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IMF Country Report No. 24/205

REPUBLIC OF MADAGASCAR

REQUEST FOR AN ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITY AND CANCELLATION OF THE CURRENT ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITY AND REQUEST FOR AN ARRANGEMENT UNDER THE RESILIENCE AND SUSTAINABILITY FACILITY—PRESS RELEASE; STAFF REPORT; STAFF SUPPLEMENTS; STAFF STATEMENT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR REPUBLIC OF MADAGASCAR

July 2024

In the context of the Request for an Arrangement Under the Extended Credit Facility and Cancellation of the Current Arrangement Under the Extended Credit Facility and Request for an Arrangement Under the Resilience and Sustainability Facility, 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.

• The Staff Report prepared by a staff team of the IMF for the Executive Board's consideration on June 21, 2024, following discussions that ended on May 3, 2024, with the officials of Republic of Madagascar on economic developments and policies underpinning the IMF arrangement under the Extended Credit Facility and the Resilience and Sustainability Facility. Based on information available at the time of these discussions, the staff report was completed on June 7, 2024.

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

• A World Bank Assessment Letter for the Resilience and Sustainability Facility.

• A Staff Statement updating information on recent developments.

• A Statement by the Executive Director for Republic of Madagascar.

The documents listed below have been or will be separately released.

Letter of Intent sent to the IMF by the authorities of Republic of Madagascar*

Memorandum of Economic and Financial Policies by the authorities of Republic of Madagascar*

Technical Memorandum of Understanding*

*Also included in Staff Report

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.

Copies of this report are available to the public from

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© 2024 International Monetary Fund

Press Release

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PR 24/232

IMF Executive Board Approves US$337 million Under the Extended Credit Facility, and US$321 million Under the Resilience and Sustainability Facility for Madagascar

FOR IMMEDIATE RELEASE

• The IMF Executive Board approved today an arrangement under the Extended Credit Facility (ECF) in the amount of US$337 million for Madagascar, in addition to a Resilience and Sustainability Facility (RSF) arrangement in the amount of US$321 million.

• The ECF and RSF-supported programs are aligned with the authorities’ objectives highlighted in the new General State Policy (PGE) adopted in early 2024 and aim to increase Madagascar’s economic resilience and foster long-term inclusive growth.

• The RSF arrangement will underpin reforms to strengthen adaptation to climate change and resilience against natural disasters, support climate change mitigation efforts, enhance the protection of ecosystems, and create conditions for green private sector investment.

Washington, DC - June 21,2024: The Executive Board of the International Monetary Fund (IMF) approved today a 36-month arrangement under the Extended Credit Facility (ECF) of SDR 256.62 million (about US$337 million) with Madagascar. The Executive Board also approved an arrangement Under the Resilience and Sustainability Facility (RSF) of SDR 244.4 million (about US$321 million). Furthermore, the Executive Board took note of Madagascar’s cancellation of the 40-month arrangement under the ECF which had been approved on March 29, 2021. The ECF-supported program will provide critical help to increase Madagascar’s economic resilience by anchoring fiscal sustainability, strengthening governance, buttressing monetary and financial stability, and advancing reform to support industrialization and human capital development. The RSF arrangement aims to address climate vulnerabilities through the implementation of appropriate climate policies.

This decision enables an immediate disbursement equivalent to SDR 36.66 million (about US$48 million) under the ECF.

Madagascar’s growth eased to 3.8 percent in 2023, while inflation pressures have waned. Weak revenue mobilization and JIRAMA’s losses have continued to weigh on the fiscal balance. The current account deficit narrowed, owing primarily to a decline in imports and reflecting the slowdown in economic activity.

The authorities are committed to stabilize debt below 60 percent of GDP and bring the primary deficit to around 3 percent of GDP during the program. They intend to undertake revenue measures and to reduce transfers to the energy sector, including by a progressive phasing-out of fuel subsidies. These efforts should help create fiscal space for investment in human and physical capital. The authorities are also committed to strengthening governance, transparency, and the fight against corruption, continuing the implementation of the interest rate targeting operational monetary policy framework, and building resilience, especially through stronger social safety nets.

