A. Anchoring Fiscal Sustainability (ECF Pillar I)

14. The new program aims to stabilize debt below 60 percent of GDP in the medium term. Public debt has increased significantly over the past five years, from 41.2 percent of GDP in 2019 to an estimated 55.6 percent in 2023, partly driven by higher foreign-financed public investment and larger SOE debt. Staff estimate that a medium-term debt anchor of 60 percent of GDP is consistent with maintaining Madagascar's debt servicing capacity (Annex IV) and recommend this debt anchor be used to design and adopt a medium-term fiscal strategy. Given the current debt level and absent any shock, this anchor implies a primary deficit of 2.9 percent of GDP. The 2023 primary deficit is estimated at 3.6 percent of GDP and 4.5 percent when excluding the collection of customs revenue arrears from 2021-22. While public debt is expected to increase to 58 percent of GDP in 2032 before declining, it will be important to continue with consolidation over the medium-term and long-term to reduce the risk of deviations above the anchor and preserve fiscal space.

15. To bring the primary deficit to around 3 percent of GDP, the program envisages a consolidation effort (i.e., improvement in the primary balance on an accrual basis, excluding exceptional customs revenue) of 1.6 percentage points of GDP by 2027. The adjustment would result from an increase in net tax revenue on an accrual basis of 2.4 percentage points of GDP and contraction of non-interest current expenditures by 1.6 percentage points partly driven by smaller transfers to JIRAMA or its suppliers, whereas domestically financed capital expenditures would grow by 0.8 percentage points of GDP and investment financed by foreign loans (project loans) would increase by 1.6 percentage points (Text Table 1).

View Full Size

• Download Figure
• Download figure as PowerPoint slide

^{Text Table 1.}

Madagascar: Envisaged Fiscal Consolidation Effort

(In percent of GDP)

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

^{Text Table 1.}

Madagascar: Envisaged Fiscal Consolidation Effort

(In percent of GDP)

	2022	2023	2024	2025	2026	2027
	Est.	Est.	Proj.	Proj.	Proj.	Proj.
Net tax revenue (cash basis)	9.4	11.1	10.8	10.9	11.6	12.5
Net tax revenue (accrual basis)	11.0	10.1	10.0	10.9	11.6	12.5
Net domestic tax revenue (accrual = cash basis)	5.4	5.4	5.4	5.6	6.0	6.6
Net customs revenue (accrual basis)	5.6	4.7	4.6	5.3	5.6	5.9
Net customs revenue (accrual basis), in percent of imports	18.7	18.5	20.3	20.8	21.5	22.3
Non-tax revenue	0.3	0.3	0.4	0.3	0.3	0.4
Grants	1.3	2.3	1.8	0.6	0.5	0.3
Total current expenditure, excl. interest payments	10.4	10.2	9.5	8.8	8.8	8.6
of which: transfers to JIRAMA and its suppliers	1.4	1.3	1.0
Domestically financed capital expenditure	1.0	1.6	1.5	1.8	2.0	2.4
Foreign financed capital expenditure	4.4	5.4	4.9	4.2	4.8	5.1
Project grants	1.3	2.3	1.8	0.6	0.5	0.3
Project loans	3.2	3.2	3.1	3.6	4.3	4.8
Primary balance	-5.0	-3.6	-2.9	-2.9	-3.1	-2.9
Primary balance with revenue on an accrual basis	-3.3	-4.5	-3.6	-2.9	-3.1	-2.9

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

View Table

^{Text Table 1.}

Madagascar: Envisaged Fiscal Consolidation Effort

(In percent of GDP)

	2022	2023	2024	2025	2026	2027
	Est.	Est.	Proj.	Proj.	Proj.	Proj.
Net tax revenue (cash basis)	9.4	11.1	10.8	10.9	11.6	12.5
Net tax revenue (accrual basis)	11.0	10.1	10.0	10.9	11.6	12.5
Net domestic tax revenue (accrual = cash basis)	5.4	5.4	5.4	5.6	6.0	6.6
Net customs revenue (accrual basis)	5.6	4.7	4.6	5.3	5.6	5.9
Net customs revenue (accrual basis), in percent of imports	18.7	18.5	20.3	20.8	21.5	22.3
Non-tax revenue	0.3	0.3	0.4	0.3	0.3	0.4
Grants	1.3	2.3	1.8	0.6	0.5	0.3
Total current expenditure, excl. interest payments	10.4	10.2	9.5	8.8	8.8	8.6
of which: transfers to JIRAMA and its suppliers	1.4	1.3	1.0
Domestically financed capital expenditure	1.0	1.6	1.5	1.8	2.0	2.4
Foreign financed capital expenditure	4.4	5.4	4.9	4.2	4.8	5.1
Project grants	1.3	2.3	1.8	0.6	0.5	0.3
Project loans	3.2	3.2	3.1	3.6	4.3	4.8
Primary balance	-5.0	-3.6	-2.9	-2.9	-3.1	-2.9
Primary balance with revenue on an accrual basis	-3.3	-4.5	-3.6	-2.9	-3.1	-2.9

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

17. In the short term, the deficit target is determined by the availability of financing and the need to clear past domestic arrears. While foreign-financed investment has increased in recent years, low revenue collection and limited domestic financing have constrained the ability of the government to spend more for development. Liquidity pressures resulting from the delayed payment of oil customs taxes by fuel distributors in 2022 and 2023 and the need for additional transfers to JIRAMA have resulted in the accumulation of domestic arrears to an estimated MGA 796.3 billion or 1.1 percent of GDP at end-2023. To support the gradual clearance of those arrears and avoid further accumulation, the program sets a ceiling on outstanding domestic arrears as an indicative target (IT).

