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—Debt Sustainability Analysis
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International Monetary Fund. African Dept.
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Publication Date:
21 Mar 2023
eISBN:
9798400236013
Language:
English
Keywords:
exports threshold; debt-carrying capacity; debt vulnerability; PPG debt; dynamics equation; Public and publicly-guaranteed external debt; Debt sustainability analysis; Debt sustainability; Global
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REPUBLIC OF MADAGASCAR

Abstract

REPUBLIC OF MADAGASCAR

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—DEBT SUSTAINABILITY ANALYSIS

February 15, 2023

Approved By

Costas Christou and Geremia Palomba (IMF) and Asad Alam and Manuela Francisco (IDA)

Prepared by the staff of the International Monetary Fund (IMF) and the International Development Association (IDA)1

Madagascar: Joint Bank-Fund Debt Sustainability Analysis

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Madagascar, classified as having medium debt carrying capacity, is still assessed at moderate risk of external debt distress and moderate risk of overall (external plus domestic) debt distress. This is unchanged from the assessment at the time of the program request and first review. We continue to assess Madagascar's risk of external debt distress as “moderate” as a shock to exports pushes Madagascar's debt (burden) indicators above the relevant thresholds, but no external public and publicly guaranteed (PPG) debt ratios breach their thresholds under the baseline., while its debt-carrying capacity rests near the lower end of the medium-range. The overall risk of debt distress continues to be assessed as “moderate” as well, since the overall debt-to-GDP ratio breaches its benchmark under various stress scenarios. The government has some space to scale-up investment, assuming ongoing efforts to improve domestic resource mobilization, continued reliance on concessional external financing, and progress in developing domestic bond markets and in the implementation of the governance reform agenda. Risks remain tilted to the downside, including social and political volatility ahead of the 2023 presidential elections and the heightened risk of a materialization of contingent liabilities, which could lead to a faster than expected deterioration in external and public debt indicators. However, the distance to risk thresholds under current baseline projections suggests some space to absorb additional shocks.

Public Debt Coverage

1. The DSA includes public and publicly guaranteed external and domestic debt. Public and publicly guaranteed (PPG) debt comprises external and domestic debt in a fairly comprehensive manner, including: all external liabilities owed by the central bank; all borrowing from the IMF; government guarantees (such as the US$ 20 million or 0.13 percent of GDP guarantee to Air Madagascar for the leasing of new aircrafts reported in the 2023 budget law); non-guaranteed domestic debts owed by state-owned enterprises (SOEs) in cases where the government has at least 50 percent of the shares (e.g., JIRAMA and Air Madagascar);3 domestic arrears (which increased from 0.25 percent of GDP in 2021 to about 1.8 percent of GDP in 2022 as a result of a dispute with oil distributors during which oil distributors withheld the payment of oil taxes );4 external legacy arrears of about 1.4 percent of GDP (related to HIPC);5 and direct guarantees provided by the central government (Text Table 1). Borrowing by local governments requires the authorization from the Ministry of Finance and no request for such authorization has been submitted to date. The measure of debt is on a gross basis and the currency criterion is used to distinguish between domestic and external debt.6 The authorities publish data on a quarterly basis on both domestic and external debt. Reporting of debt statistics on public enterprises needs to be strengthened further, particularly by: (i) requiring all public enterprises to submit financial statements to the Ministry of Finance within legal limits; (ii) compiling information about public enterprises including debt statistics and monitoring-related risks; and (iii) publishing this information online in budget documents and fiscal risk statements.7

Text Table 1.

Madagascar: Public Debt Coverage Under the Baseline Scenario

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2. Notwithstanding the comprehensive coverage of debt statistics, a contingent liability shock of 7.2 percent of GDP is simulated to account for potential liabilities. This reflects the default setting for PPPs and financial markets and a country-specific calibration for possible additional SOE liabilities (Text Table 2).