Medium-term growth prospects appear favorable, bolstered by the reforms supported by the RSF and the ECF, including government programs aimed at boosting agricultural productivity, increasing access to electricity, and improving road infrastructure. Risks to the outlook are tilted to the downside, amid an uncertain global environment. Madagascar also remains vulnerable to climate shocks.

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

Madagascar continues to face challenges, with economic growth easing in a context of weak fiscal performance and gradual reform progress. Going forward, climate change poses significant risks to Madagascar’s economy. The new arrangements under the Extended Credit Facility (ECF) and the Resilience and Sustainability Facility (RSF) will support the authorities’ program focused on strengthening human capital, accelerating economic development, and improving governance.

The authorities are implementing measures to create fiscal space for much needed social spending and investment. These include medium-term revenue mobilization efforts through tax policy and revenue administration measures. The implementation of an automatic fuel pricing mechanism and the preparation of a recovery plan for JIRAMA should enable to gradually reduce government transfers to the energy sector. These efforts should allow to stabilize public debt below 60 percent of GDP in the medium-term.

The authorities are preparing a new anti-corruption strategy, which, together with a Governance Diagnostic Assessment by the IMF, will support further efforts to fight corruption, promote transparency and improve governance Governance and Anti-Corruption (imf.org). They are also working on the implementation of a new monetary policy operational framework, focusing on strengthening liquidity management and the central bank’s communication.

Tackling climate change challenges will be critical for Madagascar’s medium-term macroeconomic resilience. The RSF-supported reforms should reinforce climate governance and mainstream climate into public financial and investment management processes, strengthen adaptation to climate change and resilience against natural disasters, curb the growth of greenhouse gas emissions, reinforce the protection of forest and biodiversity, and mobilize climate finance. The authorities should take full advantage of the support provided by the Fund and the World Bank through the Enhanced Cooperation Framework for Climate Action, and by other development partners to catalyze private climate financing

^{Table 1.}

Selected Economic Indicators, 2021-25

Sources: Malagasy authorities; and IMF staff estimates and projections. ¹ Primary balance excl. foreign-financed investment and grants. ² A negative value indicates a financing gap to be filled by budget support or other financing still to be committed or identified.

^{Table 1.}

Selected Economic Indicators, 2021-25

	2021	2022	2023	2024	2025
		Est.		Proj.
	(Percent change; unless otherwise indicated)
National Account and Prices
GDP at constant prices	5.7	4.0	3.8	4.5	4.6
GDP deflator	6.6	6.9	8.7	6.9	7.6
Consumer prices (end of period)	6.2	10.8	7.5	7.8	7.5
Money and Credit
Broad money (M3)	12.2	13.8	8.6	12.3	12.1
	(Growth in percent of beginning-of-period money stock (M3))
Net foreign assets	1.0	0.8	18.2	5.7	2.5
Net domestic assets	11.2	13.0	-9.7	6.7	9.6
of which: Credit to the private sector	11.1	9.8	0.7	6.3	6.3
		(Percent of GDP)
Public Finance
Total revenue (excluding grants)	10.3	9.6	11.4	11.2	11.2
of which: Tax revenue	9.9	9.4	11.1	10.8	10.9
Grants	0.7	1.3	2.3	1.8	0.6
of which: budget grants	0.0	0.0	0.0	0.0	0.0
Total expenditures	13.7	16.5	17.9	16.7	15.7
Current expenditure	8.4	11.0	10.9	10.3	9.7
Capital expenditure	5.3	5.5	7.0	6.4	6.0
Overall balance (commitment basis)	-2.8	-5.5	-4.3	-3.8	-3.8
Domestic primary balance1	-0.1	-1.8	-0.4	0.2	0.7
Total financing	3.2	4.7	4.2	4.1	4.1
Foreign borrowing (net)	2.3	2.5	3.0	3.2	3.4
Domestic financing	0.8	2.3	1.2	1.0	0.7
Financing gap2	0.0	0.0	-0.1	0.0	0.0
Savings and Investment
Investment	23.2	20.8	21.6	22.3	21.3
Gross national savings	10.2	15.4	17.1	17.7	16.5
External Sector
Exports of goods, f.o.b.	18.6	23.3	19.6	16.3	18.8
Imports of goods, c.i.f.	28.7	34.2	28.2	25.3	28.2
Current account balance (exc. grants)	-5.5	-6.7	-6.8	-6.4	-5.4
Current account balance (inc. grants)	-4.9	-5.4	-4.5	-4.6	-4.8
Public Debt	51.9	53.9	55.6	53.4	52.9
External Public Debt (inc. BFM liabilities)	34.3	36.5	35.7	34.8	36.5
Domestic Public Debt	17.7	17.4	19.9	18.6	16.4
		(Units as indicated)
Gross official reserves (millions of SDRs)	1630	1601	1972	2130	2250
Months of imports of goods and services	5.8	4.2	5.7	6.3	5.8
GDP per capita (U.S. dollars)	517	523	530	563	577