^{Text Table 2.}

Madagascar: 2024 Fiscal Projections Based on Revised Budget Law

(Billions of Ariary, unless otherwise indicated)

Sources: Malagasy Authorities; and IMF staff estimates and projections. ¹ Primary balance excluding foreign-financed investment and grants.

^{Text Table 2.}

Madagascar: 2024 Fiscal Projections Based on Revised Budget Law

(Billions of Ariary, unless otherwise indicated)

	2023 outurn (preliminary)	2023 outturn (%GDP)	2024 budget law	2024 projections (based on a revised budget)	2024 projections (%GDP)
Total revenue and grants	9,542	13.6	12,262	10,104	12.9
Total revenue	7,956	11.4	9,967	8,713	11.2
Net tax revenue	7,762	11.1	9,735	8,405	10.8
Domestic taxes	3,773	5.4	5,108	4,228	5.4
Taxes on international trade and transactions	3,990	5.7	4,627	4,177	5.3
o/w exceptional revenue (net payment of oil customs tax arrears)	681	1.0	412	577	0.7
Non-tax revenue	194	0.3	231	308	0.4
Grants	1,586	2.3	2,295	1,390	1.8
Total expenditure	12,522	17.9	15,888	13,037	16.7
Current expenditure	7,624	10.9	7,722	8,065	10.3
Wages and salaries	3,717	5.3	4,339	4,062	5.2
Interest payments	496	0.7	655	663	0.8
Goods and services	451	0.6	616	566	0.7
Transfers and subsidies	2,932	4.2	1,957	2,252	2.9
o/w JIRAMA and its suppliers	895	1.3	557	793	1.0
o/w fuel price subsidy	1,038	1.5		239	0.3
Treasury operations (net)	28	0.0	156	522	0.7
Capital expenditure	4,898	7.0	8,166	4,972	6.4
Domestic financed	1,094	1.6	2,488	1,183	1.5
Foreign financed	3,804	5.4	5,678	3,789	4.9
Overall balance (commitment basis )	-2,980	-4.3	-3,626	-2,934	-3.8
Variation of domestic arrears (+ = increase)	18	0.0	0	-300	-0.4
Overall balance (cash basis)	-2,961	-4.2	-3,626	-3,234	-4.1
Domestic primary balance1	-266	-0.4	411	128	0.2
excluding exceptional revenue	-947	-1.4	-1	-448	-0.6
Primary balance	-2,484	-3.6	-2,971	-2,271	-2.9
excluding exceptional revenue	-3,165	-4.5	-3,383	-2,848	-3.6

Sources: Malagasy Authorities; and IMF staff estimates and projections. ¹ Primary balance excluding foreign-financed investment and grants.

View Table

^{Text Table 2.}

Madagascar: 2024 Fiscal Projections Based on Revised Budget Law

(Billions of Ariary, unless otherwise indicated)

	2023 outurn (preliminary)	2023 outturn (%GDP)	2024 budget law	2024 projections (based on a revised budget)	2024 projections (%GDP)
Total revenue and grants	9,542	13.6	12,262	10,104	12.9
Total revenue	7,956	11.4	9,967	8,713	11.2
Net tax revenue	7,762	11.1	9,735	8,405	10.8
Domestic taxes	3,773	5.4	5,108	4,228	5.4
Taxes on international trade and transactions	3,990	5.7	4,627	4,177	5.3
o/w exceptional revenue (net payment of oil customs tax arrears)	681	1.0	412	577	0.7
Non-tax revenue	194	0.3	231	308	0.4
Grants	1,586	2.3	2,295	1,390	1.8
Total expenditure	12,522	17.9	15,888	13,037	16.7
Current expenditure	7,624	10.9	7,722	8,065	10.3
Wages and salaries	3,717	5.3	4,339	4,062	5.2
Interest payments	496	0.7	655	663	0.8
Goods and services	451	0.6	616	566	0.7
Transfers and subsidies	2,932	4.2	1,957	2,252	2.9
o/w JIRAMA and its suppliers	895	1.3	557	793	1.0
o/w fuel price subsidy	1,038	1.5		239	0.3
Treasury operations (net)	28	0.0	156	522	0.7
Capital expenditure	4,898	7.0	8,166	4,972	6.4
Domestic financed	1,094	1.6	2,488	1,183	1.5
Foreign financed	3,804	5.4	5,678	3,789	4.9
Overall balance (commitment basis )	-2,980	-4.3	-3,626	-2,934	-3.8
Variation of domestic arrears (+ = increase)	18	0.0	0	-300	-0.4
Overall balance (cash basis)	-2,961	-4.2	-3,626	-3,234	-4.1
Domestic primary balance1	-266	-0.4	411	128	0.2
excluding exceptional revenue	-947	-1.4	-1	-448	-0.6
Primary balance	-2,484	-3.6	-2,971	-2,271	-2.9
excluding exceptional revenue	-3,165	-4.5	-3,383	-2,848	-3.6

