Statement by Mr. Sembene, Executive Director for Madagascar, Mr. Razafindramanana, Alternate Executive Director, and Mr. Alle, Senior Advisor to Executive Director July 11, 2018

Third Review Under the Extended Credit Facility and Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Republic of Madagascar


Third Review Under the Extended Credit Facility and Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Republic of Madagascar

1. The Malagasy authorities would like to thank the Fund for its continued engagement with Madagascar over the past years. The policy dialogue with staff in the context of the program supported by the Extended Credit Facility (ECF) has been instrumental in helping sustain economic recovery amidst episodes of political turmoil and natural disasters. The authorities broadly share the thrust of the staff report, which fairly depicts the achievements under the program and the challenges still facing the economy.

2. Madagascar has maintained its strong growth momentum despite a series of adverse shocks in 2017, including a drought followed by a major cyclone and an outbreak of plague. The authorities’ efforts to overcome years of instability along with the support of the international community have paved the way for a sustained economic recovery.

3. Our authorities are determined to advance their reform agenda aimed notably at strengthening constitutional democracy and resolving social and political tensions that have held back the country’s economic development in the past. It is in line with their consensus-building principles that the recent pre-electoral tensions have been handled. Following street protests over the electoral process, a new and consensual Prime Minister has been appointed on June 4th and a new government set up on June 11th including representatives from major opposition parties. Tasked with the priority objective of organizing an inclusive, free and fair presidential election, the government has recently unveiled the calendar; the first and second rounds of the presidential contest are scheduled for November 7th and December 19threspectively. The consensus government has reiterated its commitment to the ECF-supported program and is also committed to conducting a peaceful election with the view to maintaining the favorable economic prospects of the country.

Recent Developments, Program Performance and Outlook

4. The economic recovery that started in 2016 has continued in 2017. Despite the different shocks that affected the economy, real GDP growth stood above 4 percent for the second year in a row, driven mainly by transport, manufactured exports, and other services. The poor rice harvest caused by bad weather conditions translated into rice-price-fueled inflation, which rose to 9 percent y-o-y at end-2017 before abating to 7.4 percent y-o-y in April 2018.

5. Program performance has continued to be strong despite the challenging environment. All end-2017 quantitative performance criteria (PCs) and indicative targets (ITs) were met. Some PCs including the floor on the domestic primary balance and the one related to external debt and some ITs such as priority social spending and the ceiling on the central bank net domestic assets were observed with a significant margin. On the structural front, all the five structural benchmarks (SB) for end-2017 were implemented, with one completed with delay. The new statistics law was indeed submitted to parliament in February 2018, rather than December 2017 as planned, causing the minor delay.

6. Regarding the outlook, our authorities concur with staff on the favorable growth prospects underpinned by the projected performance in agriculture, manufacturing, and public investment. They also broadly share the balance of risks. The authorities are confident that the recent consensus and the handling of the presidential election by a multi-partisan government should reassure all candidates and hence contribute to minimizing political risks. They are committed to continuing to monitor the situation closely, and stand ready to take necessary actions for preserving a peaceful climate including for the smooth implementation of the ECF-supported reform program.

Policies for 2018 and the Medium Term

Enhancing the fiscal stance for public investment

7. In 2018 onward, fiscal policy is geared toward creating space for growth-supporting public investment and social spending. To this end, efforts are directed toward mobilizing more revenue while improving the quality and composition of spending. The supplementary budget adopted by Parliament on June 29th reflects these overarching features, as agreed with staff. It is consistent with the objectives of the program, including a positive primary balance of 0.1 percent of GDP. While being 0.6 percent of GDP lower than the initial budget, this effort in an environment of high fiscal needs epitomizes the authorities’ commitment to fiscal sustainability. This projected favorable fiscal stance is backed by more optimistic revenue projections based on the overperformance recorded in the first quarter of 2018. In this connection, the introduction of performance contracts with management-level staff to increase custom duties constitutes one of the key administrative reform measures underpinning the expected improvement in revenue collection. Higher oil prices and performing VAT have also contributed to this performance. Going forward, additional measures such as the use of the new Tax Identification Number (TIN) throughout all departments of the ministry of finance and budget and social security offices (end-2017 SB) will also help enhance revenue mobilization.

8. On the spending side, the emphasis is on scaling up public investment financed both by domestic resources and foreign loans. The authorities’ strategy is two-fold; phasing out or rationalizing transfers and making room for efficient public investment and social spending. To better mobilize foreign financing and improve investment efficiency, they have created the Organization for the Coordination and Monitoring of Investments and their Financing (OCSIF) tasked with coordinating the selection and implementation of projects across ministries and implementing donors’ procedures. Operational losses and financial needs of the national electricity company, JIRAMA, make the bulk of budget transfers. With support from the World Bank, the authorities contained transfers in the 2018 budget, by implementing a set of measures including cost reduction and revenue increase. In this regard, efforts continue to improve bill collection, including through the installation of smart meters. Going forward, actions will encompass lowering production costs, reforming JIRAMA and the overall electricity sector and raising tariffs. With an appropriate sequencing, all these actions will help progressively phase out transfers to JIRAMA.