Sources: Malagasy authorities; and IMF staff estimates and projections. ¹ Primary balance excl. foreign-financed investment and grants. ² A 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.}

Selected Economic Indicators, 2021-25

	2021	2022	2023	2024	2025
		Est.		Proj.
	(Percent change; unless otherwise indicated)
National Account and Prices
GDP at constant prices	5.7	4.0	3.8	4.5	4.6
GDP deflator	6.6	6.9	8.7	6.9	7.6
Consumer prices (end of period)	6.2	10.8	7.5	7.8	7.5
Money and Credit
Broad money (M3)	12.2	13.8	8.6	12.3	12.1
	(Growth in percent of beginning-of-period money stock (M3))
Net foreign assets	1.0	0.8	18.2	5.7	2.5
Net domestic assets	11.2	13.0	-9.7	6.7	9.6
of which: Credit to the private sector	11.1	9.8	0.7	6.3	6.3
		(Percent of GDP)
Public Finance
Total revenue (excluding grants)	10.3	9.6	11.4	11.2	11.2
of which: Tax revenue	9.9	9.4	11.1	10.8	10.9
Grants	0.7	1.3	2.3	1.8	0.6
of which: budget grants	0.0	0.0	0.0	0.0	0.0
Total expenditures	13.7	16.5	17.9	16.7	15.7
Current expenditure	8.4	11.0	10.9	10.3	9.7
Capital expenditure	5.3	5.5	7.0	6.4	6.0
Overall balance (commitment basis)	-2.8	-5.5	-4.3	-3.8	-3.8
Domestic primary balance1	-0.1	-1.8	-0.4	0.2	0.7
Total financing	3.2	4.7	4.2	4.1	4.1
Foreign borrowing (net)	2.3	2.5	3.0	3.2	3.4
Domestic financing	0.8	2.3	1.2	1.0	0.7
Financing gap2	0.0	0.0	-0.1	0.0	0.0
Savings and Investment
Investment	23.2	20.8	21.6	22.3	21.3
Gross national savings	10.2	15.4	17.1	17.7	16.5
External Sector
Exports of goods, f.o.b.	18.6	23.3	19.6	16.3	18.8
Imports of goods, c.i.f.	28.7	34.2	28.2	25.3	28.2
Current account balance (exc. grants)	-5.5	-6.7	-6.8	-6.4	-5.4
Current account balance (inc. grants)	-4.9	-5.4	-4.5	-4.6	-4.8
Public Debt	51.9	53.9	55.6	53.4	52.9
External Public Debt (inc. BFM liabilities)	34.3	36.5	35.7	34.8	36.5
Domestic Public Debt	17.7	17.4	19.9	18.6	16.4
		(Units as indicated)
Gross official reserves (millions of SDRs)	1630	1601	1972	2130	2250
Months of imports of goods and services	5.8	4.2	5.7	6.3	5.8
GDP per capita (U.S. dollars)	517	523	530	563	577

Sources: Malagasy authorities; and IMF staff estimates and projections. ¹ Primary balance excl. foreign-financed investment and grants. ² A 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

REQUEST FOR AN ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITY AND CANCELLATION OF THE CURRENT ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITY AND REQUEST FOR AN ARRANGEMENT UNDER THE RESILIENCE AND SUSTAINABILITY FACILITY

June 7, 2024

EXECUTIVE SUMMARY

Context. Real GDP growth stalled at 3.8 percent in 2023, dampened by the deterioration of global economic prospects and the negative effect of electoral uncertainty on investment. After peaking in March 2023, inflationary pressures have eased. Led by a new presidential mandate, the authorities are requesting a cancellation of the current Extended Credit Facility (ECF) that ends in July 2024, and new ECF and Resilience and Sustainability Facility (RSF) arrangements. Cumulative disbursements under the current ECF reached SDR 171.08 million (70 percent of quota, about 78 percent of the total approved amount).