Sources: Malagasy Authorities; and IMF staff estimates and projections. ¹ Primary balance excluding foreign-financed investment and grants.

18. The Council of Ministers approved a revised budget for 2024 in line with program projections.⁵ This budget is expected to be adopted by Parliament in June (prior action (PA)). The revised budget targets a domestic primary surplus of 0.2 percent of GDP. Based on current projections for capital grants and externally financed investment, this domestic primary surplus would imply a 3.6 percent-of-GDP primary deficit on an accrual basis, that is, excluding the exceptional collection of 2023 oil customs tax arrears received in early 2024, or a 2.9 percent of GDP primary deficit on a cash basis (Text Table 2). The improvement compared to 2023 is mainly driven by a reduction in public expenditures, including transfers to oil distributors from their 2023 peak. Given the program objective to stabilize debt, the primary balance is used as the new program fiscal anchor. The domestic primary balance will continue to be monitored as an IT.⁶

19. Credible measures are needed to boost domestic revenue mobilization over 2024-27. The envisaged reduction of the primary deficit requires a sustainable increase in tax revenue, supported by quantifiable measures. The revenue package to support program objectives includes both tax policy and revenue administration measures (Text Table 3). The early implementation of some of those measures could increase 2024 revenue above current projections.

• Tax policy. The authorities are committed to reforming taxes on wages (IRSA), including by increasing the upper marginal tax rate from 20 to 25 percent, and possibly the rates of intermediate brackets, following Fund capacity development (CD) recommendations.⁷ They will review excise taxes, with a view to increasing their efficiency. Notably, they intend to align the excise rates applicable on local alcohol and tobacco products to rates on imported products. Finally, the authorities committed to reduce tax expenditures (estimated around 3.2 percent of GDP in 2022) by MGA 280 billion per year in each budget law, building on work by the African Development Bank, the World Bank and IMF CD.

• Revenue administration. The authorities commit to monitor improvements on tax and customs administration through the provision to staff of a monthly dashboard prepared with Fund CD, focusing on indicators related to compliance management (notably for VAT administration) and controls (continuous structural benchmark (SB)). The authorities will pursue their digitalization efforts to increase the tax base and to strengthen VAT administration, controls, and collection, building on Tax Administration Diagnostic Assessment Tool (TADAT) recommendations (MEFP, A15). They will continue to improve customs controls, notably the control of transfer prices in the mining sector thanks to ongoing Fund CD in this area (MEFP, A16).

^{Text Table 3.}

Madagascar: Fiscal Measures over 2024-27, Cumulative Gains

(In percent of GDP)

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

^{Text Table 3.}

Madagascar: Fiscal Measures over 2024-27, Cumulative Gains

(In percent of GDP)

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

View Table

^{Text Table 3.}

Madagascar: Fiscal Measures over 2024-27, Cumulative Gains

(In percent of GDP)

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

20. Reforms to turn around JIRAMA are key to more effective spending. Transfers to JIRAMA and its suppliers represented 1.3 percent of GDP in 2023. The authorities appointed a new CEO in May 2024 following an international recruitment process initiated in 2023 with the support of the World Bank (PA). The next step is to finalize the recruitment process for the company's other senior executives, including the Chief Financial Officer. JIRAMA’s recovery plan will need to enable a significant gradual reduction in government transfers, consistent with the planned fiscal adjustment under the program, leaving space to finance other transfers, including social ones. The authorities have committed to have this plan approved by the Council of Ministers by end-November 2024 (SB). JIRAMA will continue to provide Fund staff a monthly dashboard to monitor recovery efforts and publish all fuel purchase contracts (continuous SBs).

21. The implementation of an automatic fuel pricing mechanism (PA) should further reduce fiscal risks (Annex VII). The mechanism allows pump prices for gasoline, diesel, and kerosene to fluctuate with reference prices (proxy for market prices) on a monthly basis. It is designed as a "price band” mechanism, with two main characteristics: (i) pump prices in month M are automatically adjusted by the change in the reference price between month M-2 and month M1, capped at 200 ariary/liter, and (ii) any change in the reference price beyond 200 ariary would be postponed to the next month until the change in pump prices fully reflects that of the reference price. The subsidy resulting from the initial gap between the pump and reference prices and the delayed adjustment would be paid to oil distributors within a month after the end of every quarter. A timely settlement of the subsidy is key to limit pressure on the cash flow of oil distributors and avoid the accumulation of cross-liabilities as observed in the past. For 2024, the estimated subsidy (around MGA 239 billion or 0.31 percent of GDP) has been budgeted for in the revised budget law.

