Lower economic growth and macroeconomic instability

5. Establishing the link between corruption and economic growth requires careful analysis. A simple up-front plot of real economic growth and control of corruption for all SSA countries over 2000–15 does not provide evidence of any link. There are many reasons for the lack of correlation and one reason is countries with abundant natural resources that have grown despite corruption. Equatorial Guinea is a good example. Because of oil exploration, Equatorial Guinea was able to combine an average real growth of close to 17 percent a year with the weakest corruption scoring of all SSA countries. To identify the effect of corruption on growth it is, therefore, necessary to separate corruption from other variables like endowments of natural resources that also have an impact on economic growth. Already by reducing the sample of SSA countries to the sub-sample of LICs—countries that are more comparable—it is possible to perceive a somewhat stronger positive link between the control of corruption and growth (Figure 3).

Sub-Saharan Africa: Real Economic Growth and Corruption

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Sources: World Economic Outlook (October 2016); and World Governance Indicators.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Sub-Saharan Africa: Real Economic Growth and Corruption

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Sources: World Economic Outlook (October 2016); and World Governance Indicators.

• Download Figure
• Download figure as PowerPoint slide

Sub-Saharan Africa: Real Economic Growth and Corruption

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Sources: World Economic Outlook (October 2016); and World Governance Indicators.

• Download Figure
• Download figure as PowerPoint slide

6. Many empirical studies based on advanced statistical analyses have concluded that corruption is associated with weaker economic growth.⁵ This result is confirmed by several meta-analyses—studies summarizing and analyzing the results of many separate studies.⁶ An influential meta-analysis by Ugur and Dasgupta (2011) estimates that a one-unit increase in the index of perceived corruption is associated with a reduction in per capita GDP growth by 0.9 percent a year on average based on 434 separate estimates that include all types of countries and 0.6 percent a year on average based on 34 separate estimates that include LICs only (Table 1). While the correlation between corruption and lower growth is strong, the causality itself is less clear-cut, and probably goes in both directions. That is, less corruption is positive for growth and at the same time, countries with higher growth can take measures to reduce corruption.

Table 1.

Madagascar: Effect of a One-Unit Increase in the Index of Perceived Corruption

Source: Ugur and Dasgupta (2011).

Table 1.

Madagascar: Effect of a One-Unit Increase in the Index of Perceived Corruption

	LICs	All countries
Per capita GDP growth	−0.59	−0.92

Source: Ugur and Dasgupta (2011).

View Table

Table 1.

Madagascar: Effect of a One-Unit Increase in the Index of Perceived Corruption

	LICs	All countries
Per capita GDP growth	−0.59	−0.92

Source: Ugur and Dasgupta (2011).

7. It is plausible that the deterioration in governance during the last ten years is currently reducing Madagascar’s economic growth by about ½ percent or more a year. Madagascar’s corruption score, according to the World Governance Indicators, declined 0.9 units between 2005 and 2015. Based on the LIC estimates of Ugur and Dasgupta, this would be associated with an estimated reduction in GDP growth of about 0.5 percent a year with a coefficient of −0.59 and about 0.8 percent a year with a coefficient of −0.92. In other words, if Madagascar could reduce corruption back to the 2005 level (prior to the transition period), annual growth would, ceteris paribus, be 0.5–0.8 percentage point higher, a significant amount when considering the compounding effect (Figure 4).

Madagascar: RealGDP, Actual and with Governance as a Middle-Income Country

(Index: 2005 = 100)

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Source: IMF staff projections based on estimates by Ugur and Dasgupta (2011).

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Madagascar: RealGDP, Actual and with Governance as a Middle-Income Country

(Index: 2005 = 100)

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Source: IMF staff projections based on estimates by Ugur and Dasgupta (2011).

• Download Figure
• Download figure as PowerPoint slide

Madagascar: RealGDP, Actual and with Governance as a Middle-Income Country

(Index: 2005 = 100)

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Source: IMF staff projections based on estimates by Ugur and Dasgupta (2011).

