital inflows.
All the quantitative performance criteria at end January 2008 and all but two indicative monetary targets at March 31, 2008 were met. Due to lower–than programmed mining FDI inflows, the central Bank missed its foreign reserves target. The Central Bank of Madagascar (CBM) also exceeded its ceiling on domestic assets because of higher use of the central bank refinancing window and less than programmed sterilization of open market operations.
In the structural area, delays in the implementation of the enhanced control at the port of Toamasina were due to technical problems during installation of the Tradenet system. The draft export promotion law eliminating the duty free zone and enterprise regime, while grandfathering existing enterprises in the regime, needs further discussion to build consensus. My authorities request waivers for these two performance criteria. Also, two structural benchmarks have been met, although one, the production of treasury account balances with the budget information system SIGFIP was delayed, due to technical problems.
Regarding the issue of potential Multiple Currency Practice (MCP) and a related exchange restriction, my authorities acted in good faith and took swift and timely corrective measures. To contain sharply rising international prices and inflationary pressures, the CBM initiated in January 2007 and during the early weeks of 2008, a policy of offering foreign exchange to importers of basic foodstuffs (rice, wheat and cooking oil) at a discounted exchange rate. To ensure that the discount would not exceed a two percent spread with the interbank buying rate, the CBM Governor maintained responsibility to sign on each transaction. As a result, the selling prices deviated only on average by about 0.7 percent from the daily market rate and the aggregate discount was less than 0.01 percent of GDP. My authorities immediately halted this practice after staff drew their attention to the possibility of an MCP and a related exchange restriction. They also took corrective actions by issuing an official circular to all banks confirming Madagascar’s intention to conform to Article VIII, Section 3 of the IMF Articles of Agreement and pledging to keep the interbank foreign exchange market free of discriminatory or multiple currency practices. Given the rapid corrective actions implemented, and the relatively minor size of the foreign exchange discount, my authorities would like to request a waiver for the nonobservance of the performance criteria related to the MCP and the exchange restriction.
II. The Reform Agenda Ahead
The 2008 macroeconomic framework is based on the priorities identified in the MAP and takes into account the need to adjust to the rising energy and food prices, the damages of the cyclones and the global slowdown. Economic growth is projected to be at 7 percent from 6.2 percent in 2007, owing to the impact of major mining investments. Inflation has been revised upward for 2008 to 9.7 percent from 8 percent, reflecting rising international food and oil prices. Despite the expected inflows of FDI, gross international reserves are expected to decline markedly due to large oil and food imports. As a result, my authorities have requested an augmentation of access under the PRGF arrangement.
Fiscal policy
The key budget priorities are to further mobilize domestic revenues, finance priority and emergency spending and strengthen Public Finance Management. In spite of tax cuts and new spending measures to alleviate the shock of food and fuel prices on the population, the authorities have opted for a modest fiscal tightening in order to ease some of the inflationary pressure. In order to alleviate the consequences of the sharp rise in fuel and food prices on the population and remove structural impediments to growth, the authorities have prepared a supplementary budget stressing the following components: (i) temporary VAT exemption on rice from July 1, 2008 to alleviate the impact of higher international prices on the poorest, (i) VAT exemption on oil for lamps, (iii) targeted measures to alleviate the food price shocks for the poorest, (iv) increase of the budgetary credits for current expenditure, in order to pay overdue electricity bills of ministries and universities to JIRAMA, (v) increase of domestically financed capital expenditure, increase of the payment of accumulated arrears to the telecoms company, (vi) other expenditures to recapitalize the state airline company Air Madagascar, increase transfers to communes and embassies as well as civil servants’ wages and prepare the African Union Summit.
To achieve revenue objectives, the authorities will build on progress achieved with the 2008 tax reform to further simplify the tax code for small taxpayers, substantially reduce the scope for new exemptions or suspension of taxes and/or customs duties and publish on a monthly basis, the list of beneficiaries on the website of the Ministry of Finance. My Malagasy authorities will also introduce to the parliament the new legislation eliminating the EPZ regime and review the fiscal regime for mining projects with the assistance of the World Bank. These policy measures will be complemented with the continued implementation of the priority action plans to strengthen tax and customs administration of large and medium sized tax payers. On customs administration, the authorities will further install the tradenet electronic platform linking all the economic actors involved in foreign trade and foster the implementation of the 2007 audit recommendations with a particular emphasis on strengthening controls and collecting unpaid duties. To enhance the fight against fraud, customs and tax administrations will intensify their exchange of information.