22. The program aims to reinforce fiscal institutions and PFM processes building on ongoing efforts (with FAD resident PFM expert) to improve budget execution and traceability (Annex IV). Commitment plans will be extended to all ministries (SB), following up on efforts during the previous program to pilot commitment plans in some ministries, and enable progress in cash management via improved cash flow projections. The adoption of a new cash flow management legislation will introduce more robust tools to reinforce the Treasury Single Account (SB). To support the proposed debt anchor, the program also aims to strengthen the budget preparation process through better macro-fiscal forecasting. The introduction of commitment appropriations to better monitor multi-year investment projects and a more structured process for public investment project evaluation, selection, and budgeting (RSF RM02) will improve the budget medium-term focus. Lastly, efforts will continue to enhance the management of fiscal risks, in particular arising from state owned enterprises (SOEs). The authorities commit to publish an annual report on SOEs, highlighting their financial results, implications for the budget and realized governance efforts (MEFP, A32).

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

23. The authorities have made good governance one of the three pillars of the new PGE and requested a Governance Diagnostic Assessment (GDA). The GDA will support the elaboration and operationalization of a new anti-corruption strategy for 2025-2035, whose adoption and publication should happen before end-January 2025 (SB). Some measures can be rapidly implemented such as adequate budgeting and staffing of anti-corruption institutions, and a better enforcement of the asset declaration requirements for government officials. The adoption of a legal framework to protect whistleblowers is a key reform that would need more preparation and CD support, possibly over the course of the GDA. The GDA report will be finalized and published in 2025 (MEFP H38).

24. Better government transparency is crucial to improve accountability. The authorities have started publishing ultimate beneficial ownership (UBO) information for new public procurement contracts but contracts themselves are not systematically released and the identification of UBO needs to be enhanced. The financial accounts of SOEs are generally not published. The authorities agreed to consider the adoption of a "Freedom of Information Act” that would enshrine the right of citizens to know about public affairs and the creation of a dedicated watchdog to enforce that right before the end of the program (MEFP A44). Madagascar's accession to the Open Government Partnership Initiative would further demonstrate its commitment to greater transparency and stronger governance. These reforms would also help increase transparency on the use of natural resources, henceforth enhancing the impact of policies to protect forestry and biodiversity, including those supported by the RSF.

25. Further reforms would improve fiscal governance. Governance issues in the customs and tax administrations call for strengthening internal controls.⁸ The tax and customs administrations' monthly performance dashboard to be produced under the program (A19) should help to strengthen internal controls and monitor improvements with a focus on indicators related to compliance management and controls. In addition, the GDA will help identify measures to further strengthen internal controls and reduce vulnerabilities to corruption.

26. The ongoing operationalization of the Malagasy Sovereign Wealth Fund (FSM) created in 2021 still requires clarifications. The authorities adopted in May a first implementing decree of the August 2021 law creating the FSM. However, some elements require more clarity, such as the regulation of the Fund's capacity to engage the State's signature in investment projects or PPPs, and the guarantee of its transparency and independence through the publication of annual reports and financial statements (MEFP, A49).

27. The independence and financial autonomy of the central bank must be preserved and strengthened. Priority reform areas to fortify BFM independence include: (i) limiting BFM's involvement in the gold sector by adopting an operational strategy for non-monetary gold purchases in line with recommendations of Fund staff , (ii) reviewing the remuneration of Treasury deposits, (iii) moving towards a clear, transparent, and market-based debt management framework through a single central securities depository (CSD) for public debt securities, and (iv) strengthening the institutional framework for financial stability (see below). A new safeguards assessment of the BFM was initiated and will be completed by the first program review. The last assessment was completed in 2021 and most recommendations have since been implemented, with the exception of completing an external assessment of the internal audit function and safeguarding BFM's purchases of unrefined gold for the ultimate diversification of its foreign reserves.

28. Better market regulation should help prevent state capture. Beyond the operationalization or reinforcement of regulators in specific sectors (some of them crucial from a climate perspective, such as the water or electricity regulators), efforts to reform the vanilla and clove sectors could help prevent and curb monopolistic practices. The implementation of the Conseil Economique, Social et Culturel, provided for in the 2010 Constitution would encourage public debate and civil society's involvement in policy making.

29. The program will support efforts to enhance the effectiveness of implementation of the anti-money laundering and combating the financing of terrorism (AML/CFT) framework. The newly adopted AML/CFT law (Law 2023-026) amended the 2018 AML/CFT law to improve conformity with international standards, and the authorities committed to adopt the associated decree by end-June 2024. An additional decree establishing the mechanism for implementing targeted financial sanctions related to terrorism, the financing of terrorism, and the financing of mass destruction weapons proliferation should be adopted by end-June 2024, and the report of the national assessment of the risks of money laundering and terrorist financing should be validated by the Council of Ministers by that date. The authorities will continue ongoing work on the designation and operationalization of supervisors of designated non-financial establishments and professions (MEFP, H40).