• Download Figure
• Download figure as PowerPoint slide

8. Corruption is also likely to trigger macroeconomic instability. Money from corruption makes macroeconomic management more difficult. Activities related to corruption are often missing from official statistics, which create misleading information to policymakers (Quirck, 1996). For example, so-called hot-money can lead to large financial inflows or outflows that accompany money laundering activities, impacting the exchange rate (Hampton, 1996). The mirror-studies conducted by Chalendard (2016) illustrate that large-scale miss invoicing of imports and exports to transfer funds overseas may make it difficult to interpret exchange rate movements and, as a result, take appropriate policy actions.

Fiscal performance

9. Corruption weakens the state’s capacity to raise revenue as well as its other core functions. The culture of compliance is weakened and tax evasion increases. While other fragile SSA countries have improved their tax and customs collections to about 15 percent of GDP, collections in Madagascar declined from 12 percent of GDP in 2008 to about 10 percent of GDP during the crisis and they are currently about 11 percent of GDP. Taxes related to profits are low and the efficiency of VAT collections is one of the lowest among SADC members. Notwithstanding the high standard VAT rate (20 percent), VAT revenue corresponded to only 5.4 percent of GDP in 2012. The level of development is not sufficient by itself to explain the low revenue collections in Madagascar. Other countries with a comparable GDP per capita have significantly higher tax revenue collections (Figure 5).

Madagascar: Tax Revenue

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Sources: World Economic Outlook (October 2016); and Rota-Graziosi (2015).

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Madagascar: Tax Revenue

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Sources: World Economic Outlook (October 2016); and Rota-Graziosi (2015).

• Download Figure
• Download figure as PowerPoint slide

Madagascar: Tax Revenue

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Sources: World Economic Outlook (October 2016); and Rota-Graziosi (2015).

• Download Figure
• Download figure as PowerPoint slide

10. Low tax collections are the result of non-compliance and tax exemptions. The loss of tax revenue from corruption and other non-compliance is likely to be significant. The domestic tax administration is performing far below international best practice based on the 2015 TADAT (Tax Administration Diagnostic Assessment Tool) assessment. The main tax exemption is provided to about 600 so-called free-zone companies that are exonerated from payment of profit tax during their first five years and later pay a reduced profit tax of 10 percent. An indication of the size of this benefit is that the free-zone companies generated 9 percent of the turnover covered by the large taxpayer unit in 2013 but their corresponding share of tax collections was 2 percent.

11. The potential to increase tax collections is significant. Studies of tax performance and tax effort suggest that Madagascar could potentially increase its tax ratio up to 17 percent of GDP (from currently about 11 percent) (IMF, 2015). A large part of this performance gap is likely to be corruption related. Fund staff estimates indicate that a one-point improvement in the control of corruptions index for a given country is associated with a tax revenue increase by 4 percent of GDP (IMF, 2016b). An improvement in Madagascar’s current index value to the value of an average middle-income country (that is, a return to the governance position about 10 years ago) would then be associated with an expected tax revenue increase by just over 3 percent of GDP or about half of the performance gap.

Weak institutions, eroded legitimacy, and conflict

12. Corruption has a negative impact on citizens’ confidence in public institutions. When high levels of corruption are present, institutions tend to become rent-seeking instruments in the hands of political leaders and a small economic elite, reducing competition. For example, the Diagnostic Trade Integration Study that was prepared by the World Bank in 2015 identified the need for genuine competition in product and service markets as a key recommendation for Madagascar. Anecdotal stories talk about collusion between politicians, business people, and some customs agents permitting the clearance of imported shipments by larger, well-connected businesses with less arduous customs controls. Such favors generate competitive advantages for well-connected businesses and likely reduces competition in domestic markets. The result is higher profits for “insiders”, higher prices on key commodities in the domestic market, and significant leakages and revenue losses for the government.

13. A state that is perceived to be corrupt is more likely to be seen as illegitimate over time and as a result, to weaken political stability. Governments that favor their supporters and exploit others risk bringing to the fore grievances by disadvantaged, weaker groups and may encourage citizens to use violence (IMF, 2016a). While Madagascar economic system has gradually changed from a centrally-planned economy to a market economy starting in the 1990s, the political culture has remained relatively constant with a state that many perceive to be authoritarian and favoring a small group of people. It is thought-provoking that several events prior to Madagascar’s 2009 crisis reinforced the perception that the state was not impartial (International Crisis Group, 2010).

