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IMF Country Report No. 23/117

REPUBLIC OF MADAGASCAR

2022 ARTICLE IV CONSULTATION, THIRD REVIEW UNDER THE EXTENDED CREDIT FACILITY ARRANGEMENT, AND REQUESTS FOR A WAIVER OF NONOBSERVANCE OF PERFORMANCE CRITERIA AND MODIFICATION OF PERFORMANCE CRITERIA—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR REPUBLIC OF MADAGASCAR

March 2023

In the context of the Staff Report for the 2022 Article IV Consultation, Third Review Under the Extended Credit Facility Arrangement, and Requests for A Waiver of Nonobservance of Performance Criteria and Modification of Performance Criteria, the following documents have been released and are included in this package:

• A Press Release including a statement by the Chair of the Executive Board and summarizing the views of the Executive Board as expressed during its March 1, 2023 consideration of the staff report on issues related to the Article IV Consultation and the IMF arrangement.

• The Staff Report prepared by a staff team of the IMF for the Executive Board's consideration on March 1, 2023, following discussions that ended on January 20, 2023 with the officials of Republic of Madagascar on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on February 15, 2023.

• An Informational Annex prepared by the IMF staff.

• A Debt Sustainability Analysis prepared by the staff of the IMF and the World Bank.

• A Statement by the Executive Director for Republic of Madagascar

The IMF's transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities' policy intentions in published staff reports and other documents.

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PRESS RELEASE

PR23/56

IMF Executive Board Completes the Third Review Under the Extended Credit Facility, Approves $32.6 Million Disbursement, and Concludes the 2022 Article IV Consultation with the Republic of Madagascar

FOR IMMEDIATE RELEASE

• Two years of pandemic and multiple climate shocks have aggravated Madagascar's fragility. While Madagascar's economy rebounded faster than expected in 2021, growth is projected at 4.2 percent in 2022-2023.

• Overall program performance is mixed. Despite some macroeconomic slippages, the implementation of structural reforms is gaining momentum.

• Improving governance and accelerating reforms to increase transparency and accountability are key to deliver higher and more inclusive growth.

Washington, DC – March 1st, 2023: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ and completed the third review of the Extended Credit Facility (ECF) arrangement with the Republic of Madagascar. The completion of the review enables the disbursement of SDR 24.44 million (about US$32.6 million), usable for budget support, bringing Madagascar's total disbursements under the arrangement to SDR 146.6 million (about US$195.5 million).

Since the last Article IV consultation in 2019, the Malagasy authorities have implemented several key policy recommendations, but ambitious reforms remain hampered by limited capacity and weak governance. In a context of lower global growth and high international prices, Madagascar's growth is projected to stall at 4.2 percent in 2023 while annual average inflation would accelerate above 10 percent. Risks from the domestic political situation, low COVID-vaccination rates and adverse global developments cloud the outlook. On the upside, the implementation of the full reform agenda envisaged in the Plan Emergence Madagascar would have significant effects on productivity and growth.

Following the Executive Board discussion, Ms. Antoinette Sayeh, Deputy Managing Director and Acting Chair, made the following statement:

“In an adverse global environment and following a series of climate shocks, Madagascar's performance under the Fund-supported program has been mixed. The implementation of structural reforms is gaining momentum but needs to continue.

The gradual fiscal consolidation envisaged in the 2023 budget is appropriate. Identifying adequate tax policy measures, such as rationalizing tax exemptions, will be key to create more fiscal space for social spending and public investment. A properly designed revision of the mining code and mining taxation reform could yield significant revenue while boosting growth and exports. Further efforts are needed to strengthen public investment management and improve spending efficiency.

Going forward, the full implementation of the agreement reached with oil distributors in December 2022 and the gradual implementation of an automatic fuel pricing mechanism would help to mitigate fiscal risks. Strengthening social safety nets to protect the most vulnerable households and boosting resilience to climate shocks are important steps. Restoring the financial situation of state-owned companies and improving their governance is essential to reduce the need for fiscal transfers.

The authorities should further their efforts to enhance budget credibility and fiscal transparency. Recently adopted public financial management reforms are expected to contribute to better budget execution in 2023. Measures to enhance the legal framework for public procurement contracts would be welcome. The consolidation of the Cour des Comptes' autonomy will help improve external oversight of public finances. The effective enforcement of the anti-corruption framework is crucial to strengthen accountability and increase public trust in institutions.

The successful transition to interest rate targeting hinges on the central bank's capacity to continue the modernization of its framework for monetary operations, macroeconomic forecasting, and policy analysis. The central bank should stand ready to further raise interest rates to contain inflationary pressures and limit its foreign exchange interventions to smoothing volatility and building external buffers. The adoption of a financial stability law would help to strengthen the regulatory and supervisory role of the central bank and further enhance financial stability.