  • The baseline reflects estimated end-2021 domestic debt for SOEs in which the government has a majority stake (i.e., debt of 3.4 percent of GDP for JIRAMA and of 3.5 percent for other SOEs).8 In addition, Air Madagascar has accumulated debt to external suppliers of US$ 29 million due to COVID-19 related pressures. Therefore, the default amount of 2 percent of GDP (which captures risks associated with JIRAMA and other SOEs) was adjusted upwards to reflect Air Madagascar's external liabilities (US$ 29 million or 0.2 percent of GDP), bringing the total to 2.2 percent of GDP.

  • Exposures to PPPs are set to zero since estimates of the PPP-related capital stock fall below 3 percent of GDP, the threshold for the PPP shock to be activated (the stock related to the Ravinala Airport is estimated at only 1.8 percent of GDP). The authorities may develop more PPPs going forward, especially in the area of hydroelectric power, and the potential vulnerabilities associated with such PPPs could increase rapidly, at which point the PPP shock may be triggered.

  • The default value of 5 percent is programmed for financial markets. Most banks are financially solid with deposits exceeding loans and majority foreign shareholders. Dollarization of deposits and credits is not pronounced, and banks' foreign assets generally exceed their foreign liabilities.

Text Table 2.

Madagascar: Coverage of the Contingent Liabilities’ Stress Test

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1/ The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country's public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE's debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%.

3. Madagascar is benefitting from recent debt service relief initiatives, which are reflected in the DSA, as well as from continued support by the World Bank. The current assessment reflects debt relief from the IMF under the Catastrophe Containment window of the IMF's Catastrophe Containment and Relief Trust (CCRT) delivered between April 2020 and April 2022 (amounting to some US$ 32 million). From May 2020 to December 2021 Madagascar benefitted from the Debt Service Suspension Initiative (DSSI), under which some US$ 20 million in debt service was deferred; repayments on these will start in 2024. Over 2022, the World Bank has committed US$ 1.3 billion under highly concessional credit terms and grants.9 A large share of these commitments is directed to the South of Madagascar where a large-scale humanitarian crisis is unfolding. Considering increased commitments, IDA lending disbursements are assumed to increase.

Background

A. Recent Debt Developments

Text Table 3.

Madagascar: Breakdown of Total PPG Debt (2016–21)

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Sources: Malagasy authorities; and IMF staff estimates.

BTA are Treasury bills with less than one year maturity.

Note: BTF and BTS are Treasury bonds with maturity ranging over 1 year

4. The end-2021 PPG debt-to-GDP ratio is projected to have reached 52.3. percent, an increase of almost 12 percentage points relative to the latest pre-pandemic year (2019). To a large extent the increase is due to an increase in the primary deficit and a decline in GDP growth following the COVID-19 pandemic, occurring on the back of relative stability in this ratio since 2015 (see Text Figure 1 and Table 2). The majority of Madagascar's PPG debt continues to be external in nature, with almost 60 percent of external debt owed to multilateral sources including the World Bank, African Development Bank, and IMF.

B. Macroeconomic Assumptions

5. Madagascar's near-term economic prospects are adversely affected by COVID-induced scarring, a season of cyclones, and elevated global energy and food prices. For 2022, staff is now projecting real GDP growth of 4.2 percent, a significant downward revision relative to what was projected in the previous DSA (see Text Table 4). However, real GDP per capita is expected to surpass its 2019 level by 2023 due to a stronger-than-expected recovery in 2021. The primary deficit is estimated to have widened significantly in 2022 due to a disagreement with oil distributors and the delayed payment of oil customs taxes. This late payment explains the strong improvement in the primary balance projected in 2023. Staff expects a gradual decline in fiscal imbalances over the medium-term and a slow increase in public debt. Based on a gradual tax revenue recovery, and an increase in capital spending, the primary deficit would gradually improve over the medium term. Under these assumptions, public debt would stabilize around 55 percent of GDP over the medium term.

