2019 Article IV Consultation and Sixth Review Under the Extended Credit Facility Arrangement-Press Release; Staff Report; and Statement by the Executive Director for Republic of Madagascar


2019 Article IV Consultation and Sixth Review Under the Extended Credit Facility Arrangement-Press Release; Staff Report; and Statement by the Executive Director for Republic of Madagascar

1. Our Malagasy authorities thank Executive Directors, Management and staff for their continued support to Madagascar in implementing their reform program supported by the ECF arrangement. They are particularly thankful for the candid discussions with staff held in Antananarivo in the context of the sixth and final review of the program. The report gives a good account of these discussions. The Malagasy authorities are also grateful for the timely technical assistance provided to support their reform efforts. Likewise, we welcome the Selected Issues paper which highlights issues of interest for the authorities as the national development plan is being finalized.

2. Program implementation during the period under review has been strong. All the performance criteria for end-June 2019 were met. All but one indicative targets at end-June 2019 were respected. The structural reforms advanced despite some delays related to the electoral period and the installation of the new Parliament. Overall, there has been significant progress towards the ECF-supported program which aimed to strengthen macroeconomic stability, promote inclusive and sustainable growth, and reduce poverty. Going forward, the Malagasy authorities will pursue prudent macroeconomic and structural policies in the context of their ambitious medium-term national development plan, Plan Emergence Madagascar (PEM), to address economic, social and climate change challenges facing the country. In addition, the authorities have formally expressed their interest in a successor arrangement to support the implementation of the PEM.

3. In light of the strong achievements under the program and their continued commitment to pursue prudent policies beyond the current arrangement, our authorities are requesting the completion of the sixth and final review of the Fund-supported program under the Extended Credit Facility.

I. Recent developments and outlook

4. Macroeconomic conditions improved in 2019. Economic activity accelerated in the second half of 2019 following a slight slowdown in the first half of the year due to delayed budget execution and the private sector’s wait-and-see attitude during the election period. Growth increased from 4.6 percent in 2018 to 4.8 percent in 2019. Inflation declined from 6.9 percent in 2018 to 6.0 percent in 2019. External position remains broadly positive despite a current account balance estimated to have turned negative in 2019 due mainly to lower commodity exports. International reserves have continued to grow and stood at 4.3 months of imports. Fiscal deficit at end-June 2019 was better than programmed, owing to increased revenue mobilization and budget under-execution in the first half of 2019, which notably affected execution of social spending. The updated debt sustainability analysis (DSA) shows that overall risk of debt distress remains moderate and the risk of external debt distress is still low. The central bank (Banky Foiben’i Madagasikara, BFM) continued to successfully manage the volatile liquidity in a banking system which remains profitable, well capitalized, and liquid.

5. The macroeconomic outlook continues to be favorable. The Plan Emergence Madagascar seeks to further ameliorate macro-economic prospects, including by accelerating economic growth driven by higher private sector activity and the ongoing scaling up of public investment. The PEM assumes a gradual increase in real GDP growth from 4.8 percent in 2019 to 5.5 percent in 2020 and to 7 percent in 2023. These projections, which are higher than those in the current ECF arrangement, are based on improvements in both the quality and quantity of public investment in infrastructure, and on rising private sector activity, especially tourism, light manufacturing (e.g., textiles), mining, and agriculture. Inflation is projected to remain subdued over the medium term and a deterioration of the current account expected owing to higher public investment. The authorities agree with staff assessment of downside risks to the outlook, including a slowdown in public investment execution and terms-of-trade shocks. However, they believe that, given the greater political stability and higher private sector confidence following the election period, a substantial portion of announced investment projects could materialize more rapidly than forecast.

II. Program performance

6. All performance criteria for end-June 2019 were met. Four out of the five indicative targets at end-June 2019, including the one on tax revenue, were also achieved. As expected at the time of 5th review, the end-June 2019 indicative target on increasing social spending was not met due to the late adoption of the 2019 revised budget, but it has picked up significantly since then. Progress in the implementation of the structural reforms monitored in the program continued. Four of the eight remaining structural benchmarks (SBs) were completed albeit one, the submission of the banking law to Parliament, was implemented with delay. As regard the remaining four SBs, the draft law on financial stability has been prepared and is being reviewed by the Council of Ministers, before its submission to Parliament. The use of the new Tax Identification Number is completed in the major ministries and is being expanded to all ministries. In the context of severe electricity shortages in the capital city and to ensure the continuity of fuel supply to JIRAMA, the public utility company, one single source contract for fuel supply has been signed in August 2019 without prior notification to Fund and World Bank staff, thereby failing to observe the related continuous benchmark. With this exception, the practice of single source contracts in use until 2016 has been eliminated. Residual uncertainties on the application of the reference price structure delayed the implementation of the automatic fuel pricing mechanism, now scheduled for March 2020. However, no fuel subsidies have been paid since the implementation of the revised fuel price structure in June 2019.

III. Policies for 2020 and beyond

7. The authorities are determined to address Madagascar’s development challenges stemming notably from its fragile situation, high poverty rate, and vulnerabilities to natural disasters and terms of trade shocks. To this end, the PEM targets (i) higher and sustained economic growth, based on the mobilization of tax revenues and the prioritization of spending, particularly towards investment; (ii) more inclusion, supported by strengthened social policies and spending, with the objective of reducing poverty and a better access to education, health, and housing; and (iii) better governance and institutions. The authorities will focus on gradually enhancing the productivity of smallholder agriculture and developing export-oriented agribusiness to support inclusive growth. The reform agenda puts a special emphasis on completing reforms initiated during the ECF arrangement, notably those related to JIRAMA, fuel pricing and financial sector stability. Continued donors’ financial and technical assistance will be crucial to achieving these medium-term objectives. The recent assessments of debt sustainability are supportive of the authorities’ plans to increase borrowing to finance higher public investment.