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

30. The program will support the implementation of the new monetary policy operational framework (Box 1). A monetary policy consultation clause (MPCC) will help monitor BFM's performance in implementing the new framework and keeping inflation under control. The reviewbased approach to monetary policy conditionality is deemed appropriate as BFM has been transitioning under the previous program to a more forward-looking monetary policy framework ascribing a greater role to policy interest rates.⁹ Fiscal dominance is minimal as the 2016 central bank law strictly limits central bank lending to the government; average annual inflation has remained in the single digits; and the central bank is committed to continuing the strengthening of its policy framework. The increased use of repo operations by banks would contribute to strengthening monetary policy transmission. BFM aims to encourage such operations (MEFP ^51), and the authorities have committed to implement a Central Securities Depository (CSD) by end-December 2024 (SB).

31. BFM should stand ready to raise its policy rates to keep inflation on a downward path. The projected path for M3 (MPCC) has been set to support the decline in inflation. While the current policy stance is appropriate, BFM should be ready to raise interest rates as needed to drive inflation down if price pressures were to reappear, continue to manage bank liquidity through open market operations, and communicate more predictably and transparently about its interest rate policy and liquidity management to enhance credibility and accountability. Continued improvement of monetary policy decision communication, including through the development of a quarterly monetary report, would help better anchor expectations.

32. Maintaining a flexible exchange rate regime remains the best way to absorb external shocks. While restrictions on residents' holding of bank accounts in foreign currency were lifted before becoming effective, FX repatriation and surrender requirements on export proceeds, considered capital flow management measures (CFMs), remain in place. The phasing out of CFMs should be done in a properly timed and sequenced manner. This would require considering external vulnerability risks and progress made with reforms to foster necessary institutional and financial development, including macroprudential reforms, and in line with the IMF's Institutional View on Liberalization and Management Capital Flows and Integrated Policy Framework. Meanwhile, BFM is reviewing its FX intervention strategy to move away from fixed-volatility triggers towards more riskbased triggers (MEFP A54).

33. Bolstering financial stability is key to the development of credit markets. Overall, the banking sector remains profitable, liquid, and resilient. The definition and requirements of minimal capital adequacy, as well as liquidity ratios, are being adapted to follow Basel III recommendations. The effective implementation of the 2020 banking law would also reinforce financial stability (MEFP A60). At the macroprudential level, the authorities committed to adopt the long-awaited financial stability law by end-June 2025 to strengthen the supervision of the financial system (SB). The forthcoming Financial Sector Stability Review (FSSR) will provide a comprehensive diagnostic of gaps in the oversight of the financial sector to be addressed in subsequent reviews, including through capacity development.

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

34. In a context of high social fragility and vulnerability to climate disasters, sustained efforts are needed to build resilience and increase potential growth. This fourth pillar of the program will closely align with the PGE’s priorities on human capital and industrialization.

35. The program will support stronger social safety nets. Drawing lessons from past analyses,¹⁰ the program envisages an increase in spending for education and health and continued improvements in the social safety net coverage. In this context, the program sets a floor on social spending, using the new functional classification developed with Fund CD support (IT). Additionally, the authorities committed to (i) expand the social registry to 600,000 households (SB), from the initial pilot program which covered 81,278 households in 2 regions, and continue to work on measures to mitigate the planned increases in fuel prices (RSF RM07 and RM08) (ii) adapt the legal framework of the national Social Security Fund (CNAPS) to extend contributory coverage to selfemployed workers, and (iii) extend the food bank program (SB) (MEFP A56).

36. Digitalization can accelerate financial inclusion and the development of social protection programs. The authorities have introduced the possibility to file and pay taxes online and started processing some payments via mobile money (e.g., salaries, scholarships). Digital payments and mobile money providers are governed by law, including the banking law and the 2017 law on electronic money and electronic money providers. Most digital financial services are currently provided by institutions supervised by the Banking and Financial Supervision Commission (CSBF). The authorities committed to work on a new strategy for financial inclusion, updating the previous strategy that expired in 2022, and to upgrade regulations to mitigate new potential risks (MEFP fl58). They are working on the implementation by BFM of a national switch, which aims to facilitate and secure electronic transactions between different players in the financial system and businesses (MEFP fl59).

37. Industrialization will benefit from a more reliable supply of electricity following JIRAMA’s recovery and a greater formalization of the economy. Allowing informal and selfemployed workers to voluntarily contribute to the social protection system will increase workforce formalization. Reforms to support industrialization efforts include updating the 2014 industrialization strategy and improving the business environment through governance reforms. The GDA would allow to identify more specific actions in this regard.