  • Output is projected to grow modestly by 4.2 percent in 2023 due to the combined effects of inflationary pressures, political uncertainty, and slowing global growth prospects. Growth is expected to peak over the medium-term at 4.8 percent in 2024, with some deceleration thereafter—towards the estimated rate of potential growth (which following the recent Climate Macroeconomic Assessment Program (CMAP), staff now project at 4.5 percent to better account for the adverse impact of natural disasters on productivity).10 The secondary sector is expected to remain the main driver of growth thanks in particular to an increase in mining activities. Primary sector output would grow by around 3 percent per year on average, reflecting the adverse effects of climate change. These growth prospects are conditional on a scaling-up of both public and private investment (the latter driven by the current governance reform agenda).

  • Both government and private investment rates over the medium term were revised slightly downward relative to the prior DSA (Figure 4) and our forecasts continue to be significantly more conservative than those envisaged by the Plan Emergence Madagascar (PEM) reflecting current constraints on investment implementation capacity.

  • Headline inflation rose from about 4 percent in 2020, to 10.8 percent y-o-y in November 2022, reflecting high international prices and the direct and indirect effects of a 43-percent fuel price increase in July. Inflation is expected to reach 11.2 percent and 9.3 percent in 2022 and 2023 following monetary policy tightening. Inflation rates are expected to be somewhat higher than prior projections over the forecast horizon.

  • In line with the stronger inflationary pressures, we have also revised up government borrowing costs, reflecting the higher cost of borrowing observed globally as well as domestically (since the first review, the central bank has raised the marginal lending facility rate by 290 basis points).

  • The primary deficit is expected to be higher than previous estimates for 2022 but staff expect a significant improvement in the primary balance in 2023 as a result of the delayed payment of overdue oil customs taxes by oil distributors; over the medium term, projections continue to be in line with previous DSAs. Primary deficits are expected to remain contained going forward, reflecting gains in revenue mobilization including: (i) continued streamlining of VAT and free-zone companies' exemptions; (ii) improvements to the taxpayers' database; (iii) strengthening controls in customs administration; (iv) broader use of electronic tax declarations and payments and the digitalization of related procedures; and (v) continued clearance of tax arrears. On the expenditure side, non-interest current expenditure is projected to remain around 9 percent of GDP. Capital expenditure would significantly increase, exceeding 9 percent of GDP over 2025-27 compared to less than 6 percent pre-pandemic, reflecting the authorities' effort to boost investment as part of the PEM.

Text Table 4.

Madagascar: Baseline Macroeconomic Assumptions for DSA

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Sources: Malagasy authorities; World Bank and IMF.

6. Financing assumptions broadly reflect the authorities' Medium Term Debt Strategy but are conservative with respect to external financing. One of the main targets of the strategy for end-2023 includes a limit on the share of external public debt relative to total public debt that should not exceed a maximum of 86 percent (it is estimated at around 74 percent at end-2021, where it is expected to reach 80 percent over the projection horizon).11 The financing assumptions of this sustainability analysis deviate from the medium-term debt strategy on domestic financing due to the more conservative approach on the volumes of available external financing on concessional terms. The resulting increased reliance on domestic financing along with SOE debt gives rise to higher financing costs.12 To mitigate the potential liquidity pressures, the authorities will continue to develop the domestic debt market and will prioritize securing external financing on concessional terms (including grants), which would keep debt servicing costs at manageable levels and is in line with their debt strategy.13 External commercial borrowing is expected to slowly scale back up from 2031 onwards as Madagascar's fundamentals are projected to strengthen.

7. Realism tools suggest that our assumptions are in line with reasonable bounds. Across a range of realism checks staff's underlying assumptions do not appear to raise any flags (Figure 4). The projected fiscal path is not in the tail of the historical distribution, while projected growth for 2022 is below the range of potential growth paths under various fiscal multipliers; however, as for all countries, the magnitude and multifaceted effects of the COVID-19 pandemic are not well-captured by that aspect of the analysis.