Program objectives and modalities. The authorities have requested a 36-month ECF arrangement with access at 105 percent of quota (SDR 256.62 million). The ECF arrangement is justified by the need to buffer international reserves, which are projected to fall to 4.7 months of imports by 2027 in the absence of Fund financing. To bolster Madagascar's climate resilience, the authorities have also requested a 36-month RSF arrangement with access at 100 percent of quota (SDR 244.40 million), concomitant with the ECF. The programs will be subject to semi-annual reviews. Disbursements under the RSF will be equally split among twelve reform measures to be completed over six reviews. Under the program baseline, Madagascar's risk of external and overall public debt distress remains moderate and its capacity to repay the Fund is adequate but subject to significant risks.

Program policies. Recognizing the importance of program ownership, the priorities of the ECF and RSF arrangements are closely aligned with those of the new General State Policy. The ECF arrangement aims to (i) anchor fiscal sustainability by increasing domestic revenue, reducing fiscal risks, building buffers to enhance resilience to shocks, and strengthening fiscal institutions and public financial management, (ii) strengthen governance and the fight against corruption, (iii) consolidate monetary and financial stability, and (iv) foster stronger and more inclusive growth. Energy sector reforms, including the overhaul of JIRAMA, underpin progress towards all four goals. RSF reforms will support climate change adaptation and mitigation with ongoing assistance from development partners.

Staff views. Staff supports the authorities' request to cancel the current ECF arrangement, as well as their requests for new ECF and RSF arrangements. The Letter of Intent and Memorandum of Economic and Financial Policies demonstrate strong program ownership. Targeted capacity development will be key to the achievement of program objectives.

Approved By

Costas Christou (AFR) and Geremia Palomba (SPR)

Contents

• CONTEXT

• RECENT ECONOMIC DEVELOPMENTS

• OUTLOOK AND RISKS

• POLICIES UNDER THE NEW ARRANGEMENTS

• A. Anchoring Fiscal Sustainability (ECF Pillar I)

• B. Strengthening Governance and the Fight Against Corruption (ECF Pillar II)

• C. Consolidating Monetary and Financial Stability (ECF Pillar III)

• D. Fostering Stronger and More Inclusive Growth (ECF Pillar IV)

• E. Combatting Climate Change (RSF)

• PROGRAM MODALITIES

• STAFF APPRAISAL

• BOX

• 1. Strengthening the Monetary Policy Operational Framework

• 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

• 2. National Accounts

• 3a. Fiscal Operations of the Central Government (Billions of Ariary)

• 3b. Fiscal Operations of the Central Government (Percent of GDP)

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

• 5a. Balance of Payments (Millions of SDR)

• 5b. Balance of Payments (Percent of GDP)

• 5c. Balance of Payments (Millions of U.S. Dollars)

• 6. Monetary Accounts

• 7. Balance Sheet of the Central Bank

• 8. Selected Financial Soundness Indicators

• 9. External Financing Requirements and Sources, 2022-27

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

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

• 12. Proposed Schedule of Disbursements and Timing of Reviews Under the ECF and RSF Arrangements

• 13. Capacity to Repay Indicators Compared to UCT Arrangements for PRGT Countries

• 14. Indicators of Capacity to Repay the Fund

• 15. Timeline of the Proposed Reform Measures Under the RSF

• ANNEXES

• I. Performance Under the 2021 ECF Arrangement

• II. Risk Assessment Matrix

• III. External Sector Assessment

• IV. Towards a Stronger Fiscal Framework

• V. Combatting Climate Change

• VI. Macroeconomic Effects of Climate Change

• VII. Automatic Fuel Pricing Mechanism and Fuel Pricing Issues

• VIII. Capacity Development Strategy

• APPENDICES

• I. Letter of Intent

  • Attachment I. Memorandum of Economic and Financial Policies

  • Attachment II. Technical Memorandum of Understanding