E. Combatting Climate Change (RSF)

38. Madagascar faces significant risks to balance of payments stability given its high vulnerability to climate hazards (Annex V). Weather-related shocks (notably cyclones, droughts, and floods) could reduce agricultural exports and disrupt port activity - a major factor for an island country. Erosion linked to deforestation could also hamper hydropower production and lead to additional needs for fuel imports and / or power outages harmful to the industrial sector - as seen with the loss in production from the Andekaleka dam, a major source of power for the Antananarivo urban area. Climate change could also have serious implications on debt sustainability (see DSA).

39. Failing to address climate change would have severe economic and human costs. According to the World Bank's forthcoming Climate Change and Development Report (CCDR), direct losses from cyclones and impact on tourism and fisheries are likely to be the primary drivers of climate-related losses. The CCDR also shows a robust correlation between climate shocks and economic growth and points out that as the risk of climate shocks increases, the probability of Madagascar experiencing strong economic growth diminishes. Climate change disproportionally affects some population groups, with poor households and women being the most exposed given their higher employment in the informal sector and agriculture. This is compounded by specific regional vulnerabilities, notably in Madagascar's Southern regions ("Grand Sud"), which have been suffering from an acute drought for several years.

40. Financing needs related to climate change are enormous (especially for adaptation). According to the implementation plan of its updated Nationally Defined Contribution (NDC2), Madagascar's financing needs ("conditional contributions") total US$24.4 billion over the period 2022-2030. With a focus on disaster risk management and five priority climate-sensitive development sectors (agriculture, land, and blue economy; hydropower; urban resilience; resilient transport; social protection, health, and education), the CCDR identifies priority near- and medium-to-long term climate resilience investments for a combined cost of nearly US$10 billion by 2050 (about 67 percent of 2022's GDP), of which US$3.5 billion would be required by 2030. These investments would generate higher import needs in the near term but would help mitigate risks to balance of payments stability in the medium-to-long term. The needs far outstrip current financial flows, despite ongoing efforts to secure support by international actors like the Green Climate Fund (GCF).

41. Madagascar’s RSF request is grounded in the analysis of climate challenges made in the 2022 Climate Macroeconomic Assessment Program (CMAP) and in the CCDR. Proposed reform measures (RMs) aim to complement existing support by development partners (Text Table 4). Their sequencing is intended to put in place the institutions and mechanisms required to advance the climate agenda in the first three reviews and prepare further reforms towards the end of the RSF arrangement.

^{Text Table 4.}

Madagascar: Climate-Related Priorities Supported by Development Partners

^{Text Table 4.}

Madagascar: Climate-Related Priorities Supported by Development Partners

Key Country Challenge	Reform Priority	Diagnostic Reference	Development Partner Involvement
Elevated disaster risks	Put in place a fully-fledged Early Warning System against cyclones and other climate hazards	WB CCDR	WB, UN, AfDB, USAID
Inadequate social safety nets	Expand the social safety nets and make them responsive to climate shocks	WB CCDR	WB, UNICEF, EU, USAID
Cities exposed to natural hazards	Ensure effective implementation of climate-resilient urban planning and construction regulations	WB CCDR	WB, AFD
Roads poorly maintained and highly vulnerable to climate shocks	Support implementation of shock-resistant road design standards and support road maintenance through a reenergized Road Fund	WB CCDR	WB DPO, EU
Need to scale up renewable energy sources	Adopt a regulatory framework on the implementation of the Least Cost Development Plan, on strengthening competition in the electricity market and on promoting renewable energy	WB CCDR	WB DPO, AfDB
Vulnerable agricultural sector	Pilot and expand climate-smart agricultural practices	WB CCDR	WFP, FAO, EU, USAID

View Table

^{Text Table 4.}

Madagascar: Climate-Related Priorities Supported by Development Partners

Key Country Challenge	Reform Priority	Diagnostic Reference	Development Partner Involvement
Elevated disaster risks	Put in place a fully-fledged Early Warning System against cyclones and other climate hazards	WB CCDR	WB, UN, AfDB, USAID
Inadequate social safety nets	Expand the social safety nets and make them responsive to climate shocks	WB CCDR	WB, UNICEF, EU, USAID
Cities exposed to natural hazards	Ensure effective implementation of climate-resilient urban planning and construction regulations	WB CCDR	WB, AFD
Roads poorly maintained and highly vulnerable to climate shocks	Support implementation of shock-resistant road design standards and support road maintenance through a reenergized Road Fund	WB CCDR	WB DPO, EU
Need to scale up renewable energy sources	Adopt a regulatory framework on the implementation of the Least Cost Development Plan, on strengthening competition in the electricity market and on promoting renewable energy	WB CCDR	WB DPO, AfDB
Vulnerable agricultural sector	Pilot and expand climate-smart agricultural practices	WB CCDR	WFP, FAO, EU, USAID

42. The RSF discussions placed great emphasis on implementation capacity and cooperation among development partners. Discussions with the authorities and with donors confirmed assistance for implementing RMs in the few areas not covered by IMF core expertise and CD capabilities. Reform ideas that still required time and efforts to mature have been identified as MEFP commitments (e.g., clean cooking, agricultural insurance, development of environmental taxation). The proposed RSF revolves around the following five priorities:

