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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 10, 2024

WORLD BANK ASSESSMENT LETTER FOR THE RESILIENCE AND SUSTAINABILITY FACILTY

A. Country Vulnerability to Climate Change Including Human, Social and Economic Costs for the Country Arising from Climate Change Vulnerabilities

1. Extreme weather events take a heavy toll on Madagascar with climate-related disasters and shocks having a significant impact on poverty levels, underscoring Madagascar’s vulnerability to climate change. Madagascar has the highest risk of cyclones in Africa and currently experiences three to four cyclones between November and April each year. Major tropical cyclones have hit Madagascar an average of about once every three years since 1998. The costs associated with cyclones are high, with a typical tropical cyclone costing the economy an estimated 1 percent of GDP per year, and up to 8 percent of GDP for once-in-a-century events, devastating rural communities and agriculture along the Eastern Coast. Total losses from cyclones in 2020 alone were equivalent to 4.8 percent of GDP, as per the World Bank’s Global Rapid Damage Estimation (GRADE). The economic and human impacts of droughts are even larger, especially in the South, where a multi-year severe drought has deepened poverty and food insecurity. Moreover, climate-related disasters and shocks can cause people to fall into poverty both through direct near-term losses and damages, and through long-term indirect impacts on nutrition and education, among others. Overall, from 2008 to 2022, in Madagascar, disasters linked to natural hazards displaced 1.4 million people, 1.3 million of them due to storms alone. Most recently in December 2023, storm Alvaro left a dozen of deaths, around 16,290 victims representing 4,626 households, and material damages in the South of Madagascar. Cyclone Gamane that hit the Northern part of Madagascar in March 2024 impacted up to 89,000 victims and 18,787 houses, and destructed several road infrastructures, with reconstruction costs estimated at $76 million.

2. Although Madagascar is a minor contributor to climate change, it is highly vulnerable to its impacts. In 2020, the country emitted an estimated 40.21 Mt CO2e, or 0.09 percent of global greenhouse gas emissions^1,2. In per capita terms, Madagascar's per capita emissions rank 169th in the world, at just 1.45 tCO2e emitted per person. However, due to its high exposure to climate hazards, deep social and economic vulnerabilities, dependency on natural capital, and other factors, Madagascar is considered one of the countries that are most vulnerable and least prepared to cope with climate change, ranked 172nd of 185 countries by the 2022 ND-GAIN Index.³

B. Government Policies and Commitments for Climate Change Adaptation and Priority Areas to Strengthen Resilience

3. Madagascar’s National Adaptation Plan (PNA), published in 2021, explicitly references the Plan Emergence Madagascar and aims to strengthen adaptation governance and mainstream adaptation, including in priority sectors, and mobilize finance.⁴ It includes a diverse array of actions, with a 10-year perspective, including the creation of a "green belt” to prevent desertification and enhance climate resilience; promoting adaptation in agriculture, especially in the Grand Sud; improving access to drinking water; strengthening early warning systems (EWS); accelerating reforestation and conserving natural forests; protecting coastal infrastructure; and making cities more sustainable and resilient. Enhanced efforts are needed to advance implementation of these actions. So far, Madagascar lags countries in the region regarding hydrometeorological services and EWS. In the agriculture sector, only a small subset of proposed adaptation measures has been adopted, notably a water pipeline project in the south with an irrigation component and some research investment in climate-resilient crop varieties.⁵ On the positive side, several Malagasy cities, such as Toamasina and Mananjary, which are both very prone to storms and flooding, have made important progress towards risk-informed planning, including detailed multi-hazard risk maps and a strategic investment plan. A whole-of-government and sector objectives prioritizing climate-resilient development is needed to push this agenda forward.

4. Climate change and variability, particularly extreme events, put significant pressure on the water and agriculture sector, and transport infrastructures. Access to safe drinking water is limited, particularly in rural areas, and could worsen with population growth and due to climate change impacts and contamination. Climate change is already making water supplies less reliable and affects water quality, which is important both for drinking water and for irrigation. Key threats include saltwater intrusion in some aquifers as well as contamination from human activities (fertilizer use, poor sanitation). Water stress due to droughts is a particular concern, especially in arid regions. Moreover, the agriculture sector faces growing losses due to the erosion of cultivable land during intense rainfall, cyclones, and floods; increases in pests, including locust plagues; and reduced labor (and animal) productivity during times of extreme heat. To improve the resilience of its agri-food systems to climate shocks, Madagascar top priorities include scaling up support for the development and promotion of climate-smart agriculture,⁶ deploying digital technologies to enhance farmers' access to knowledge and enhance their risk management capacity; and strengthening the enabling environment to attract private sector investment and technologies for adaptation. In addition, climate change poses major threats to roads, bridges and other transport infrastructure, as poor construction and inadequate maintenance make it highly vulnerable to extreme weather. The priority in the short term should focus on developing resilient infrastructure, and in the medium term, on the promotion of multimodal connectivity and lower carbon alternatives to road transport.