Measures to build resilience to climate shocks, drawing on recommendations from the recent Climate Macroeconomic Assessment Program (CMAP) are important. Efforts to strengthen the emergency response capacity, increase agricultural productivity, improve infrastructure, and develop social safety nets would help to address food insecurity.”

Executive Board Assessment²

Executive Directors agreed with the thrust of the staff appraisal. They welcomed Madagascar's progress on implementing reforms, although they noted the mixed performance under the Fund-supported program in a challenging environment. While the outlook remains favorable, growth has decelerated, and risks are to the downside. Directors encouraged continued commitment to policies that promote sustainable and inclusive growth and build resilience to shocks, including from climate change. They emphasized the importance of IMF capacity development to support reform implementation.

Directors agreed that a more gradual fiscal consolidation path was appropriate to help navigate a complex global and domestic environment. They emphasized the need to mobilize domestic revenue to finance higher social and investment spending, preferably by removing costly and distortionary tax exemptions. Noting the improvement in social spending execution in 2022, Directors encouraged continued efforts to modernize public financial management and improve budget execution and transparency. They underscored the importance of further steps to enhance the legal framework for public procurement contracts, including by requiring the identification of ultimate beneficial owners. Directors welcomed the settlement of cross-liabilities with oil distributors and urged strong efforts to restore the financial position of loss-making state-owned enterprises to further reduce fiscal risks.

Directors stressed the urgency of improving governance and accountability to improve trust in institutions. They underscored the importance of effective enforcement of the anti-corruption framework, including by providing adequate human and financial resources to anti-corruption agencies and upgrading the AML/CFT framework.

Directors encouraged the central bank to stand ready to further raise interest rates to contain inflationary pressures as needed. They recognized the progress in reforming the monetary policy framework to transition to interest rate targeting. Directors noted the steps taken to enhance financial stability and highlighted that the adoption of a financial stability law would help to strengthen the central bank's regulatory and supervisory role and further enhance stability.

Directors welcomed efforts to build resilience to climate shocks, drawing on recommendations from the recent Climate Macroeconomic Assessment Program (CMAP). They agreed that improving food security would require strengthening the emergency response capacity, increasing agricultural productivity, improving infrastructure, and developing social safety nets.

It is expected that the next Article IV consultation with the Republic of Madagascar will be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.

^{Table 1.}

Madagascar: Selected Economic Indicators, 2019–24

Sources: Malagasy authorities; and IMF staff estimates and projections.

¹Primary balance excl. foreign-financed investment and grants. Commitment basis.

²A negative value indicates a financing gap to be filled by budget support or other financing still to be committed or identified.

^{Table 1.}

Madagascar: Selected Economic Indicators, 2019–24

	2019	2020	2021	2022	2023	2024
	Est.				Proj.
	(Percent change; unless otherwise indicated)
National Account and Prices
GDP at constant prices	4.4	-7.1	5.7	4.2	4.2	4.8
GDP deflator	6.5	4.3	6.6	7.4	9.5	8.3
Consumer prices (end of period)	4.0	4.6	6.2	11.2	9.3	8.6
Money and Credit
Broad money (M3)	7.3	12.1	12.2	34.5	16.5	16.8
	(Growth in percent of beginning-of-period money stock (M3))
Net foreign assets	-2.6	2.1	1.0	-0.9	3.5	4.1
Net domestic assets	9.9	10.0	11.2	35.4	13.0	12.7
of which: Credit to the private sector	10.3	5.6	11.1	25.3	7.3	9.6
	(Percent of GDP)
Public Finance
Total revenue (excluding grants)	10.8	9.9	10.5	11.1	11.9	12.7
of which: Tax revenue	10.6	9.5	10.2	10.8	11.7	12.4
Grants	3.1	2.5	0.7	2.5	2.7	2.6
of which: budget grants	0.7	0.9	0.0	0.0	0.0	0.1
Total expenditures	15.4	16.4	14.0	20.3	17.6	18.6
Current expenditure	9.5	9.6	8.7	12.3	8.9	9.9
Capital expenditure	5.8	6.8	5.3	8.0	8.7	8.7
Overall balance (commitment basis)	-1.4	-4.0	-2.8	-6.8	-3.0	-3.3
Domestic primary balance1	0.3	-1.9	-0.1	-2.7	1.3	0.6
Total financing	1.3	3.5	3.2	5.0	4.6	3.3
Foreign borrowing (net)	1.3	1.8	2.3	2.6	2.2	2.5
Domestic financing	0.0	1.7	0.8	2.4	2.4	0.9
Financing gap2	0.0	0.0	0.0	0.0	0.0	0.0
Savings and Investment
Investment	21.2	19.5	23.2	23.4	25.3	24.6
Gross national savings	20.4	12.3	10.1	17.8	19.6	19.5
External Sector
Exports of goods, f.o.b.	18.5	15.0	18.6	23.2	24.4	24.4
Imports of goods, c.i.f.	26.9	24.3	28.7	34.0	35.0	32.0
Current account balance (exc. grants)	-5.4	-7.9	-5.7	-8.0	-8.4	-7.7
Current account balance (inc. grants)	-2.3	-5.4	-5.0	-5.6	-5.7	-5.1
Public Debt	41.0	51.2	52.3	57.1	53.1	51.9
External Public Debt (inc. BFM liabilities)	27.0	36.8	38.5	42.5	41.1	40.8
Domestic Public Debt	13.9	14.4	13.8	14.7	11.9	11.2
	(Units as indicated)
Gross official reserves (millions of SDRs)	1196	1338	1630	1601	1523	1627
Months of imports of goods and services	4.2	6.0	5.8	4.3	3.7	3.9
GDP per capita (U.S. dollars)	532	477	517	526	536	560

