Statement by Mr. Raghani, Executive Director for Madagascar, Mr. Razafindramana, Alternate Executive Director, and Mr. Alle, Senior Advisor to Executive Director March 22, 2019

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


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

Mr. Raghani, Mr. Razafindramanana and Mr. Alle submitted the following statement:

1. Our Malagasy authorities would like to thank the Board, Management and Staff for the Fund’s continued engagement with Madagascar. The country has emerged from a highly anticipated presidential election which saw the victory of President Andry Rajoelina. The new President was sworn in on January 19th and appointed a new Government headed by the former consensual Prime Minister Christian Ntsay. The peaceful elections supported by the international community helped preserve the momentum of strong economic recovery.

2. Staff’s recent visit to Antananarivo has provided the opportunity for the new Government to commit to the main reforms agreed on in late 2018 in the context of the fourth review under the Extended Credit Facility (ECF). Even more significantly, the newly-elected President has committed to pursuing Madagascar’s reform program. In the period ahead, the authorities are determined to implement their agenda of economic transformation embodied by the President’s platform “Initiative pour l’Emergence de Madagascar” (Initiative for the Emergence of Madagascar).

3. The staff report candidly depicts the achievements made under the program and the policy areas that warrant the authorities’ efforts in 2019 onward. The authorities have posted a strong program performance over the period of the fourth review, despite challenges associated with the elections. Going forward, they intend to step up efforts to gradually address critical issues in areas such as fiscal policy and economic governance. The ECF-supported program will continue to serve as an important framework to enhance macroeconomic stability and advance key structural reforms.

Recent Developments, Program Performance and Outlook

4. The year 2018 confirmed the positive momentum of economic recovery of the past years. Real GDP growth is estimated to have accelerated at 5.2 percent against 4.3 percent in 2017, on the back of rising public and private investment and buoyant agriculture. Inflation is declining from rice price-related pressures of the recent years and stood at 6 percent at year-end. Budget execution has been broadly consistent with the program albeit challenges in the second half of the year, notably stemming from delays in adjusting fuel prices to international prices. This led to delayed tax payments by affected private distributors, a government cash shortfall and, consequently, budget savings at the expense of domestically-financed investment. On the external front, high international vanilla prices and mining receipts have helped maintain a strong position, with a current account surplus of 0.3 percent of GDP. As a result, reserves have risen, covering more than 4 months of imports, which is a comfortable level.

5. Program performance has continued to be strong despite elections-related spending pressures. All end-June 2018 quantitative performance criteria (PCs) were met. As well, all but one indicative targets (IT) were met. The IT on tax revenue was observed with a comfortable margin, exceeding the target by more than 0.1 percent of GDP. Regarding the IT on priority social spending, which was slightly missed due to administrative delays, the authorities are confident that such situations will be fixed going forward as they make progress in enhancing investment processes. Furthermore, they have prepared contingency measures, should the minor shortfalls on tax revenue caused by elections-related disturbances continue through early 2019. The authorities remain committed to keeping the primary fiscal balance in the margins agreed under the program. As regards structural reforms, most of the structural benchmarks (SBs) were observed, some with delays. The SB on avoiding budget costs from fuel pricing was not observed for its sensitivity in a fragile social and political situation. The authorities’ newly adopted plan will address the issue going forward. Preliminary data indicate that all end-December 2018 PCs have been observed except the one on the fiscal balance due to lower tax revenue in the run-up to the election.

6. The implementation of the two prior actions for this review adds to the strong program performance. An agreement with the fuel distributors has been signed on February 28. This is part of the authorities’ plan to settle the liability related to fuel pricing and avoid its re-occurrence. Regarding the second prior action, the management of the state-owned public utility JIRAMA has adopted a revised budget consistent with the transfers envelope planned in 2019. Furthermore, the authorities who oversee the company confirmed the Government’s commitment to the adoption and implementation of this revised 2019 budget.

7. , The authorities share the view of the balance of risks to the outlook presented by staff. On the downside, terms of trade shocks, disappointing global growth and rising protectionism could negatively affect exports. As regard risks related to low investment project implementation and to corruption, the authorities are confident that their ongoing measures to overhaul the framework for public investment and improve the business environment will bear fruits in the coming period. On the upside, the authorities are optimistic that the country will soon reap the dividends of the peaceful elections, including in terms of increasing FDI. As well, public investment should be scaled up as a result of an enhanced institutional framework. Such developments should boost growth and contribute further to the favorable outlook.