8. The outlook remains uncertain with risks tilted to the downside. The main risks stem from the possibility of further adverse shocks to Madagascar's terms-of-trade (higher prices for rice, wheat, and/or energy); supply chain disruptions; renewed COVID-19 outbreaks; and natural disasters (mainly cyclones for the north and droughts for the south), resulting in losses in lives, livelihoods, and physical capital. Protracted weak budget execution in health and education spending (alongside reversals in the governance reform agenda) could also result in social and political volatility, especially ahead of the 2023 presidential elections. Weak investment implementation capacity could further curtail growth. All downside risks would have negative implications for debt sustainability. Upside potential includes the unlocking of large-scale projects in the energy sector and extractive industry; the implementation of the PEM's agenda, which could improve the growth potential and attract additional investment.

C. Drivers of Debt Dynamics

9. Over the medium term (and absent adverse shocks), Madagascar's ratio of PPG debt-to-GDP is projected to remain relatively constant at its current level of around 60 percent. The PPG external debt-to-GDP is also projected to remain relatively constant at its current level of around 45 percent (Figure 3). Projected primary deficits going forward represent the main force driving debt up, while the favorable interest-growth differential helps to keep the debt-to-GDP ratio relatively constant (aided by trends in prices and the exchange rate), with the framework assuming some real appreciation over the medium term driven by the Balassa-Samuelson effect.

10. The medium-term projections for public and private capital spending have been revised slightly downwards and average 5-year real growth was revised down by about 0.5 pp relative to prior DSA to better account for the effects of natural disasters (Figure 4). Over the upcoming years, the authorities still plan to scale up infrastructure spending, with institutional reforms to better prioritize projects and improve execution rates. Despite a small downward revision compared to the previous DSA, reflecting more conservative forecasts, the projected contribution of public investment to real GDP growth over the next 5 years is roughly the same as in the previous DSA. Private investment is expected to remain relatively constant over the medium term (21 percent of GDP in 2027) with some upside risk if structural reforms accelerate and public investment helps crowd-in additional private investment.

D. Country Classification and Determination of Stress Test Scenarios

11. Madagascar's debt carrying capacity continues to be classified as medium, although its composite indicator score remains near the cutoff for weak debt-carrying capacity. Based on the calculation of the LIC-DSF's composite indicator (reflecting the CPIA index, real growth rates, reserve coverage, remittances, and world growth) Madagascar continues to be rated as having medium debt-carrying capacity (Text Table 4). The CI score is at 2.77 and is estimated using the October 2022 WEO and 2021 CPIA (the CI was 2.82 in the last DSA). Text Figure 2 summarizes the classification scheme and displays the associated thresholds.

Text Figure 1.
Text Figure 1.

Madagascar: Composite Indicator Cut-off Values and Respective Debt Burden Thresholds & Benchmarks

Citation: IMF Staff Country Reports 2023, 117; 10.5089/9798400236013.002.A003

12. Stress tests generally follow standardized settings (except for the growth shock) and include tailored shocks for natural disasters and commodity export prices. The contingent liability stress test is based on the quantification of potential contingent liabilities (including SOE-related concerns that extend beyond the baseline SOE debt coverage as detailed in ¶2), and the standardized stress tests apply the default settings. However, the growth test continues to warrant adjustment, as done in prior DSAs. Given the high levels of uncertainty, the social and political volatility ahead of the 2023 presidential elections, and with risks tilted heavily towards the downside, the growth shock simulates a two standard deviation shock instead of one (i.e., a reduction of 6.8 percentage points).14 Madagascar also remains exposed and vulnerable to natural disasters, like cyclones and droughts, whose impact is captured by the natural disaster shock.15 Since commodities (e.g., vanilla, nickel, cobalt) comprise about half of goods and services exports, we also include a commodity shock stress test. The standardized settings of this stress test are customized to Madagascar's country-specific circumstances. In particular, we assume an illustrative fall in prices equivalent to 10 percent of commodity exports, with no mitigating effect on imports, alongside declines in real GDP growth of 1.55 percent and in fiscal revenue of 2.32percent of GDP (default values). The shock occurs in 2023 and unwinds gradually by 2032. Residual financing is assumed to be at less favorable terms than under the baseline. For external debt, the interest rate and maturities are assumed to be 25 percent higher and lower, respectively. For overall public debt stress tests, limited recourse to domestic sources in the short run leads to consideration of a scenario in which 65 percent of additional financing comes from external sources while the interest rate for residual domestic financing would be 100 basis points above baseline.16

Text Table 5.