Sources: Malagasy authorities; and IMF staff estimates and projections.

¹Primary balance excl. foreign-financed investment and grants. Commitment basis.

²A negative value indicates a financing gap to be filled by budget support or other financing still to be committed or identified.

View Table

^{Table 1.}

Madagascar: Selected Economic Indicators, 2019–24

	2019	2020	2021	2022	2023	2024
	Est.				Proj.
	(Percent change; unless otherwise indicated)
National Account and Prices
GDP at constant prices	4.4	-7.1	5.7	4.2	4.2	4.8
GDP deflator	6.5	4.3	6.6	7.4	9.5	8.3
Consumer prices (end of period)	4.0	4.6	6.2	11.2	9.3	8.6
Money and Credit
Broad money (M3)	7.3	12.1	12.2	34.5	16.5	16.8
	(Growth in percent of beginning-of-period money stock (M3))
Net foreign assets	-2.6	2.1	1.0	-0.9	3.5	4.1
Net domestic assets	9.9	10.0	11.2	35.4	13.0	12.7
of which: Credit to the private sector	10.3	5.6	11.1	25.3	7.3	9.6
	(Percent of GDP)
Public Finance
Total revenue (excluding grants)	10.8	9.9	10.5	11.1	11.9	12.7
of which: Tax revenue	10.6	9.5	10.2	10.8	11.7	12.4
Grants	3.1	2.5	0.7	2.5	2.7	2.6
of which: budget grants	0.7	0.9	0.0	0.0	0.0	0.1
Total expenditures	15.4	16.4	14.0	20.3	17.6	18.6
Current expenditure	9.5	9.6	8.7	12.3	8.9	9.9
Capital expenditure	5.8	6.8	5.3	8.0	8.7	8.7
Overall balance (commitment basis)	-1.4	-4.0	-2.8	-6.8	-3.0	-3.3
Domestic primary balance1	0.3	-1.9	-0.1	-2.7	1.3	0.6
Total financing	1.3	3.5	3.2	5.0	4.6	3.3
Foreign borrowing (net)	1.3	1.8	2.3	2.6	2.2	2.5
Domestic financing	0.0	1.7	0.8	2.4	2.4	0.9
Financing gap2	0.0	0.0	0.0	0.0	0.0	0.0
Savings and Investment
Investment	21.2	19.5	23.2	23.4	25.3	24.6
Gross national savings	20.4	12.3	10.1	17.8	19.6	19.5
External Sector
Exports of goods, f.o.b.	18.5	15.0	18.6	23.2	24.4	24.4
Imports of goods, c.i.f.	26.9	24.3	28.7	34.0	35.0	32.0
Current account balance (exc. grants)	-5.4	-7.9	-5.7	-8.0	-8.4	-7.7
Current account balance (inc. grants)	-2.3	-5.4	-5.0	-5.6	-5.7	-5.1
Public Debt	41.0	51.2	52.3	57.1	53.1	51.9
External Public Debt (inc. BFM liabilities)	27.0	36.8	38.5	42.5	41.1	40.8
Domestic Public Debt	13.9	14.4	13.8	14.7	11.9	11.2
	(Units as indicated)
Gross official reserves (millions of SDRs)	1196	1338	1630	1601	1523	1627
Months of imports of goods and services	4.2	6.0	5.8	4.3	3.7	3.9
GDP per capita (U.S. dollars)	532	477	517	526	536	560

Sources: Malagasy authorities; and IMF staff estimates and projections.

¹Primary balance excl. foreign-financed investment and grants. Commitment basis.

²A negative value indicates a financing gap to be filled by budget support or other financing still to be committed or identified.