Policies for 2019 and the Medium Term

Bolstering Growth-Enhancing Fiscal Policy

8. The authorities continue to focus their fiscal policy on creating space for growth-enhancing public investment and social spending. To this end, they maintain a twofold strategy in the 2019 budget which targets a domestic primary surplus of 0.1 percent of GDP; mobilizing more revenue to increase the net tax to GDP ratio to 12.3 percent and restraining low priority spending while keeping the wage bill in check. On the revenue side, administrative measures introduced in 2018, notably the performance contracts with management-level staff in the customs administration, continue to bear fruits. New tax measures including adjustments in the VAT regime and streamlining exemptions and spending savings, form a package of contingency measures to be adopted in a supplementary budget in case of a revenue shortfall. Overall, the authorities will continue their efforts of domestic revenue mobilization by further improving the tax and customs administrations and broadening the tax base to new activities.

9. On the spending side, the authorities are strongly committed to stepping up efforts to reduce transfers to JIRAMA. Resolute cost-cutting measures are being implemented as well as efforts to increase revenue, with World Bank support. On fuel pricing, the authorities have adopted a plan to avoid any new budget impact. The plan includes a new fuel pricing mechanism and a settlement of arrears to distributors, which will gradually help phase out costs on public finances. Going forward, the authorities are dedicated to closely monitoring developments in world oil prices and stand ready to take measures for a smooth implementation of the pricing mechanism and for mitigating its potential adverse impact on the most vulnerable. Other efforts for spending restraint will proceed as well. They include reforms to contain the wage bill and transfers to the civil servants’ pension fund.

10. It is the authorities’ intention to use the fiscal space stemming from the combined efforts in revenue mobilization and non-priority spending restraint, to scale up growth-enhancing public investments. To this end, they are also working on lifting the administrative bottlenecks. A central institutional body has been created in the Presidency and is solidifying linkages and coordination with technical ministries involved in the implementation of investment projects. Similar efforts are underway to improve the institutional framework for future PPP projects, including mitigating fiscal risks.

Strengthening Monetary Policy and the Financial Sector

11. The authorities have continued their efforts to improve the central bank’s capacities, including with the support of IMF technical assistance (TA), on many fronts. In the face of a persistent trend of high world vanilla prices, the central bank has used a well-inspired combination of exchange rate flexibility, foreign reserves accumulation and liquidity operations. A draft law on repurchases to be adopted in 2019 is meant to further improve the monetary policy transmission mechanisms and spur the interbank market.

12. Reforms to invigorate the financial sector have proceeded well. While the banking sector remains healthy, efforts are warranted to diversify it beyond the few large banks which make the bulk of the industry. The authorities therefore welcome the development of smaller commercial banks, microfinance institutions (MFI) and electronic money services. Such a trend should gain further impetus with the implementation of their strategy for financial inclusion. Important steps have been made in that regard, including revamping the legal and regulatory frameworks, licensing a provider of electronic money services and a provider of a private credit bureau. The transformation of the public savings fund (CEM) into an MFI would also be a welcome development for the authorities’ financial inclusion strategy. These efforts to deepen the financial sector are being complemented with a draft law to be submitted to Parliament by mid-2019 and meant to enhance financial stability and address systemic risks.

Improving Economic Governance and Fighting Corruption

13. The authorities have made significant progress in creating and strengthening institutions for better economic governance, furthering accountability and fighting corruption. Efforts started in 2016 have culminated recently with the adoption of several additional laws. The institutional architecture is now made up of an anti-corruption law; a law on anti-corruption courts; a law on international cooperation; and a law on anti-money laundering and combating the financing of terrorism (AML/CFT). The authorities will also take steps for the adoption of the draft law on asset recovery in future parliamentary session with the view to completing the anti-corruption framework.

14. Noteworthy progress has also been made in the areas of public financial management, with the implementation of the 2018–2020 Strategic Plan of Modernization of Public Financial Management. Key aspects include priority areas on the management of fiscal risks, a better integration of SOEs and PPPs in the budget, the implementation of the new public procurement code and the strengthening of the debt management strategy.


15. Amid a challenging domestic electoral environment, Madagascar has maintained its momentum of strong economic performance under the ECF-supported program. Growth has accelerated further, macroeconomic stability has been preserved, and the implementation of structural reforms has broadly proceeded well. Going forward, the authorities are committed to continuing their efforts to create fiscal space for scaling up growth-enhancing public investment and social spending. Furthermore, they are determined to step up effort to further improve economic governance for unleashing the economy’s full potential.

16. In view of the strong economic performance and the authorities’ renewed commitment to the objectives of the program, we would appreciate the Executive Directors’ support for the completion of the fourth review under the ECF arrangement and the authorities’ request for modification of performance criteria.