Business climate and investment

14. Corruption reduces private-sector investment because it acts as a tax on capital and raises the hurdle rate of return. Payments of bribes, delays, distortions etc. increase the cost of investment. Entrepreneurs opening new businesses need permits and licenses, putting them at the mercy of corrupt public officials. Corruption also creates an uneven playing field and stifle genuine competition with the result that more human capital will be allocated to rent seeking instead of productive activities that promote business development.

15. Corruption is a challenge for the private sector in Madagascar. The private sector is concerned by the lack of fair competition in many sectors because of the presence of business groups with close ties to politicians. The 2016 Doing Business Survey ranked Madagascar 164 (out of 189 countries) on ease of doing business and several indicators of corruption are well above the SSA average (Figure 6). Market restrictions that require permits and licenses facilitate rent seeking. For exporters, many products require documentation linked to regulatory controls and this process can require a significant amount of time, costs, and possibly bribes. Exporting firms that use imported inputs suffer twice, because of demanding import and export procedures. Companies that could otherwise participate in international value chains by specializing on specific parts or tasks become less competitive (Figure 7).⁷

Madagascar: Indicators of Corruption that Affect the Business Climate

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Source: World Bank Enterprise Survey.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Madagascar: Indicators of Corruption that Affect the Business Climate

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Source: World Bank Enterprise Survey.

• Download Figure
• Download figure as PowerPoint slide

Madagascar: Indicators of Corruption that Affect the Business Climate

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Source: World Bank Enterprise Survey.

• Download Figure
• Download figure as PowerPoint slide

Sub-Saharan Africa: Indicators of Corruption, Regulatory quality, and Judicial Independence

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Sources: Heritage Foundation, Index of Economic Freedom 2016; World Economic Forum; Global Competitiveness Index; and World Governance Indicators.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Sub-Saharan Africa: Indicators of Corruption, Regulatory quality, and Judicial Independence

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Sources: Heritage Foundation, Index of Economic Freedom 2016; World Economic Forum; Global Competitiveness Index; and World Governance Indicators.

• Download Figure
• Download figure as PowerPoint slide

Sub-Saharan Africa: Indicators of Corruption, Regulatory quality, and Judicial Independence

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Sources: Heritage Foundation, Index of Economic Freedom 2016; World Economic Forum; Global Competitiveness Index; and World Governance Indicators.

• Download Figure
• Download figure as PowerPoint slide

16. Challenges from corruption and the lack of competition are exacerbated by doubts about the impartiality of the judicial system. People in the private sector believe that the justice system is biased and laws are enforced unfairly. Compared with other SSA countries, Madagascar is ranked as having one of the least independent judicial systems according to the World Economic Forum Global Competitiveness Index. Existing laws give the President of Madagascar extensive power over the judiciary. The Supreme Council of the Judiciary (Conseil Supérieur de la Magistrature, CSM) manages the career of the judges, with the President as the chairman and the Minister of Justice as the vice chairman. The Constitutional High Court (Haute Cour Constitutionnelle, HCC) also has limited independence from the executive power. HCC has nine members, of which the President directly nominates three, including the HCC President, and the CSM nominates another three members. Against this background, judges can be extremely cautious and often anxious to avoid contradicting powerful decision makers. The judiciary is also vulnerable to manipulation because of a lack of financial and human resources (International Crisis Group, 2010). A variety of cases has illustrated the widespread impunity for officeholders who break the law, especially with regard to the trafficking of natural resources (Bertelsmann Stiftung, 2016).

17. Studies analyzing the growth impact of corruption probably underestimate the extent to which corruption and distortions reduce productive private sector investment (Quirk, 1996). Money-laundering diverts resources to less productive investment and thereby reduces growth. For example, receipts from rose-wood traffic are often used for “sterile” investment like real estate and as a result, real estate prices increase, causing general overpayment for real estate and crowding out of more productive investments. Another corruption effect is the transformation of productive companies into sterile investments because they are operated solely for money laundering. Corruption is also likely to increase imports. To help launder money, corruption money is occasionally used to import goods that are then dumped on the domestic market with a negative impact on the private sector.

18. While corruption is clearly negative for private-sector investment, the effect on public investment is more complex. On one hand, corruption shrinks tax collections and reduces funds available for fiscal spending and investment On the other hand, corrupt officials have an incentive to increase public spending in favor of large projects with the potential for large private gains for the policy maker himself (for example, large defense contracts) regardless of the quality of investment There is empirical data supporting a generally positive correlation between public expenditure and corruption (Baliamoune-Lutz and Ndikumana, 2008). That said, corruption reduces the quality and efficiency of public investment Moreover, in a highly resource-constrained environment like Madagascar, corruption is more likely to cost more in foregone resources for investment than is gained in incentives.