9. Other efforts for spending restraint include containing the wage bill and implementing the fuel price adjustments. The wage bill was contained in 2017. Efforts in crosschecking the payroll and workforce data will yield savings on around 1,000 ghost workers in 2018. The strategy on the wage bill will be further enhanced with ongoing initiatives to improve the covering of salaries and pensions and hence forecasts. Regarding fuel prices, the authorities have concluded in February, a provisional agreement with the distributors to reduce their margins (lowered by MGA 140 per liter). In addition, pump prices were increased in March, April and June by an average of MGA 205 per liter. Discussions continue and based on a joint study underway, additional measures will be taken including possible further modifications to the margins and incremental steps towards automatic price adjustments. All the combined efforts in revenue mobilization and spending restraint should help create fiscal space both for much needed public investment and social spending in education, health and security.

Maintaining debt sustainability

10. The authorities take good note of staff assessment that the country’s risk of external debt distress remains moderate. They also welcome the upgrade in their debt monitoring capacity from “weak” to “adequate”, following a higher score in the 2014–16 World Bank Country and Policy Institutional Assessment Index (CPIA). The authorities and staff have agreed to fully take account of the implications of the new status from end-December 2018 onwards. Going forward, our authorities are committed to prioritizing concessional borrowing in their debt strategy with the view to preserving debt sustainability.

Strengthening the monetary policy framework and the financial sector

11. The central bank has managed well thus far the inflationary pressures and appreciation pressures on the Ariary (national currency) stemming from the high world price of vanilla. High liquidity in the banking system added to inflationary pressures. Going forward, the authorities are taking measures aimed at strengthening the monetary policy framework, including improving the functioning of the interbank market. The development of the financial sector remains a key component of the authorities’ agenda. Reforms are underway to enhance financial stability and supervision. A new banking law aimed at strengthening supervisory powers should be submitted to parliament by end-December 2018; followed by a law on preventing systemic risks and managing financial crises to be submitted to parliament in 2019.

12. The government is revamping the legislative framework for engineering new products, services and actors in the financial sector. In this regard, a new law on microfinance has been enacted, setting the stage for revamping Paositra Malagasy (PAOMA) and Caisse d’Epargne de Madagascar (CEM), two institutions with systemic importance for financial inclusion. In the same vein, electronic money services are developing at a rapid pace, nearly doubling every year over 2010–16. This trend should be sustained with the recent entry into force of the new law on electronic money. These positive developments should contribute to deepening the financial market and help improve access to credit, especially to SMEs.

Supporting structural transformation through industrial policy

13. The authorities have embarked on an agenda of structural transformation of the economy. Their strategy evolves around three features for which draft laws have been enacted: a Law on Special Economic Zones (SEZ), a Law for Industrial Development (LID) and a Law on Free Trade Zones. Overall, the aim of the SEZ and LID is to spur the diversification of the economy towards industrial activities including agroindustry, construction-related products and consuming goods. The free trade zone aims to leverage the water endowments of Madagascar to create a competitive harbor for regional and international trade. The government intends to adopt an incremental approach through pilot projects and adjust policy moving forward. Likewise, building on staff comments and recommendations, they are committed to continuing to improve draft laws, including by paying due attention to fiscal implications. In this regard, efforts will be made to attract private investment without jeopardizing unduly revenue mobilization.

Improving economic governance and fighting corruption

14. Significant progress has been made in setting the institutional framework to improve economic governance, enhance accountability and fight corruption in the management of public affairs. The authorities are fully aware of the potential benefits that achievements in those areas would bring to the business climate. Several new laws have been adopted by parliament including the anti-corruption law, which should facilitate the disclosure of assets by concerned public officials. Other draft laws submitted to parliament in December 2017 are pending discussion, including the asset recovery law, by which judicial authorities can freeze, seize and confiscate proceeds of crime; and the anti-money laundering and counter terrorism financing law (AML/CFT), which will align Madagascar’s AML/CFT framework with international standards. Two enforcement institutions are being reinforced to apply the laws; the anti-corruption office (BIANCO) and the financial intelligence unit (SAMIFIN). In addition, an anti-corruption center has been established and another one is scheduled to be opened this year.

15. Specific efforts are also being made in areas of public financial management, public procurements, PPPs and SOEs to enhance economic governance. Fiscal transparency will be improved with the development of a medium-term fiscal framework, SOEs are better covered by the budget and a PPP Unit has been created and is spearheading the process for finalizing procedures in coordination with ministries and the National Committee for PPPs. Two bodies have been created to oversee public procurements with an emphasis on increasing the share of competitive bids. With UNDP assistance, the authorities are taking steps to elaborate a catalog of benchmark prices of goods and services in public procurements, to ensure value for money.


16. In the face of a challenging domestic and external context, Madagascar sustained strong economic performance under the ECF-supported program. Growth remained robust, the domestic primary balance was in surplus, and progress was made in implementing structural reforms. In the period ahead, the authorities are committed to continuing fiscal consolidation with a view to creating fiscal space for much-needed public investment and social spending. Furthermore, they intend to lay the basis of strong and inclusive growth, while further improving economic governance.

17. In view of the strong economic performance and the authorities’ commitment to the objectives of the program, we would appreciate the Board’s support for the completion of the third review under the ECF arrangement and the authorities’ request for modification of performance criteria.

Republic of Madagascar: Third Review Under the Extended Credit Facility and Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Republic of Madagascar
Author: International Monetary Fund. African Dept.