Statement by Mr. Sembene, Executive Director for Madagascar, Mr. Razafindramanana, Alternate Executive Director, and Mr. Ismael, Advisor to the Executive Director June 28, 2017

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


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

The Malagasy authorities are thankful to staff for the insightful set of balanced reports and productive discussions during and after the review mission to Antananarivo. They broadly agree with staff’s assessment and appreciate the policy recommendations. The ECF-supported program is providing a solid framework aimed at preserving macroeconomic stability and putting economic growth on a higher trajectory. This is crucial to sustain social stability and to achieve permanent gains in the fight against poverty.

Recent Developments and Program Performance

Madagascar is making good progress in the implementation of its ambitious reform program supported by an ECF, despite adverse climate-related developments. Indeed the country has suffered from two large shocks since last year, notably a severe drought and the most violent cyclone in recent history which struck the island in March 2017. The cyclone caused the loss of more than 80 lives, destroyed the homes of about a quarter million people, and resulted in considerable physical damages estimated at about 4 percent of GDP.

Nevertheless, the Malagasy authorities have steadfastly pursued their program of reforms, with encouraging results. Real GDP growth accelerated to 4.2 percent in 2016 from 3.1 percent in 2015, supported mainly by higher investment, stronger exports from the export processing zones and improved agricultural output supported by higher vanilla prices. Inflation remained contained at about 7 percent at end-2016, and the external sector strengthened.

Performance under the ECF was strong. All end-December 2016 performance criteria (PCs) and indicative targets were observed, some with considerable margins. However, servicing debt to Libya was delayed due to technical problems beyond the authorities’ control, leading to a temporary breach of the continuous performance criterion on the accumulation of new external payment arrears. All arrears have since been cleared and the Malagasy authorities are seeking a waiver for non-observance of this continuous performance criterion.

Progress was also made in the implementation of the ambitious structural reform program, although not all benchmarks were met through end-February 2017. Two benchmarks were met with delays. These include the establishment of the Council of Budget and Financial Discipline and the law on asset recovery which was only submitted to Parliament recently, due to the need for further revision and consultations.

The fuel pricing formula was implemented—albeit not automatically but with no budgetary costs. Negotiations are ongoing among stakeholders on a new price structure and mechanism which will ensure automatic adjustments. The continuous benchmark on the prior notification of Fund and World Bank regarding the signing of any single source contracts by JIRAMA was not met as one contract was signed as a matter of urgency to meet a deadline agreed upon with the investor. The new management team at the JIRAMA has renewed the commitment to competitive and transparent procurement practices.

Macroeconomic performance in 2016 was much better than programmed in many ways. Total revenues were 11.2 percent of GDP, higher than the 11 percent budgeted, while overall expenditure was kept within the program target. As a result, the overall balance (on a commitment basis) registered a deficit of 1.3 percent of GDP, significantly less than the 3.2 percent programmed. More importantly, the primary balance, excluding foreign financed investment, registered a surplus of 0.8 percent of GDP compared to a projected deficit of 0.6 percent. Performance in the monetary sector was also strong, with the level of international reserves growing to an equivalent of 3.9 months of imports compared to 3.3 months in the program. Monetary policy was prudent, and the inflation rate was kept under control. The current account balance was far stronger than projected, with a surplus of 0.8 percent of GDP.

Economic Outlook and Macroeconomic and Structural Policies

The economic recovery is gaining strength. The authorities are slightly more optimistic than staff about growth prospects. Their growth forecasts are predicated on increased public and private investments, prudent macroeconomic policies, sustained structural reforms, and strong contribution from the mining, agricultural and tourism sectors. The authorities view the scaling up of public investment as central to their strategy to resolve the pressing social and infrastructure needs, to attract private investment and to sustain strong inclusive growth. Priority investments will encompass several areas, including social sectors, infrastructure, and agricultural development. In this connection, the authorities have developed a prioritized investment program through a broad consultative process, with careful attention being given to debt sustainability and absorptive capacity. The Investment Program, which is consistent with the National Development Plan (NDP) and the Sustainable Development Goals (SDGs) was presented to international donors and investors in December 2016, catalyzing strong financial pledges of over $6 billion. Priority is being given to grants and concessional borrowing, with a view to maintaining debt sustainability.

The authorities recognize that the rapid increase in investment can pose risks, and they are therefore taking steps to reinforce implementation capacity, strengthen supervision of projects, and improve donors’ coordination, among others. A new PPP law has been enacted, and the application decrees were adopted by the Cabinet in March 2017, with the view to executing properly the PPP projects in the investment program. To reduce fiscal risks and strengthen oversight of projects, a dedicated unit will be responsible for project coordination. In addition, the Fund and the World Bank are called upon to help build capacities within the Ministry of Finance and Budget which will retain the right to disapprove or stop projects that may entail fiscal risks. The terms and conditions of all PPP contracts will be published within one month of the date of signature on the web site of the Ministry of Finance and Budget.