Slower financial sector development

19. People involved in corruption need to disguise the origin of their illegal money to avoid detection and the risk of prosecution when they spend it. Corruption is, therefore, closely linked to money laundering, which usually involves a series of multiple transactions aiming to disguise the source of illegal financial assets so that these assets can be used without compromising the person using them. Such transactions typically include: (i) placing unlawful proceeds into financial institutions through deposits, wire transfers, or other means; (ii) separating the proceeds of corruption from their origin through a series of complex financial transactions; and (iii) finally, using an apparently legitimate transaction to disguise the illicit proceeds.

20. Corruption is likely to distort and delay the growth of the financial system through several channels:

• Corruption favors the use of cash instead of the banking system. To avoid paying taxes, the informal sector prefers to use cash, reducing deposit availability. This deprives the formal banking sector of financing, hurting the development of the financial system.

• Some banks or financial firms become engaged in money laundering. People involved in corruption use banks in Madagascar and abroad to convert illegal financial proceeds into legal laundered funds. However, such interactions with corrupt people increase the likelihood that the bank itself or its other customers will be defrauded or that criminal elements take outright control of the bank, particularly when institutions are small and regulators are weak. Thus, many firms and households become suspicious towards the banks and the formal financial system (IMF, 2001).

• A reputation for corruption makes foreign banks reluctant to do business with less well-established companies. Because of constraints imposed by the parent company and to preserve their reputation, the foreign-owned banks prefer to lend to well-established companies with certified accounts, which impedes lending to the broader economy and reduces the access to financing for smaller companies. As a result, legitimate investment is discouraged with damages to the financial system and trade.

21. Madagascar’s financial system is shallow also when compared with other fragile African countries. Financial deepening is lagging with broad money (M3) having remained roughly stable as a share of GDP for over ten years⁸. The net effect is likely to be slower economic growth (Figure 8).⁹

Madagascar and Fragile SSA Countries: Broad Money (M3)

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Sources: Malagasy authorities; and IMF staff estimates.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Madagascar and Fragile SSA Countries: Broad Money (M3)

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Sources: Malagasy authorities; and IMF staff estimates.

• Download Figure
• Download figure as PowerPoint slide

Madagascar and Fragile SSA Countries: Broad Money (M3)

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Sources: Malagasy authorities; and IMF staff estimates.

• Download Figure
• Download figure as PowerPoint slide

Human capital

22. One of the strongest correlations in the literature is that countries with higher levels of corruption have lower levels of human development (Rose-Ackerman and Truex, 2012). Highly-corrupt countries tend to underinvest in human capital, especially spending less on education. Incentives to study are also lower, as employment within the government administration is more likely to be based on connections or payments, rather than on years of education. Inequality is also raised as a result, as those who have the money to buy places within the administrations perpetuate their positions within society.

23. Higher public spending on health and education is less likely to lead to better outcomes (i.e., an improvement in human capital) in countries with poor governance. Corruption reduces the efficiency of public spending, and thus, higher spending on health and education will have limited positive effects in countries that are rated as very corrupt or having a very ineffective bureaucracy (Rajkumar and Swaroop, 2008). For example, a mid-1990s public expenditure tracking survey in Uganda established that schools received only around 20 percent of central government spending on the school program. Most grants were captured by local government officials and politicians in charge of disbursing the grants (Reinikka and Svensson, 2004).

Environmental degradation

24. Deforestation and illegal logging is a major environmental challenge in Madagascar, hurting future generations by depleting its natural capital. Recent calculations of deforestation indicate that the total forest area is decreasing by over ½ percent a year. The selective logging of expensive tropical hardwoods like rosewood and ebony introduces invasive species, increases the risk of forest fires due to localized drying, impairs habitats, and reduces genetic diversity and biodiversity. The ecological balance is sometimes disturbed to such an extent that the forest dies off completely. The negative effects of illegal logging are reinforced by population growth that is increasing the demand for agricultural land for both subsistence farming and cash crops, and thus the deforestation continues.