Madagascar: Calculation of Debt-Carrying Capacity

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Note: 10-year average values are based on an average over 2017-2026.

Debt Sustainability Results

A. External Debt Sustainability

13. Under the baseline, external PPG debt remains well below the thresholds associated with Madagascar's medium debt-carrying capacity (Table 1, Figure 1). External PPG debt is projected to rise 38.5 percent of GDP end-2021 to about 48 percent of GDP in 2032. Debt-creating flows include sizable current account deficits over the medium term (owing to declines in the trade balance and falling inflows from official transfers) and less advantageous endogenous debt dynamics (due to higher interest rates).17 In PV terms, external PPG debt is projected to rise from 18percent of GDP end-2021 to about 27 percent of GDP in 2032. The long-term rise in PV terms is the result of our assumption that borrowing will become less concessional over time, as well as sizeable gross financing needs. Together with expiring grace periods for some loans (including prior IMF financing), this explains why debt service indicators rise substantially off their low base. Nonetheless, all indicators remain well below the applicable thresholds for Madagascar (Figure 1).

14. Under stress scenarios the PV of external debt-to-exports ratio is above the applicable threshold (Table 3; Figure 1). The analysis suggests that Madagascar is most vulnerable to export shocks. Under such shocks, the PV of external debt-to-exports ratio breaches the applicable threshold for a sustained period from 2026 onwards.

15. The granularity assessment suggests that Madagascar has some space to absorb shocks (Figure 5). All baseline debt indicators remain well below their thresholds under a median shock, but two indicators (PV of external PPG debt-to-GDP and debt-service-to-revenue) would exceed them under a more extreme scenario. This suggests that Madagascar has some space to absorb shocks, unchanged from the assessment at the time of the first review (March 2022).

16. External private sector debt is not assessed to pose a significant threat to external sustainability (Table 1). The risks associated with the levels of external private debt, which was recently revised upward, appear contained.18 Around 80 percent of the private debt is associated with the mining sector, whose income is in foreign currency (providing it with a natural hedge); the majority of its debt is medium-to-long term; and a sizeable portion of its debt is with its affiliated headquarters or global groups. Moreover, much of mining companies' loans do not bear large interest payments and many of the debt instruments are not required to be fully reimbursed to parent companies until liquidation. Private external debt is projected to rapidly decline as the loans related to major mining projects are repaid, with the stock of external private debt falling by over half by 2030. Still, such debts will be closely monitored going forward for potential risks and, in line with recent DSAs, we have conservatively assumed that more borrowing would be needed to sustain mining exports towards the end of the DSA horizon, contributing to private debt equivalent to about 5 percent of GDP in 2040.

B. Total Public Debt Sustainability

17. Under the baseline, total public debt levels are projected to remain well below the benchmark (Table 2; Figure 2). Total public debt (both external and domestic) is projected to remain just below 60 percent of GDP over the medium-term horizon. In PV terms, total public debt-to-GDP is expected to rise from 32.5 percent at end-2021 to about 0 percent over the medium term, still well below the benchmark of 55 percent for medium debt carrying-capacity countries.

18. The projected rise in the PPG debt-service-to-revenue-and-grants ratio could introduce liquidity risks. To contain risks along this dimension, the authorities should continue to prioritize securing external concessional financing, as done in recent years and in line with their medium-term debt strategy, as well as continuing to accelerate domestic debt market development to bring down borrowing costs. If strong donor support continues, liquidity risks can be mitigated.