Growth-Friendly and Inclusive Fiscal Policy

8. The authorities will pursue a prudent fiscal policy consistent with the objectives of the PEM. In particular, fiscal policy will continue to focus on pursuing domestic revenue mobilization efforts and streamlining non priority spending to create fiscal space required for priority investment and social spending. The recently-adopted budget for 2020 is in line with those objectives. It targets achieving a fiscal primary surplus in 2020. Tax revenue is expected to increase with ongoing improvements in tax and customs administrations, and new tax measures included in the budget law. The composition of expenditure will shift towards priority investment and social spending through the rationalization of current outlays, notably transfers. Although picking up in 2020, the wage bill will be contained at a sustainable level over the medium-term with notably the modernization of the payroll management. Priority social spending is projected to augment steadily over the medium-term, with enhanced monitoring and social programs. Public investment will increase significantly in 2020 and over the medium-term to address infrastructure gaps. Moreover, the authorities will continue, with the support of development partners, their efforts on the identification, monitoring and, where possible, mitigation of fiscal risks, including those related to state-owned enterprises (SOEs), especially JIRAMA, PPPs or the deficit of the public pension fund. They are ready to implement contingency measures if revenue assumptions do not materialize, while protecting social and investment priority spending. These measures would be part of a revised budget law.

Enhancing Economic Governance and Fighting Corruption

9. The authorities remain resolved to sustain their ongoing efforts to enhance public financial management, improve governance and transparency and reduce corruption vulnerabilities. In this regard, as extensively described in the MEFP, they will fully enforce the public financial management and anticorruption reform legislations approved during the program period. In particular, measures to strengthen budget preparation, public procurement, public investment management, treasury management, fiscal risk management and debt management in the context of the updated 2018–2026 Strategic Plan of Modernization of Public Financial Management and the 2018–2020 Action Plan will be implemented based on the recommendations of technical assistance missions. In addition, the implementation decrees of the 2016 anti-corruption law and 2019 AML/CFT law will be issued in early 2020. Moreover, improvement in transparency is continuing with increasing publication of institutional activity reports, notably from the institutions in charge of enforcing the anti-corruption framework. The authorities are of the view that pursuing progress in those areas is essential to improve the business climate and stimulate both domestic and foreign investment.

Maintaining Stable Inflation and Building External Resilience

10. The authorities remain committed to price stability in the context of a flexible exchange rate regime, while pursuing a gradual monetary policy transition from monetary aggregates targeting to interest rate targeting policy. Consistent with the price stability objective, the BFM will continue to closely monitor potential inflationary pressures and actively manage bank liquidity, in order to maintain an appropriate policy stance. It is also strengthening its monetary policy framework to improve the effectiveness of the interest rate transmission channel with the revision of the short-term interest rate corridor and the preparation of legislations on repo transactions and collateral to be submitted to Parliament in 2020. The central bank will also continue to build international reserves, consistent with its mission to safeguard external stability. The long-term objective is to gradually increase import coverage to 6 months or more. The BFM’s modernization is continuing, with a reform agenda to increase transparency and to enhance its financial independence. The central bank remains committed to full adoption of International Financial Reporting Standards (IFRS) for the 2020 accounts.

Building a Sound Financial Sector Supporting Economic Development

11. The authorities will continue to reinforce financial stability while promoting greater access to financial services. Pending the Parliament approval of the banking law, the authorities will prepare the related implementation text in accordance with international standards and FSSA recommendations. The law on financial stability is expected to be submitted to the Parliament in 2020. The authorities will also approve updated prudential directives by end-June 2020 on capital adequacy, liquidity, concentration of risks, and classification and provisioning of credit risks, also in line with international standards and FSSA recommendations. A revised law to improve the functioning of the foreign exchange market, prepared in consultation with the banking sector and the support of the Fund, is expected to be presented to the Parliament in May 2020. As regard financial inclusion, the authorities have partnered with a local bank and a mobile phone operator to launch the KRED Initiative, a mobile digital platform to provide financing to micro and small enterprises in the context of the Fihariana program, and they are very encouraged by its early success. Progress is being made in the implementation of action plans regarding the restructuring of two public financial institutions, the Caisse d’Epargne de Madagascar (CEM) and Paositra Malagasy (PAOMA), which have the potential to improve access to financial services.

IV. Conclusion

12. The implementation of the ECF-supported program has been strong, which demonstrates the Malagasy authorities’ continued commitment to sound policies and reforms. Going forward, the authorities are determined to pursue their reform program agenda with a view to address economic, social and environmental challenges facing Madagascar. In this regard, they are contemplating a successor arrangement to support the implementation of the Plan Emergence Madagascar. In light of the above, we would appreciate Executive Directors’ favorable consideration of the Malagasy authorities’ request for the completion of the sixth and final review of the ECF-supported program.

Republic of Madagascar: 2019 Article IV Consultation and Sixth Review Under the Extended Credit Facility Arrangement-Press Release; Staff Report; and Statement by the Executive Director for Republic of Madagascar
Author: International Monetary Fund. African Dept.