25. Corruption makes it possible for the illegal logging to continue. It occurs at all stages of the trade chain. Timber operators bribe officials to get export permits. Enforcement officials may at times be bribed to turn a blind eye to trucks or canoes carrying illegal logs. When regulatory violations are found, judicial corruption often prevents prosecution (USAID, 2016). There are also claims in media of grand (political) corruption to influence the fight against the rosewood traffic, with some politicians in senior positions having been accused of close connections with rosewood traders. Thus, the natural capital of Madagascar is being depleted, with benefits accruing to a small elite (Box 2).

Short Term Measures to enhance the rule of law

30. It is key to ensure the adequate criminalization of acts of corruption, in line with international instruments. The new anti-corruption law introduces new provisions to the penal code and amends existing ones to bring Madagascar’s legal framework closer in line with the United Nations Convention against Corruption (UNCAC). Most acts of corruption are now criminalized, with only certain elements such as the passive bribery of foreign officials and obstruction of justice in the context of investigation of corruption remaining unaddressed. Malagasy authorities are currently working on much needed legislative reforms. A draft law on asset recovery is currently being finalized, and should allow authorities to seize, freeze, confiscate and manage proceeds of crime, while protecting the rights of bona fide third parties. Additionally, a draft law on extradition and mutual legal assistance in criminal matters is also being finalized. This will allow Madagascar to provide and receive assistance from other countries in corruption investigations.

31. AML measures targeted at supporting anti-corruption efforts are instrumental to fighting corruption. Proceeds of corruption are usually laundered to avoid detection or confiscation, and an effective AML framework can contribute to both prosecuting and deterring corruption. Under international standards, AML frameworks should require heightened scrutiny of financial transactions conducted by “politically exposed persons,” adequate transparency of company ownership, and credible specialized institutions such as financial intelligence units. By implementing an effective AML/CFT framework, countries can better safeguard the integrity of the public sector, protect the private sector from being abused, increase transparency of the financial system, facilitate the detection, increase the investigation and the prosecution of corruption and money laundering, and the recovery of stolen assets.¹¹

32. Madagascar’s AML framework still needs to be significantly strengthened. Madagascar has drafted an AML/CFT law which would allow authorities to, among other things, (i) investigate and prosecute the laundering of proceeds of corruption; (ii) require financial and non-financial institutions and professionals to carry out customer due diligence (CDD) and report suspicious activity; (iii) required enhanced CDD of politically exposed persons (PEPs), including domestic and foreign, as well as PEPs of international organizations; (iv) require transparency on beneficial ownership (Box 3). It is imperative that Madagascar prioritizes the adoption of appropriate AML legislation in line with the revised Financial Action Task Force (FATF) standards.

33. The publication of comprehensive asset disclosures of senior officials is crucial to support anti-corruption efforts. Together with adequate criminalization of illicit enrichment and of money laundering, this would facilitate the prosecution of acts of corruption. The publication of comprehensive asset declarations on a public website would also support the efforts of financial institutions in Madagascar and abroad to identify politically exposed persons, compare the assets declared and the assets in their books, and report information to their respective financial intelligence units in case of unexplained discrepancy. For the system to be effective it is also necessary to have dissuasive sanctions in place in case of absence of declaration or false declaration.

34. Madagascar’s asset disclosure framework is ineffective and requires reform. The new anti-corruption law includes a broader range of public officials, including their wives and under aged children, with some exemptions, and allows BIANCO to verify asset declarations forms. However, the current system is of limited assistance to anti-corruption efforts as there is no requirement to disclose assets beneficially owned and to publish the declarations, and there are no dissuasive sanctions for absence of declaration or false declaration.

Medium term measures to enhance the rule of law

35. Building robust and independent anti-corruption institutions is a critical medium term objective to ensure the sustainability of the anti-corruption reforms. While there has been some progress in updating the legal framework, implementation remains a challenge. There is much need to increase capacity to ensure the effectiveness of the framework. Judicial independence has been elusive in Madagascar. The justice system itself has been perceived as corrupt by the population (IMF, 2016c). Court decisions have been so inconsistent and ill-founded that many stakeholders have become distrustful of the justice system. Also, more actions are needed to reduce corruption in state-owned enterprises (SOEs, for example JIRAMA), partly because of the perception of state capture by these public institutions.

