This paper discusses Madagascar's Staff-Monitored Program (SMP) and Request for Disbursement under the Rapid Credit Facility (RCF). Madagascar's economic recovery has failed to gain momentum in 2015, largely due to external shocks, persistent political instability, and weak governance. Nonetheless, the authorities have implemented an adequate policy mix that has broadly maintained macroeconomic stability. In light of urgent balance of payments needs, the Malagasy authorities are requesting a second disbursement under the RCF, accompanied by a SMP. The IMF staff supports the authorities' request for a disbursement under the RCF based on the policy track record over the past six months.


This paper discusses Madagascar's Staff-Monitored Program (SMP) and Request for Disbursement under the Rapid Credit Facility (RCF). Madagascar's economic recovery has failed to gain momentum in 2015, largely due to external shocks, persistent political instability, and weak governance. Nonetheless, the authorities have implemented an adequate policy mix that has broadly maintained macroeconomic stability. In light of urgent balance of payments needs, the Malagasy authorities are requesting a second disbursement under the RCF, accompanied by a SMP. The IMF staff supports the authorities' request for a disbursement under the RCF based on the policy track record over the past six months.

My Malagasy authorities would like to thank staff for the constructive and candid discussions during their mission to Antananarivo in September 2015. They very much appreciate staff’s awareness and understanding of the fragile domestic situation and the constraints facing the country. Their policy advice to reverse the deteriorating economic and financial situation and place the country on a firm and sustainable growth path is also valued.

Madagascar’s efforts at reforms were severely affected by a number of exogenous shocks in 2015. After receiving Fund support under an RCF in June 2014 to meet urgent balance of payments needs, Madagascar, with Fund technical assistance, started to put in place reform measures aimed at strengthening macro stability and laying the foundation for broader reforms that could lead to Fund support under the Extended Credit Facility (ECF). However, starting in late 2014 and continuing in 2015, the country was hit by a number of domestic and external shocks which constrained the authorities’ reform efforts.

The unexpected shocks made it difficult to achieve fully the economic objectives set. A sharp fall in the international prices of mining products severely affected the mining sector. Cyclones and heavy rains in the central part of the country earlier in the year caused agricultural output to decline, and led to the displacement of 39,000 people. Prolonged drought in the south required food assistance for over 200,000 persons. The tourism sector and part of external trade were also affected by these factors, as well as by a lengthy strike at Air Madagascar, the national carrier. The damages from the severe weather are estimated to be equivalent to about 1 percent of GDP, with reconstruction costs projected at about 3 percent of GDP. As a result, growth which had been projected to reach 5 percent in 2015 has now been revised downward to 3.2 percent.

In response to this challenging environment, the authorities maintained and even strengthened the reform efforts which have helped to maintain stability and sustainability. Thus, in the fiscal sector, additional measures were taken to strengthen tax and customs administration, minimize the significant revenue shortfalls versus the 2015 budget, and avoid serious spending overruns. Unavoidable increases in transfers to state-owned enterprises were partially offset by measures to reduce fuel subsidies, clean up the civil service payroll, achieve some cost-savings on current spending and defer non-priority capital spending. These measures yielded significant savings. In addition enhanced monitoring at JIRAMA, the electricity and water public enterprise, has helped reduce transfers from1.7 percent of GDP in 2014 to 0.6 percent in 2015. As a result of these efforts, the increase in the fiscal deficit has been contained and is projected to increase only slightly in 2015 compared to original projections. However, tighter than expected financing conditions affected the arrears clearing plans. Nevertheless, negotiations have started with creditors to settle arrears through the use of treasury bills and they have continued to work on solutions to resolve the issue. Monetary and exchange rate policies have remained on track and have kept inflation in single digits, and the central bank proceeded with a number of reforms to strengthen its capacity. The central bank has also stopped buyback transactions in the interbank foreign exchange market, such that the official exchange rate has now converged to the market exchange rate, after a depreciation of about 10 percent in September.

These shocks worsened the already difficult external position, and have led to urgent balance of payments needs for 2015. My Malagasy authorities are therefore requesting an immediate support from the Fund in the form of a disbursement under the RCF in an amount equivalent to 25 percent of quota. The RCF will be accompanied by a 6-month Staff-monitored Program (SMP). In their Memorandum of Economic and Financial Polices (MEFP), the authorities describe the policies they have been implementing this year and those they plan to implement in 2016, but especially over the next six months in the context of the SMP and cover the period from end-September 2015 to end-March 2016. The RCF will also play a catalytic role in mobilizing donors’ support, and is viewed by the authorities as laying the groundwork towards an ECF.

Outlook and Policies for 2016

The policies envisaged under the SMP aim at addressing fiscal weaknesses, preserve macroeconomic stability, support better governance and build the foundations for sustainable growth. The program is consistent with the authorities’ National Development Plan (NDP) covering 2015-19 and the Presidential Plan of Urgent Action (PPUA) for 2015-16. For 2016, absent any major shock, the economy is projected to grow by 4.3 percent, mainly on the basis of higher agricultural production, a recovery in textiles export and tourism and some infrastructure investments. However, with the aim of achieving a higher and sustained growth, the authorities are working closely with development partners and external private investors to finance much needed public investment. Inflation is projected to remain at around 7 percent, and the fiscal deficit to be reduced to 3.2 percent of GDP. The authorities also expect an increase in the level of international reserves.