RSF Priority 1. Reinforcing Governance and Mainstreaming the Climate Agenda into PFM/PIM Processes

43. Climate governance issues will be addressed at the start of the RSF-supported arrangement to advance the effective implementation of the national climate change agenda. Both the CMAP and the CCDR note that the institutional and political fragmentation of the national climate change agenda results in delays in reform implementation. The longstanding Inter-ministerial Committee for Environment (CIME) chaired by the Minister of Environment on behalf of the Prime Minister is devoid of specific competences on climate change issues and has been largely inactive over the last few years. While the national bureau for coordination of climate issues and the REDD+ strategy (BNCC-REDD+), an agency under the Ministry of Environment, has been entrusted with a broad mandate for the definition and operationalization of overall climate-related policies and commitments, the absence of a functional decision-making mechanism hampers its efforts. To address these challenges, the CIME will be reactivated under the leadership of the Prime Minister with a mandate to lead and supervise all climate-related policies (RM01).

44. The RSF will build on past reforms of the public investment management (PIM) framework to make it climate-sensitive, with a strong focus on actual implementation. Madagascar has one of the lowest public investment efficiency rates in the sub-Saharan Africa (SSA) region, highlighting considerable room for improvement. A more robust PIM framework has been adopted in early 2023 with IMF and World Bank support, but its implementation is barely starting, and the framework does not yet include climate considerations. The 2004 decree on environmental impact assessments is outdated and does not mention climate considerations either. The RSF will support in a sequenced manner the integration of climate change concerns into the public investment projects evaluation and selection process (RM02) and ensure effective and transparent implementation (RM03).

45. Madagascar is still at an early stage in the integration of climate considerations in PFM. The budget does not allow the tracking of expenditures that would contribute to the transition to a more resilient and low-carbon development model, complicating both decision making and access to climate financing. The RSF would take advantage of the work of the FAD resident advisor -currently working on the reform of the budget classification, a major enabler to track climate-related expenditures - and support the production of a first Climate Budget Statement appended to the 2026 budget (RM04).

RSF Priority 2. Enhancing Adaptation to Climate Change and Resilience Against Natural Disasters

46. Climate change increases the need for adequate governance of the water sector, as the availability of water resources is crucial for the economy and for overall development. While Madagascar is currently subject to acute water stress only in its Southern region ("Grand Sud"), climate change combined with urbanization and agricultural expansion puts pressure on water resources and raises the risk of water scarcity for agriculture, drinking, and other domestic resources (set to increase if the country improves water services access - currently at only 53 percent of the population, lower than the SSA average of 65 percent). Risks to agriculture are macro-critical since food exports are about 40 percent of merchandise exports (versus about 15 percent on average in SSA). The expected development of hydropower could also be undermined by changes in precipitation patterns and related impacts on river basins, compounded by deforestation: the Andekaleka hydroelectric dam has seen its capacity reduced by 78 percent due to the decline of water flows, thereby contributing to frequent power outages in the capital region¹¹.

47. Adopting and ensuring the effective implementation of an integrated water resource management (IWRM) approach is key to addressing the challenges of the “water, energy and food” nexus. The current Water Code (Law 98-029) fails to consider the environmental and climate change dimensions. There is no effective IWRM at the level of the twelve main Madagascar river basins, some of which are heavily exposed to climate change.¹² This leaves the country poorly equipped to face water stress, tackle possible conflicts between different water uses, and take preventive measures (protection of forested areas or reforestation, creation of reservoir dams). The RSF suggests addressing this challenge through the adoption of a new Water Code (RM05), as a first step towards the operationalization of IWRM plans at the level of those river basins most exposed to climate change. CD support (European Union and World Bank) will be essential to achieve the objectives under this RM, notably to help put in place adequate institutional arrangements as the authority in charge of water and sanitation created under the 1998 law has not been able to fulfil its mandate effectively.

48. Given its major exposure to natural disasters, Madagascar has already put in place many elements of an overall disaster risk management framework. Madagascar has developed a national disaster risk management strategy (2016). It has also adopted in 2019 a series of regulations outlining norms for resilient construction and land planning. Climate-responsive social protection is being developed with the support of the World Bank and UNICEF, in connection with the extension of the Unified Social Register. Work to improve and extend the early warning system is ongoing with UN support.

49. The RSF proposes to support improvements in financing instruments to respond to natural disasters. Madagascar has adopted in 2023 a national disaster risk financing and insurance strategy (prepared with the support of AfDB) outlining a layered disaster risk financing model, and already possesses some elements of this financing model, notably through the ARC financing mechanism (insurance policy on droughts and cyclones). It has also already made use of a World Bank CAT DDO. However, while a national contingency fund (FNC) has been created as a conduit for emergency response, it remains to be operationalized and properly budgeted (current budget allocation is only MGA 2 billion) to enable swift disbursement of emergency spending: the CCDR notes that disbursements made by the African Risk Capacity took up to six months to reach the end beneficiaries due to cumbersome internal procedures. The RSF will henceforth support adequate budgeting and operationalization of the FNC, as well as improvements in process for emergency expenditure, including adequate transparency and reporting mechanisms (RM06). This action will benefit from World Bank support and will also be able to build on the experience gathered by IMF (FAD) CD, notably through the recent audit of the expenditure chain (2023) and through previous work on COVID spending.