36. The existing institutional framework is weak, particularly the judiciary. Political interference in the affairs of the judiciary is common and the executive exerts pressure on judges including by reassigning magistrates to different locations. The Global Competitiveness Report for 2016–2017 ranks Madagascar 126 out of 138 countries in judicial independence¹². In May 2015, the Union of Malagasy Judges voiced concerns about arbitrary placements and transfers of judges without justifications based on official criteria. All appeals are reported to have been systematically rejected by the Supreme Council of Magistrates (CSM), the entity charged with the appointment, transfer and dismissal of judges and which is chaired by the President of the Republic. The political influence on the judicial branch also influenced the Court of Accounts. which did not receive the fiscal resources required for it to be effective for several years. Even though the court is mandated to audit all public accounts, the accounts of public companies such as JIRAMA, Air Madagascar, Omert, or Somapar were not audited due to the lack of sufficient budget for the court to function, as well as its dependence on the executive. In fact, decisions of the Court of Accounts are to be transmitted to the Minister of Finance who in turn notifies the concerned persons or institutions. Thus, legally such reports are not required to be published, and most often are not or are only published with a significant delay.

37. Steps are being taken to achieve judicial independence. In 2016, the government created a specialized anti-corruption jurisdiction, called the Pôle Anti-Corruption (PAC). Other measures include: (i) launching a case assignment system to eliminate the concept of “ownership” of a case by a judge before the case is ready to go to trial; (ii) guaranteeing that justice is served within a reasonable time frame and reduce the significant backlog of cases in the court system; and (iii) publishing, including providing on-line internet access to, all court decisions to increase transparency and reduce the inconsistencies between decisions.

38. Strong institutions would benefit from a clear framework for interagency coordination. Madagascar has a multitude of control organs and anti-corruption agencies (Box 4). Many observers view this complex system as an obstacle in the fight against corruption. Coordination problems occur due to: (i) overlaps (e.g. conflicts about the responsibility for a given case leading to delays); (ii) the risk of creating procedural errors and thus, certain dossiers are abandoned; and (iii) insufficient exchange of information and waste of limited budget resources (e.g. each entity has its own office and staff), and ultimately a lack of transparency. Some entities, like BIANCO, are attached to the Presidency, which leads to a perceived lack of independence. International experience of anti-corruption agencies is that they have not been very successful in most countries: law enforcement is costly, and requires an honest bureaucracy and judicial system (Voigt et al., 2008).

39. Potential actions to improve the current institutional structure include:

• Institutional leadership. It is imperative that an institution take the effective lead in the coordination of the anti-corruption work. By law, it is the Comité pour la Sauvegarde de l’Intégrité (CSI) that should assume this role.

• More trials of corruption cases. The justice system, CPEAC, has not explored all potential corruption cases related to rose wood traffickers or JIRAMA investigated by BIANCO and no final judgment (so far) of the 152 cases transferred from SAMIFIN.

• Improve the quality of recruitment. The entry exams for the ENMG (Ecole Nationale de la Magistrature), the military academy, national police, gendarmerie, IGE, customs official, ENAF (Ecole Nationale de l’Administration Financière) and INFA (Institut National de Formation Administrative), which are currently overseen by BIANCO, may benefit from being strengthened. The perception exists that many of the candidates passed their exams through corrupting officials.

• The anti-corruption agencies must also be provided with sufficient financial resources and be free from political interference. Many of these entities were originally financed by donors. Concerns remain about BIANCO’s attachment to the Presidency. The government’s aim is to allocate 0.3 percent of GDP the general government budget (about $30 million) to the fight against corruption (SNLCC, 2015). Total 2017 budget allocations to the anti-corruption centers, BIANCO, SAMIFIN, and CSI amounted to about $2.5 million compared with requests of about $6.5 million.

Transparency and accountability

40. Transparency is a critical element to prevent corruption and promote good governance. Access to information relating to government decisions and financial transactions protects results and empowers civil society to maintain an effective oversight of government functions. Several studies show a positive correlation between corruption and lack of public budget transparency.¹³ Transparency imposes discipline on government policy. Among SSA countries, the ranking of control of corruption increases with freedom, as rated by Freedom House, and the openness of the budget process (Figure 9). Best practices include data dissemination, publication of statistics, open government and access to information, and enacting an asset disclosure system.