19. Total public debt is most vulnerable to growth shocks and such stress tests lead to a breach of its benchmark (Figure 2; Table 4). Under both the growth shock and the commodity price shock the PV of total public debt-to-GDP, is projected to reach levels well above the 55 percent benchmark for medium debt-carrying capacity countries like Madagascar.

Risk Rating and Vulnerabilities

20. Madagascar is assessed as being at moderate risk of external debt distress (unchanged from the previous assessment conducted at the time of the first review). No thresholds are breached under the baseline scenario. However, an exports shock leads to a breach of the PV of debt-to-exports threshold. A granularity assessment suggests that Madagascar has some space to absorb shocks.

21. The overall assessment is that Madagascar is at moderate risk of overall debt distress (unchanged from the previous assessment conducted at the time of the first review). The PPG external debt has a moderate risk assessment (¶20), while the PV of overall debt-to-GDP indicator breaches its benchmark following a growth or commodity price shock. Moreover, liquidity pressures could arise if more concessional external financing is not secured or if domestic debt market development is delayed, including under the baseline and under a natural disaster shock.

22. Conditional on the mobilization of concessional external financing, this assessment is supportive of Madagascar's current plans to scale up its borrowing. A steeper-than-expected increase in borrowing in line with a rapid execution of the government's ambitious medium-term borrowing plan would carry significant risks, especially in the absence of securing additional external concessional financing. Also, poorly selected public investments and less favorable financing terms could affect debt vulnerability. The state of SOE liabilities could also influence future assessments. Less grant financing and a switch to a less concessional mix of borrowing would raise the debt burden, especially when measured in PV terms, as well as debt service risks. The domestic debt market should continue to be developed in order to lower borrowing costs and reduce exchange-rate risk. Finally, external private debt could increase in less ringfenced sectors (e.g., banking) that would increase the vulnerabilities associated with such debt. As mentioned in prior DSAs, in addition to debt sustainability, other crucial considerations for the pace of borrowing include the economy's vulnerability to terms-of-trade shocks, natural disasters, general absorptive capacity, public financial management, and public investment management.

23. Structural reforms and improvements in debt coverage statistics remain paramount, especially in light of the CI score, which is near the weak debt-carrying capacity threshold. Efforts to enhance external statistics could improve private debt coverage. Also, Madagascar's ability to preserve and build its debt-carrying capacity rely on strengthening the capacity and quality of its institutions, including on the Public Financial Management-front where identification and mitigation of fiscal risks (relating to fuel subsidies, SOEs, PPPs, and pensions), the transparency and accountability of public sector institutions, and more effective and rules-based management of public investment within a credible medium-term expenditure framework are key.

Authorities' Views

24. The authorities broadly agreed with staff's assessment of the debt sustainability analysis. Although they agreed on the need to rely on more concessional debt, they emphasized the need for more financing to invest in development and resilience to climate change. They also believe the DSA's assumptions are too pessimistic and (i) a gradual acceleration of growth toward 7 percent in 2025 is feasible, (ii) Madagascar's CI score should improve with their efforts to strengthen public sector management and institutions.

Table 1.

Madagascar: External Debt Sustainability Framework, Baseline Scenario, 2019–2042

(In percent of GDP; unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections. 1/ Includes both public and private sector external debt. 2/ Derived as [r - g - p(1+g)]/(1+g+p+gp) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and p = growth rate of GDP deflator in U.S. dollar terms. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. 4/ Current-year interest payments divided by previous period debt stock. 5/ Defined as grants, concessional loans, and debt relief. 6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 7/ Assumes that PV of private sector debt is equivalent to its face value. 8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 2.

Madagascar: Public Sector Debt Sustainability Framework, Baseline Scenario, 2019–2042

(In percent of GDP; unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections. 1/ Coverage of debt: The central, state, and local governments, central bank, government-guaranteed debt, non-guaranteed SOE debt . Definition of external debt is Currency-based. 2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections. 3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt. 4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows. 5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question. 6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Figure 1.
Figure 1.