On the expenditure side, the authorities will use the room created by increased tax revenue to increase the level of priority outlays, while keeping domestic indebtedness low. In addition to earmarking expenditure for the priority sectors, the authorities will focus on reforming the civil servants’ pension fund, paying VAT on externally financed expenditure and avoiding accumulating new arrears. In particular, they will accelerate the reimbursement of VAT credit to exporters, oil distributors and oil refueling for international shipping and airline within a maximum of 60 days after receiving their requests. They will also maintain a prudent debt management policy based on concessional lending to finance the MAP development agenda. In this context, the authorities will continue negotiations with non–Paris Club creditors to obtain additional debt cancellation. They are also determined to advance the Public Finance Management agenda, in order to improve budget execution and strengthen public finances. To this end, they intend to use the potential offered by the fiscal management information system (SIGFP) to enhance the monitoring of budget execution. In close collaboration with donors, the authorities will develop an action plan to enhance the effectiveness of financial control.
Monetary and Financial Sector Policies
As regards monetary and exchange rate policy, my authorities will continue to adhere to a prudent policy aimed at keeping inflation in the single digits and avoiding potential overshooting of the exchange rate. To meet these goals, the central bank will enhance the sterilization policy to a level deemed necessary to maintain the targeted level for base money and the authorities have agreed to cover any extra costs of sterilization operations. In order to minimize monetary financing of the State, my authorities have decided to reduce statutory advances of the CBM. To enhance the management of its foreign exchange reserves, the CBM has developed a strategic investment plan with Fund’s technical assistance.
In the financial sector, a national strategy is being prepared with the assistance of the international community. On the basis of this strategy and the World Bank financial Sector Project under preparation, the authorities will improve the framework and structure of the financial sector and the supervision of nonbank financial institutions, while increasing access to financing for small and medium enterprises. With the assistance of the South African Development Bank and the German Development Bank, the authorities are working on the creation of a development bank. In this endeavor, they intend to proceed with caution, while respecting transparency, adequate governance and limiting fiscal risks.
Structural Reforms
My authorities are determined to continue implementing the agenda outlined in the MAP aimed at reducing the cost of doing business. In the electricity sector, while the authorities recognize the need to make further progress on restructuring JIRAMA, they are also concerned about the impact of the oil price shock for the population. As such, my authorities have decided to delay the 15 percent electricity price increase until October 2008, while taking a number of measures to strengthen JIRAMA, including the implementation of a price adjustment mechanism allowing a profit margin for investment, a budget transfer to cover operational losses and an international tender for a new five–year management contract.
As regards trade liberalization, my authorities have stepped–up efforts to phase out import duties on imports from the SADC with a view of eliminating them by 2012. They are also pursuing negotiations with the European Union (EU) to reach agreement on the aspects of the Economic Partnership Agreement (EPA) that were not covered by the interim agreement signed in 2007. Concerninggovernance, the authorities are committed to taking measures to ensure compliance with the Extractive Industries Transparency Initiative (EITI) and scale up efforts to combat money laundering and large–scale financial crime
III. Conclusion
My authorities have achieved significant progress and ownership in the implementation of policies and reforms defined in the PRGF program. Since the HIPC Completion point, they have outlined a clear strategy to align the Madagascar Action Plan (MAP) and PRSP priorities with the allocation of budgetary resources. The authorities have also taken a number of remedial measures to keep the program on track.
In light of the sound macroeconomic policy performance and the effective remedial actions implemented in response to address slippages, I would like to request completion of the fourth review and the granting of waivers for the nonobservance of two quantitative and three structural PCs, and modification of two continuous PCs. Given the pressures on balance of payments and the need to maintain a prudent level of international reserves, I would like, on behalf of my authorities, to request an augmentation of access under the PRGF arrangement by 15 percent of quota. I would appreciate Board support in this regard.