Sub-Saharan Africa (SSA): Transparency and Control of Corruption

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Sources: Freedom House 2016 report; Open Budget Survey; and World Governance Indicators.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Sub-Saharan Africa (SSA): Transparency and Control of Corruption

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Sources: Freedom House 2016 report; Open Budget Survey; and World Governance Indicators.

• Download Figure
• Download figure as PowerPoint slide

Sub-Saharan Africa (SSA): Transparency and Control of Corruption

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Sources: Freedom House 2016 report; Open Budget Survey; and World Governance Indicators.

• Download Figure
• Download figure as PowerPoint slide

41. While fiscal reporting has improved, fiscal data could be more transparent. Budget documents are not sufficiently comprehensive. Analyses covering budget execution, financial assets, and the impact of new revenue and expenditure measures are inadequate. Reports on (significant) off-budget spending undertaken by state-owned enterprises (SOEs) like the public utility JIRAMA and projects financed by external borrowing and grants are incomplete. Annual reports summarizing the budget execution of local and regional authorities do not exist. The central government does not provide a consolidated assessment of contingent fiscal risks from off-budget execution by SOEs, local authorities, and public-private partnerships (PPPs). Intra-year reports on budget execution are insufficient and the Parliament did not receive audited reports on budget execution for several years. A system for tracking the public expenditure chain could also shed light on where the money gets lost.

42. The government would also be well advised to provide more information and data on multinationals and SOEs active in extractive industries. The extractive industries—industrial and artisanal mining and logging—need adequate monitoring and rule-based operations to ensure that the economic benefits are shared equitably and not captured by insiders. Equitable sharing requires that the government captures an adequate share of the profits through an appropriate fiscal regime and uses the additional revenues to improve the supply of public goods and services. Information and data on free-zone companies would also be valuable for an informed discussion about the benefits and costs of the preferential tax regime.

Expenditure control and budget management

43. Madagascar has a strong legal framework for public procurement, but the implementation is weak¹⁴. The Public Procurement Code requires that all procurements follow open and competitive bidding, and further defines specific exceptions for single sourcing. In practice, numerous public contracts have been awarded without competitive bidding and the public has limited access to the results and documents associated with procurement. Moreover, while it is stipulated that companies violating the procurement regulations are prohibited from participating in future bids, the procurement authority (Autorité de Régulation des Marchés Publics, ARMP) lacks financial means to fulfill its oversight role and does not keep a public registry of companies forbidden from bidding.

44. The government has taken actions to strengthen controls of public spending. The Prime Minister issued a “note d’instruction” to all public institutions and ministries in 2016 reiterating that all procurement contracts above a minimum threshold will be awarded competitively through open bidding. External audits and Parliamentary control have been reinforced by submission of long overdue audit reports covering 2012–14 to the Parliament. The government has also estimated the amount of domestic payment arrears and is committed to clear existing arrears over the medium term.

45. However, many remaining weaknesses remain. New payment arrears are difficult to avoid because budget execution and cash management are too weak to adjust for changes in available resources during the year. The quality of intra-year budget execution reports needs to improve. Controls to certify that allocated resources reach intended front-line service delivery units, like primary schools and primary health centers, are inadequate. The rules applicable to expenditure executed under exceptional procedures are not fully observed although the amounts involved are small. Payroll data are not systematically cross-checked against information in the register of government employees. The legal framework governing the provision of guarantees is incomplete.

46. More work is required to make the Malagasy budget a reliable instrument for planning. The difference between budgeted spending and the actual outcome has been significant in recent years and ministerial spending ceilings fixed in the budget are, therefore, an unreliable predictor of actual spending. The discussion of debt sustainability (to be part of the budget per best practice) is insufficient, sector strategies covering spending by line ministries such as education, transport, justice, water, and health are incomplete, and the analysis of effects on future current spending from planned investment is deficient.