Madagascar: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2022–2032

Citation: IMF Staff Country Reports 2023, 117; 10.5089/9798400236013.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2032. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 2.
Figure 2.

Madagascar: Indicators of Public Debt Under Alternative Scenarios, 2022–2032

Citation: IMF Staff Country Reports 2023, 117; 10.5089/9798400236013.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2032. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Table 3.

Madagascar: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2022–2032

(In percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

Table 4.

Madagascar: Sensitivity Analysis for Key Indicators of Public Debt, 2022–2032

(In percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the benchmark.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

Figure 3.
Figure 3.

Madagascar: Drivers of Debt Dynamics – Baseline Scenario

Citation: IMF Staff Country Reports 2023, 117; 10.5089/9798400236013.002.A003

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.
Figure 4.
Figure 4.

Madagascar: Realism Tools

Citation: IMF Staff Country Reports 2023, 117; 10.5089/9798400236013.002.A003

Figure 5.
Figure 5.

Madagascar: Qualification of the Moderate Category, 2022–20321

Citation: IMF Staff Country Reports 2023, 117; 10.5089/9798400236013.002.A003

Sources: Country authorities; and staff estimates and projections.1/ For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent. For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent.
1

Prepared by the IMF and the World Bank. This DSA follows the Guidance Note of the Join Bank-Fund Debt Sustainability Framework for Low Income Countries, February 2018.

2

Madagascar's Composite Indicator (CI) is 2.77, which corresponds to a medium debt-carrying capacity as confirmed by the October 2022 WEO data and the 2021 Country Policy and Institutional Assessment (CPIA).

3

Although legislation allows it, public enterprises do not hold direct external non-guaranteed debt.

4

These arrears do not trigger an “in distress"-rating given their domestic nature.

5

The arrears to private external creditors (less than 0.1 percent of GDP) do not trigger an “in distress”-rating given their de minimis nature and as the restructuring with the majority of creditors has been completed and the government is judged to be engaging in “good faith”; the arrears to official-bilateral creditors (Algeria and Angola, for a total of 1.3 percent of GDP) do not trigger an “in distress"-rating as they are deemed away under the Fund's Lending into Official Arrears Policy.

6

Locally issued debt denominated in local currency held by non-residents and locally issued debt denominated in foreign currency held by residents are insignificant, meaning that results would be similar if done on a residency basis.

7

Under the Sustainable Development Finance Policy (SDFP), Madagascar has been implementing reforms in areas of debt transparency (by publishing a contingent liabilities registry), fiscal sustainability (by implementing measures to reduce irrecoverable tax arrears and strengthen the tracking and recovery system for outstanding amounts), and debt management (by adhering to a non-zero debt ceiling in FY22) and successfully completed its Performance and Policy Actions (PPAs) under the SDFP in FY22. In FY23, Madagascar is expected to continue to implement reforms in these areas by adopting through decrees, a new framework for the evaluation and management of fiscal risks as well as a system for tax management.

8

While JIRAMA is working with the World Bank on the implementation of its recovery plan, to be conservative, we do not account for the potential benefits of this plan on the domestic debt forecast owing to its long horizon. In particular, we assume that JIRAMA's debts remain at the same ratio to GDP through the entire forecast horizon (2.3 percent of GDP). This implies that successful implementation of the plan is an upside risk for the baseline, while non-implementation of the plan could result in still-high arrears and larger projected operational transfers.

9

The new terms under IDA20 are applicable since July 2022.

10

In fact, downward revision of potential GDP reflects a combination of factors including inter alia, long lasting impact of repeated natural disasters, impact of the COVID-19 pandemic on learning outcomes, as well as slower-than anticipated pace of implementation of reforms.