Title Page

REPUBLIC OF MADAGASCAR

STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION, THIRD REVIEW UNDER THE EXTENDED CREDIT FACILITY ARRANGEMENT, AND REQUESTS FOR A WAIVER OF NONOBSERVANCE OF PERFORMANCE CRITERIA AND MODIFICATION OF PERFORMANCE CRITERIA

February 15, 2023

EXECUTIVE SUMMARY

Context. The COVID-19 pandemic and extreme weather events have aggravated Madagascar's fragility. The poverty rate is estimated to be above 80 percent. After a stronger-than-expected recovery in 2021, growth is estimated to have decelerated in 2022 mostly due to climate shocks and a worsening global environment. Fiscal performance has deteriorated with weak revenue performance and increasing cross-liabilities with oil distributors. While fiscal and external deficits have widened, fiscal and external sustainability are preserved in the medium term.

Outlook and Risks. The outlook is highly uncertain with risks tilted to the downside. Madagascar continues to face risks associated with social fragility, weak state capacity, and climate shocks. Political risks are likely to increase ahead of the presidential elections. In a context of slowing global growth and higher inflation, real GDP is projected to grow by 4.2 percent in 2023, while average inflation would accelerate and reach 9.5 percent.

Program Performance. Three out of five quantitative performance criteria (QPCs) were met in June 2022 while all three indicative targets (ITs) were missed. The authorities are requesting a waiver for non-observance of performance criteria on the domestic primary deficit and the central bank's net foreign assets. The authorities advanced key structural reforms, notably by removing the spending authorization requirement—a key obstacle to better budget execution—, preparing annual spending commitment plans for social ministries in line with the approved budget, and strengthening the budgetary autonomy of the supreme audit institution. Moreover, they have reached an agreement to clear cross-liabilities with oil distributors.

Policy Discussions. There was broad agreement on policies to promote strong, sustainable, and inclusive growth and bolster macroeconomic stability by: (i) scaling up investment and social spending and creating additional fiscal space through enhanced revenue mobilization and spending prioritization; (ii) improving fiscal transparency and governance, including by tackling corruption; (iii) improving the monetary policy framework to promote stability and contain inflation; and (iv) building resilience, including to climate change, by strengthening social safety nets and infrastructure.

Approved By

Costas Christou (AFR) and Geremia Palomba (SPR)

Contents

• BACKGROUND

• RECENT ECONOMIC DEVELOPMENTS

• OUTLOOK AND RISKS

• PROGRAM PERFORMANCE

• POLICY DISCUSSIONS

• A. Creating and Strengthening Fiscal Space to Allow for Much Needed Investment and Social Spending

• B. Strengthening Public Financial Management, Governance and the Fight Against Corruption

• C. Advancing Monetary and Financial Reforms

• D. Building Resilience to Climate Shocks

• OTHER PROGRAM ISSUES

• STAFF APPRAISAL

• BOXES

• 1. Drivers of Inflation

• 2. Recommendations for the Revision of the Mining Code

• 3. Strengthening Budget Credibility

• 4. Improving the Financial Inclusion of Smallholder Farmers

• FIGURES

• 1. Real Sector Developments

• 2. Inflation and External Developments

• 3. Government Revenue and Spending

• 4. Monetary Developments

• 5. Financial Sector Developments

• 6. Medium-Term Macroeconomic Prospects

• TABLES

• 1. Selected Economic Indicators, 2019–28

• 2. National Accounts, 2019–28

• 3a. Fiscal Operations of the Central Government, 2019–28 (Billions of Ariary)

• 3b. Fiscal Operations of the Central Government, 2019–28 (Percent of GDP)

• 4. Fiscal Operations of the Central Government (Quarterly Projections)

• 5a. Balance of payments, 2019–28 (Millions of SDRs)

• 5b. Balance of payments, 2019–28 (Percent of GDP)

• 6. Monetary Accounts, 2019–28

• 7. Balance Sheet of the Central Bank

• 8. Selected Financial Soundness Indicators, 2019–22

• 9. External Financing Requirements and Sources, 2019–24

• 10. Decomposition of Public Debt and Debt Service by Creditor

• 11. Projected External Borrowing Program, on a Contractual Basis

• 12. Schedule of Disbursements and Timing of ECF Arrangement Reviews

• 13. Indicators of Capacity to Repay the Fund

• ANNEXES

• I. Global Risk Assessment Matrix

• II. Status of Key Recommendations from the 2019 Article IV Consultation

• III. Implementation Status of Key 2016 FSSA Recommendations

• IV. Capacity Development Strategy

• V. External Sector Assessment

• VI. Drivers of Growth Under the Plan Emergence Madagascar

• VII. Strengthening Governance and Fight Against Corruption

• VIII. Climate Macroeconomic Assessment Program (CMAP): Recommendations and Implementation Status

• APPENDICES

• I. Letter of Intent

  • Attachment I. Memorandum of Economic and Financial Policies

  • Attachment II. Technical Memorandum of Understanding