Republic of Madagascar: 2017 Article IV Consultation, First Review Under the Extended Credit Facility Arrangement, and Requests for Waiver of Nonobservance of Performance Criterion, Modification of Performance Criterion, and Augmentation of Access—Press Release; Staff Report; Informational Annex, Debt Sustainability Analysis, and Statement by the Executive Director for Republic of Madagascar

2017 Article IV Consultation, First Review Under the Extended Credit Facility Arrangement

Abstract

2017 Article IV Consultation, First Review Under the Extended Credit Facility Arrangement

Context: A Strategy for Investment Scaling Up and Improved Governance

1. Madagascar has a long history of weak economic growth amid recurrent political instability. Successive political crises and weak governance have held back revenue collection, public investment, social spending, external donor support, and private investment, especially FDI. As a result, growth has suffered—at best barely keeping up with rapid population growth—and social welfare indicators have deteriorated (Text Figure 1). Madagascar’s development has also suffered from its high vulnerability to natural disasters. Madagascar has become one of the poorest countries in the world, with over 80 percent of the population living on less than $1.90 a day.

Text Figure 1.
Text Figure 1.

Madagascar: Growth and Poverty

Citation: IMF Staff Country Reports 2017, 223; 10.5089/9781484310656.002.A001

Source: World Development Indicators, the World Bank.

2. The government aims to break the cycle of low growth and political instability by accelerating public investment and structural reforms under its 2014 National Development Plan (NDP). During the political crisis following the military coup (2009-13), tax collections declined from 12 percent of GDP in 2008 to 9 per cent in 2013, while donor support fell as low as 2 percent of GDP in 2012 (from 14 percent of GDP in 2006).1 To help finance scaling up investment and social spending, Madagascar’s development partners made pledges estimated at $6.4 billion (over 60 percent of GDP) at the donor conference in December 2016.

3. In the face of deteriorating governance indicators, the government has revived the fight against corruption. During the five-year crisis period, Madagascar’s governance indicators regressed, while other countries in Sub-Saharan Africa (SSA) advanced (Text Figure 2). Under the National Strategy to Fight Corruption adopted in 2015, the government aims to reverse this adverse trend, starting with bringing the legal framework into compliance with international standards. At the same time, reforms are underway to boost fiscal transparency and controls.

Text Figure 2.
Text Figure 2.

Madagascar: Indices of Corruption and Good Governance

(Percentile)

Citation: IMF Staff Country Reports 2017, 223; 10.5089/9781484310656.002.A001

Note: A corruption percentile of close to 90 indicates more perceived corruption than in close to 90 percent of the countries included in the survey.

Key Recommendations of the 2014 Article IV Consultation and Current Status

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Source: IMF staff assessment.

4. The authorities have made progress on all recommendations from the 2014 Article IV consultation (the first in 6 years), although most remain relevant. Reforms are advancing in all key areas (Box 1), albeit at different speeds. Nevertheless, most of the recommendations remain relevant given that many structural problems are deep-rooted and require sustained effort (although the National Development Plan and the Central Bank Act were successfully adopted).

Recent Economic Developments, Outlook, and Risks

5. The economic recovery following the political crisis gained speed in 2016, although it took longer than expected to emerge. Investment, the anticipated driver of the economy, remained subdued in 2015, and growth was estimated at only 3.1 percent. Public investment grew faster in 2016, which supported construction activity; together with increasing textile exports and accelerating activity in agroindustry, it helped boost growth to 4.2 percent. Inflation remained under control at 7.0 percent at end-2016 (Figures 1-4, Tables 1-8).

Figure 1.
Figure 1.

Madagascar: Real Sector Developments, 2006-17

Citation: IMF Staff Country Reports 2017, 223; 10.5089/9781484310656.002.A001

Sources: Malagasy authorities; and IMF staff estimates.
Figure 2.
Figure 2.

Madagascar: Fiscal Developments, 2006-17

Citation: IMF Staff Country Reports 2017, 223; 10.5089/9781484310656.002.A001

Sources: Malagasy authorities; and IMF staff estimates.
Figure 3.
Figure 3.

Madagascar: External Sector Developments, 2006-17

Citation: IMF Staff Country Reports 2017, 223; 10.5089/9781484310656.002.A001

Sources: Malagasy authorities; and IMF staff estimates.
Figure 4.
Figure 4.

Madagascar: Monetary Developments, 2015-17

Citation: IMF Staff Country Reports 2017, 223; 10.5089/9781484310656.002.A001

Sources: Malagasy authorities; and IMF staff estimates.
Table 1.

Madagascar: Selected Economic Indicators, 2015-22

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

Primary balance excl. foreign-financed investment. Commitment basis.

Table 2.

Madagascar: National Accounts, 2015-22

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Sources: Malagasy authorities; and IMF staff estimates and projections.
Table 3.

Madagascar: Fiscal Operations of the Central Government, 2015-22

(Billions of Ariary)

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

Estimates of domestic taxes and other treasury operations net include an amount of MGA 90bn (0.3 percent of GDP) in 2016 and MGA 72 bn (0.2 procent of GDP) in 2017 corresponding to tax arrears of Air Madagascar used for its recapitalization.

Data for overall balance in 2015 includes an amount of MGA 340bn (1.2 percent of GDP) corresponding to recapitalization and interest rescheduling operations with the central bank.

Commitment basis.

A negative value indicates financing that has not yet been identified.

Table 4.

Madagascar: Fiscal Operations of the Central Government, 2015-22

(Percent of GDP)

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

Projections for domestic taxes and other treasury operations net include an amount of MGA 90bn (0.3 percent of GDP) in 2016 and MGA 72 bn (0.2 procent of GDP) in 2017 corresponding to tax arrears of Air Madagascar used for its recapitalization.

Data for overall balance in 2015 includes an amount of MGA 340bn (1.2 percent of GDP) corresponding to recapitalization and interest rescheduling operations with the central bank.

Commitment basis.

A negative value indicates financing that has not been identified