The Fiscal Sector

The 2016 Budget that has been submitted to the National Assembly envisages an increase in revenue equivalent to about 0.6 percent of GDP (including a one-off operation for the regularization of tax arrears of Air Madagascar) and better prioritization of expenditure. The fiscal deficit on a commitment basis is 2016 is budgeted to decline to 3.2 percent of GDP. The increase in revenue is expected to come from new measures to improve tax administration, strengthened efforts to ensure compliance, measures to reduce fraud, and elimination of some exemptions. Additional revenues are expected from new measures such as a uniform ten percent excise duty on all imported new vehicles, an increase in excise duties on alcoholic beverages and soft drinks, and a tourist arrival fee, among others. Vitally important efforts to strengthen revenue administration, which are already underway, will be further strengthened. As regards expenditures, the authorities will eliminate fuel subsidies, continue the process of cleaning the government’s payroll and reduce transfers to loss-making enterprises. The authorities expect that the measures envisaged, especially the reduction in subsidies for fuel and to state enterprises will enable an increase in expenditure in priority areas such as agriculture, education, health and infrastructure.

The authorities are also addressing the issue of payment arrears. In spite of their best intentions, they were not able to progress on this issue, due in part to the unexpected economic and financial shocks. They are however committed to solve the issue and are developing a framework, based on the recommendations of the recent IMF technical assistance, to prevent the emergence of new arrears and settle the existing stock, including arrears related to VAT refunds. Starting in January 2016, an escrow account will be created at the central bank to ring fence the resources required for VAT reimbursement. Also with the support of the African Development Bank, the authorities are developing a PFM reform strategy for 2016-20.

The authorities recognize the importance of improving revenue performance and controlling financial losses in state-owned enterprises, in particular, for JIRAMA and Air Madagascar. They are working closely with the World Bank to reform these two enterprises. As regards JIRAMA, a consultant has been hired to develop a management improvement plan, which includes the organizational restructuring of the company. A program of on-site audits of the largest users (1000) has started, and the authorities are looking into the use of advanced metering for new customers to minimize losses. Steps are also being taken to reduce costs, in particular, the rehabilitation of heavy fuel oil generating units and the auditing of supplier contracts. Air Madagascar has been a major drain on the finances of the state and the authorities are taking strong measures not only to improve the company’s financial position, but to rebuild the company so that it can be internationally competitive. In this regard, the Management and Board of the company were replaced, and the new team is working with the World Bank to contract external expertise to restructure the company and develop a new business plan under a new Chairman.

Monetary Policy

The central bank will pursue a prudent monetary policy aimed at keeping inflation at around 7 percent, maintaining a flexible exchange rate and improving the level of international reserves. In this regard, it will use Treasury bill sales and weekly deposit auctions to achieve liquidity targets. The reference interest rate will be allowed to fluctuate more and reflect movements in the money market.

Steps are also being taken to strengthen the independence of the central bank and improve its governance and controls. A revised Central Bank Act will be submitted to the Cabinet for approval before the end of the year, and it includes, among others, clauses that provide for an effective mechanism for the automatic transfer of central bank losses and profits to the government; a phased reduction of statutory advances from the central bank; and establishment of an Audit Committee of the Board of Directors. Moreover, all outstanding central government obligations owed to the central bank will be settled through issuance of interest-bearing instruments, which should improve the financial position of the central bank.

Financial Sector

Reform of the financial sector will continue. An action plan will be finalized following the completion of the Financial Sector Assessment Program (FSAP) that is currently underway. In the meantime, the central bank is taking steps to improve the supervision of foreign-owned banks, finalize the law regulating mobile banking and completing the revision of the Financial Sector Law, including the establishment of a stock exchange in 2016. The authorities are also working with the World Bank to reform and strengthen the supervision of the microfinance sector.

Medium-term Objectives

Over the medium term, the objective remains durable poverty reduction with strong, sustainable growth in a stable macroeconomic environment. In this regard, the authorities are pursuing efforts at national reconciliation, taking steps to strengthen institutions to improve governance and create a conducive environment for private sector development. An important factor towards this development is the existence of good infrastructure for which there is a very large need. The country, however, has very limited resources to undertake these investments and meet the objectives set out in the NDP. The authorities are therefore developing a carefully prioritized plan of the most important projects. They are also exploring all financial options, including Public-Private Partnerships (PPPs). Already a number of potential projects that can be implemented with PPPs have been identified. In order to minimize budgetary risks, a policy and legal framework for PPPs is under preparation and expected to be enacted by year-end. The authorities are also giving a very high importance to improving governance and the fight against corruption. In this regard, a national strategy against corruption has been put in place and the authorities have increased budget allocation for the agencies dedicated to the fight against corruption. Additional measures, as outlined the MEFP will be implemented gradually over the medium term. The authorities also expect that additional financial assistance will be received from developing partners at the Donors’ Conference that they plan to hold early next year, and for which the RCF will play a catalyzing role.


The measures outlined above and described in the Memorandum of Economic and Financial Policies demonstrate well the commitment of my Malagasy authorities to address the constraints the country faces. In spite of the challenging environment, the authorities are of the view that they have established an adequate track record in support of macroeconomic stability and sustainability. They remain fully determined to pursue the major reform efforts needed to improve the economic and financial situation of the country and place it on a strong and sustainable growth path. In this endeavor, they are hopeful that their efforts will receive the strong support of the international community. In view of the needs of the country, the commitment of the authorities to reforms and the policy objectives outlined above, I would greatly appreciate Directors’ support for my Malagasy’s authorities request under the RCF.