RSF Priority 3. Supporting Efforts to Curb the Increase of Greenhouse Gas (GHG) Emissions

50. While carbon emissions per capita remain very low compared to other SSA countries, the RSF would support efforts to convey the right price signals in the energy sector. Madagascar's emissions are increasing, albeit from a low level and with a composition skewed towards land use, land use change and forestry (LULUCF) and agriculture (80 percent of emissions). Reforms under the ECF (automatic fuel pricing mechanism) would go a long way towards reducing fuel subsidies - already relatively modest at 1.6 percent of GDP cumulatively over 2021-23 and expected to decrease to 0.3 percent of GDP in 2024. The full elimination of fuel price subsidies by May 2026 (RM07) would complement these efforts, increase incentives for conservation and create fiscal space to finance social safety nets and/or investment in climate-resilient infrastructure. Similarly, an increase in the diesel excise tax would reduce the tax advantage of using diesel over gasoline with a positive mitigation impact (RM08).

51. Initiatives to promote the development of renewable electricity will also be encouraged under the RSF. The 2015-2030 New Energy Policy and the 2022 SDG7 implementation plan aim to raise the share of renewable energy in electricity generation from 40 percent currently to about 85 percent in 2030 while increasing household access to electricity from 33 percent to 70 percent by 2030. While most of this increase is expected to accrue from large hydropower projects (Sahofika and Volobe), there is scope to develop mini-grid and off-grid solar or hydropower solutions notably to enhance electricity access in rural areas. Progress in this field could be achieved through the creation of a dedicated financing vehicle called National Sustainable Energy Fund (FNED), which could leverage State contribution and support from donors to support renewable energy projects in rural areas (RM09).

RSF Priority 4. Reinforcing the Protection of Forests and Biodiversity

52. Deforestation has major negative consequences in terms of water resources, agriculture, biodiversity, and resilience to natural disasters. Forest coverage has declined from 29 percent to 21 percent between 2000 and 2020 (CCDR). Deforestation leads to high erosion rates, increased flood risks, and reduced water resources for agricultural and household usage. It also impacts biodiversity - a major source of natural capital and attraction for Madagascar's tourism sector.

53. The effectiveness of current efforts to protect forests could be enhanced through a framework more conducive to private initiative and supportive of reforestation projects. Madagascar is equipped since 2018 with a national REDD+ strategy, implemented notably through a 2021 decree regulating access to the forest carbon market. Madagascar has implemented an effective Measurement, Reporting and Verification (MRV) mechanism under the World Bank Forest Carbon Partnership Facility (FCPF), which covers public projects only. Extending the scope of this mechanism to reforestation schemes would tap into significant private interest (RM10). World Bank CD support would help make sure that this new framework is conducive to high-quality projects, not just in terms of mitigation but also in terms of adaptation to climate change (fighting soil erosion for example) and benefits for local communities.

RSF Priority 5: Mobilizing Climate Finance

54. Current climate financing flows to Madagascar are well below estimated needs. As a low GHG emitting country frequently hit by climate shocks (cyclones, droughts, floods, sea level rise), most of Madagascar's climate finance needs are on adaptation. The AfDB estimates that Madagascar mobilized around USD 420 millions of climate financing per year on average in 2019-20, covering 16 percent of its estimated needs. The private sector share was around 5 percent and 70 percent of these private financing flows went to the energy sector. However, Madagascar has the potential to be an attractive destination for climate investments with multiple adaptation and mitigation co-benefits, building on the financial sector reforms under the ECF. The upcoming CCDR points to several private sector investment opportunities. Reforms under this priority area focus on addressing two key structural challenges.

55. Given Madagascar’s abundant natural capital endowment, the proposed adoption of a National Climate Finance Mobilization Strategy (RM11) will strengthen Madagascar’s position on the global as well as domestic stage as an attractive destination for climate investments. This RM addresses the fragmented climate agenda identified by the CCDR and the CMAP and brings a sharpened focus on developing a strategy that includes the private sector and prioritizes key investment areas with a tentative budget, options for innovative blended financing mechanisms and a timeline. The strategy will be developed after extensive consultations and adopted as a decree -thus ensuring its publication and giving it a strong legal standing vis-a-vis various stakeholders, especially within the administration.

56. In addition, a national green taxonomy (RM12) will bring clarity and transparency to financial market participants keen on investing in green projects and/or projects with clearly defined climate outcomes.¹³ It will help financial actors and others (climate funds) make an informed investment decision and prevent greenwashing. Clearly defined outcomes in the fields of adaptation, mitigation and biodiversity can also incentivize investors interested in supporting Madagascar's climate policies and support tracking and monitoring of climate finance flows in the country.