47. Strengthening the monitoring and supervision of SOEs is a priority. While the value of off-budget operations undertaken by the SOEs is significant, most SOEs have not respected the requirement to submit their annual financial statements for control to their supervisory line ministry and the Ministry of Finance and Budget (MFB). The fiscal risks are considerable. Government transfers to cover losses in public enterprises corresponded to about 10 percent of total fiscal expenditure in 2016. The government has provided large transfers to support the struggling public utility JIRAMA and Air Madagascar. JIRAMA is mismanaged as evidenced by declining operational efficiency, theft of fuel, high non-technical losses, and increased use of expensive diesel-based thermal generation. The financially weak company has underinvested in network maintenance and upgrades, which in turn has increased technical losses and further aggravated its financial difficulties. To identify risks and contingent liabilities, the MFB would be well advised to analyze the financial data of all SOEs and complete a comprehensive annual report.

Madagascar: Fiscal Transfers to SOEs in 2016

(Percent of total fiscal expenditure)

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Source: Malagasy authorities.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Madagascar: Fiscal Transfers to SOEs in 2016

(Percent of total fiscal expenditure)

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Source: Malagasy authorities.

• Download Figure
• Download figure as PowerPoint slide

Madagascar: Fiscal Transfers to SOEs in 2016

(Percent of total fiscal expenditure)

Citation: IMF Staff Country Reports 2017, 224; 10.5089/9781484310663.002.A001

Source: Malagasy authorities.

• Download Figure
• Download figure as PowerPoint slide

Strengthen revenue collections through risk-based analysis

48. The tax and customs administrations can fight corruption more effectively by refocusing their limited staff resources on real challenges and compliance risks. It is essential to identify key areas with revenue potential and measures to recover missing payments of tax and duties. In tax administration, priority should be given to: (i) establishing systems to identify all taxpayers and determine their tax liabilities; (ii) making the best use of modern technologies, including mobile phones, to ease payment of taxes; (iii) making compliance as easy as possible through adequate taxpayer services; (iv) estimating the potential tax base (and thus the amount of tax evasion); and (v) establishing an adequate penalty structure to deter tax evasion. Coordinating the data bases used by different bodies—tax administration, customs, pension providers—will be crucial in the effort to identify taxpayers. There is a need to make a complete annual reconciliation between on one hand, taxes paid, recovery of tax arrears, and new tax arrears, and on the other, inflows to the consolidated revenue fund. Cross-debts between the state and private-sector companies is a specific issue that also needs to be resolved because companies withhold tax payments to offset unpaid bills for goods and services delivered.

49. In customs, the priority is to move from strictly transaction-based controls to more use of post-clearance audits (PCAs). The transaction-based controls are applied to each individual shipment at the time of border crossing and include physical examination, verification of value, origin, certificates, licenses etc. Customs administrations focused on transaction-based controls like Madagascar often inspect a significant share of imported goods and thus, long delays at the border occur frequently and there is often room for corrupt practices to grow and flourish. The customs in Toamasina inspected about half of all containers that passed through the port in 2014. In comparison, PCAs use a more comprehensive and holistic evaluation for the calculation of duties and taxes to be paid. Goods are released upon arrival and clearance is completed and duties paid later after the PCA, which typically takes the form of periodic and cyclic audits, usually at the premises of the importer. Customs staff review imports over a given period and check all relevant commercial records, including bank statements and contracts, to verify the information given at the time of border crossing.

50. The civil servants’ participation in the fight against corruption could be enhanced. For example, no law requires civil servants to report cases of alleged corruption. No specific law exists for the protection of whistleblowers within the civil service.¹⁵ In practice, civil servants are also not entirely free from political influence. There are anecdotal stories of civil servants having been transferred to less influential positions as a reprimand.¹⁶

51. Limiting the discretion of civil servants can help reduce corruption. However, such measures must be implemented after careful considerations. Rules aimed to reduce discretion often produce costs and may reduce efficiency. For instance, the quality of procurement controls would suffer if the procurement officers only checked if the formal specifications had been fulfilled and disregarded all other information. When contractors detect loopholes, however, more details will be requested in the tender documents, increasing the burden on bidders and reducing competition (Lambsdorff, 2008).

52. The government is taking measures to strengthen the integrity of the civil service. Recruitment is becoming more transparent and BIANCO has uncovered some corrupt practices. The Law 2004–030 concerning the fight against corruption and the Decree 2003–1158 concerning the code of conduct of civil servants establish formal rules to prevent conflict of interest and nepotism (Global Integrity, 2016). Within the law, there are also restrictions of up to three years for civil servants entering the private sector after leaving the government. Madagascar is one of only four countries to have such provisions.