The authorities are also taking measures with World Bank assistance to improve social conditions and reduce poverty, especially for the poorest members of society. These consist, among others, projects that involve cash transfers and cash for work. The authorities are also undertaking agricultural and rural development projects which are aimed at helping to raise income of the rural population. Projects in the education and health sectors are ongoing.

Fiscal performance is also improving, in spite of unexpected expenses this year. Thanks to the authorities’ continuous reform efforts supported by Fund’s technical assistance, revenue mobilization continues to improve. In 2017, efforts will continue to improve efficiency at the tax and customs administrations. In this respect, the authorities will maintain the efforts to recover outstanding tax arrears. They are also working to broaden the use of tax identification number (TIN) throughout all departments of the Ministry of Finance and Budget by year-end, and to all other ministries by end-2018. Performance contracts will be extended to the anti-fraud units at Customs by end-September 2017. On the expenditure side, efforts to reduce low-priority spending will be sustained. However, the climate-related emergency spending, higher transfers to the utility company, JIRAMA, and the national airline, Air Madagascar, will cause an increase in government expenditure in 2017.

As regards JIRAMA, the deterioration in the financial position was due to the exceptional drought that affected significantly the production of hydro-electricity, causing an increased reliance on more expensive imported diesel for electricity generation. Making the situation more challenging were delays in ensuring the conversion to new generators from the use of diesel to less expensive heavy fuel oil, and in putting in place measures to improve enforcement of customer payments and control procedures. The authorities are taking important measures to address the situation. A new management team for JIRAMA has been put in place and has developed a multi-year business plan along with a timetable and a list of concrete measures to reverse the deteriorating financial situation. The measures are expected to reduce the need for government transfers gradually over the medium term with an objective of zero transfer by 2020.

As regards Air Madagascar, an agreement has been reached with a strategic partner, Air Austral, that will help to put the airline on a financially sound and commercially viable position, while allowing it to continue to provide vital domestic services. As part of the agreement, there will be an injection of new capital from the new partner, with the government having to assume past net liabilities.

Overall, the fiscal deficit and borrowing requirements will increase this year, compared to the original program. However, these additional expenses are being accompanied by strong reforms that will lead to permanent improvements in these two strategic SOEs, and enable them to contribute solidly to economic growth and government revenue, over the medium- to long-term.

Improving economic governance continues to be an important objective of the authorities. Steps have been taken to strengthen existing institutions, including the adoption of legislation aimed at promoting assets disclosure for a wider range of public officials, setting up specialized anti-corruption centers, and combatting the traffic of precious wood. In addition, two new laws are in an advanced stage of preparation for submission to Parliament. They are in regards to anti-money laundering, and the cooperation with other countries on the exchange of mutual legal assistance in criminal matters. Our authorities are confident that the reforms they are taking will lead to significant improvement in governance.

Monetary policy remains prudent, allowing for greater exchange rate flexibility while helping to contain inflation and re-build external reserves. The increase in export prices of vanilla led to large cash payments to the small farmers, thus drawing liquidity from banks, which, in turn, reduced their lending to the government and the private sector. To restore normal liquidity and credit conditions in the system, the central bank undertook foreign exchange purchases and domestic liquidity operations. As a result, the Central Bank was able to stabilize bank liquidity and credit conditions, while inflation remained contained at about 7 percent at end-2016. Higher export proceeds also helped to reduce the current account deficit.

Going forward, the authorities will pursue a tight monetary policy consistent with the objectives of money growth and inflation. The central bank will also continue to take measures to enhance the effectiveness of monetary policy, in particular through the enhancing of the transmission mechanisms. The aim is to move gradually from monetary targeting towards an interest-rate based framework over the medium- to long-term.

Madagascar’s financial sector is sound and resilient, as confirmed by the 2016 FSAP. However, the FSAP also drew the authorities’ attention on some gaps, notably in the area of financial oversight. The authorities are following up on staff recommendations. In addition, they are also taking measures to improve financial inclusion. In this regard, the law on electronic money was passed in February and the associated decrees and regulations are expected to be issued by year-end. The authorities are also working closely with the World Bank on a new financial inclusion project that will focus on the digitalization of transactions and access to credit. In the same vein of improving financial inclusion, the laws on banking and microfinance are being redrafted.


In spite of significant shocks, Madagascar has continued to implement steadfastly its economic and financial program with encouraging results: growth has rebounded, macroeconomic stability has strengthened, and the medium-term outlook is improving. The Malagasy authorities remain strongly committed to the program’s objectives and will continue to implement the policies needed to achieve them.

Based on the good performance under the program, and the commitment to continue the adjustment efforts over the period ahead, the Malagasy authorities request the completion of this first review under the ECF as well as a waiver for the non-observance of the continuous performance criterion on external payment arrears, and the modification of the performance criterion on the primary balance, excluding foreign-financed investment, for end-June 2017. Moreover, in view of the additional balance of payments needs due to climate-related shocks, the authorities are requesting an augmentation of access under the ECF arrangement.

In light of the above, we would appreciate Directors’ support for the authorities’ requests.

Republic of Madagascar: 2017 Article IV Consultation, First Review Under the Extended Credit Facility Arrangement, and Request 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
Author: International Monetary Fund. African Dept.