11

The other main targets consist of (i) the average maturity of locally-issued debt being over 10 months (estimates put it around one year for 2022); (ii) the share of new external debt falling due within a year should be less than 25 percent of the stock of external debt (it is estimated to be around 12 percent in 2022); and (iii) the share of new domestic debt falling due within a year should be less than 75 percent of the stock of domestic debt (it is estimated at almost 56 percent in 2022).

12

Financing in 2023 includes the issuance of special T-Bills by the government to clear liabilities associated with the 2022 fuel requisitions on behalf of JIRAMA (around 0.44 percent of GDP).

13

To reflect recent increased use of medium-term locally-issued debt instruments and further developments in the debt market, the local financing share of medium-term bonds has been revised upwards to 30 percent from 2020–2025 (close to its current share based on end-2021 estimates), with continued growth thereafter, and longer-term bonds (e.g., between 4-7 years) are assumed to reach a share of 3 percent in 2026-30, which rises to 9 percent by 2036-40. On the external front, concessional financing dominates all other types of sources throughout the projected period, albeit declining as of 2027.

14

The magnitude of the shock to growth is comparable to the prior DSA (conducted at the time of the first review), but the shock is now first hitting in 2023 (rather than 2022).

15

We apply the default settings for this one-off shock in the template, namely a 10 percentage-point rise in the public external debt-to-GDP ratio alongside a fall in real GDP growth (1.5 percent) and exports (3.5 percent), in 2021.

16

We view this as reasonable given the current development of Madagascar's domestic bond market and its ongoing engagement with international donors and investors.

17

The residual includes reserve accumulation, unrepatriated mining receipts, and potentially other misclassified BOP entries.

18

In 2020 INSTAT completed a survey on the external private sector, including on its external debt obligations. The last survey had been conducted in 2013 and covered a smaller sample of firms and only included debts reported by companies' headquarters offices, which did not offer a complete view of the debt obligations of their Malagasy operations. The results uncovered large deviations relative to prior forecasts; prior IMF forecasts had estimated there was SDR 2 billion in external private debt at end-2018; the new data estimated that it had reached SDR 4 billion.

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Cover IMF Staff Country Reports
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
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2023: Issue 117
Publisher:
International Monetary Fund
ISBN:
9798400236013
ISSN:
1934-7685
Pages:
156
DOI:
https://doi.org/10.5089/9798400236013.002
  • <sup><xref rid="RA003txfig01" ref-type="fig">Text Figure 1.</xref></sup>
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    Text Figure 1.

    Madagascar: Composite Indicator Cut-off Values and Respective Debt Burden Thresholds & Benchmarks

  • <sup><xref rid="RA001p145fig01" ref-type="fig">Figure 1.</xref></sup>
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    Figure 1.

    Madagascar: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2022–2032

  • <sup><xref rid="RA001p145fig02" ref-type="fig">Figure 2.</xref></sup>
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    Figure 2.

    Madagascar: Indicators of Public Debt Under Alternative Scenarios, 2022–2032

  • <sup><xref rid="RA001p145fig03" ref-type="fig">Figure 3.</xref></sup>
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    Figure 3.

    Madagascar: Drivers of Debt Dynamics – Baseline Scenario

  • <sup><xref rid="RA001p145fig04" ref-type="fig">Figure 4.</xref></sup>
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    Figure 4.

    Madagascar: Realism Tools

  • <sup><xref rid="RA001p145fig05" ref-type="fig">Figure 5.</xref></sup>
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    Figure 5.

    Madagascar: Qualification of the Moderate Category, 2022–20321

Text Figure 1.

Madagascar: Composite Indicator Cut-off Values and Respective Debt Burden Thresholds & Benchmarks
Figure 1.

Madagascar: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2022–2032
Figure 2.

Madagascar: Indicators of Public Debt Under Alternative Scenarios, 2022–2032
Figure 3.

Madagascar: Drivers of Debt Dynamics – Baseline Scenario
Figure 4.

Madagascar: Realism Tools
Figure 5.

Madagascar: Qualification of the Moderate Category, 2022–20321