5. Although lacking a clear strategy, Madagascar does have a vision for making cities resilient to the impacts of climate change and enhance climate-resiliency health systems. The PNA addresses urban issues at length, as part of discussions of land planning and infrastructure; a vision for building "new cities” with a large supply of housing that is sustainable and resilient; coastal flood risk management; and access to safe drinking water in both urban and rural areas, among other topics.⁷ However, local governments do not have enough means to invest in and administer services needed to support resilience. In the health sector, the PNA outlines two strategic public health priorities: improving the health sector's capacity to address climate-related adverse effects and increasing the population's resilience capacity in the face of climate and climate-related health risks.⁸ The sectoral plan aims to strengthen the technical, institutional, and organizational capacities of the health sector in the face of climate change. Due to the lack of budget, progress on key activities, including preparedness of climate-related hazards, research on climate and health-related risks, monitoring and evaluation are limited.

C. Government Policies and Commitments in Terms of Climate Change Mitigation and Priority Areas to Reduce Greenhouse Gas Emissions

6. Madagascar’s Nationally Determined Contribution (NDC) includes mitigation commitments, mainly focused on energy and land use, land-use change and forests (LULUCF). The initial NDC, submitted in 2016 with commitments to 2025, laid out a package of actions projected to cost US$42.1 billion. Most of the near-term goals in the initial NDC were not achieved, so an NDC update in 2022 (still not officially submitted as of this assessment) aimed to set more realistic, achievable goals.⁹ It pledges to reduce cyclone-related loss of life, lower GHG emissions (by 32.6 Mt CO2, or 24 percent relative to business as usual), increase land-based carbon sinks, boost the share of renewable energy in the electricity mix to 80 percent, scale up adoption of improved stoves by households, slow coastal erosion in vulnerable areas, triple marine protected areas, and restore 55,000 ha of degraded land and mangroves. The government is now drafting a long-term low-emissions development strategy under the United Nations Framework Convention on Climate Change,¹⁰ laying out a vision for achieving a just transition to net zero emissions by mid-century. In addition, several hydropower projects, including Volobe and Sahofika, are underway to reduce GHG emissions and transition to renewable electrification.

D. Other Challenges and Opportunities

7. Madagascar can leverage several opportunities to attract private sector and international finance to support climate action, including through green finance and carbon markets. Insurance and risk management products are available in Madagascar, but scaling up their use is a challenge. Initiatives such as index-based insurance for farmers remain funded by financial and technical partners, and the insurance sector is still dominated by state-owned enterprises. In addition, to financing its adaptation bill, and considering its potential to serve as a global carbon sink, Madagascar can raise funds on carbon markets, including through Reducing emissions from deforestation and forest degradation (REDD+) initiatives, to support forest protection and restoration. Madagascar’s current commitments of enhancing 270,000 ha of forests with native species, in addition to existing REDD+ initiatives (potential absorption of 40 Mt CO2e¹¹) could allow to absorb around 44 Mt CO2e per year. This could represent US$44 million per year and $286 million to $1.4 billion by 2030.¹² One option would be to support efforts by large mining companies looking to improve their sustainability by funding large-scale reforestation and forest restoration activities. Potential collaboration with an existing quasi-private forest plantation concession could expand afforestation and restoration of degraded forests activities within an existing 200,000 ha concessions in central Madagascar, and produce wood products, biofuels and emission reduction credits to sell into carbon markets. However, several constraints now prevent Madagascar from accessing climate finance from forest carbon markets. Madagascar nationalized its forestry carbon markets in January 2022, through decree 2021-1113. This is not a problem when the investments that lead to emission reductions are funded by the government, but the regulation may have potentially discouraged¹³ existing conservation projects led by private companies and nonprofits that used to issue carbon credits and kept new ones from being set up, which warrants a revision of the decree.¹⁴ With its abundant marine and coastal resources, including over 250,000 hectares of mangroves, Madagascar has also a large potential to intensify blue carbon financing.

E. World Bank Engagement

8. The World Bank has an active portfolio of financing and technical assistance that is helping Madagascar implement its climate commitments.

• Active operations: The Atiala-Atsinanana Emission Reductions Program Project (P167725) aims to make payments to the program entity for measured, reported and verified Emission Reductions (ER payments) related to reduced deforestation, forest degradation and the enhancement of forest carbon stocks (REDD+) at the national level in Madagascar, and distribution of ER payments in accordance with agreed Benefit Sharing Plan. The MG ethanol clean cooking climate finance program (P154440) aims to increase household use of ethanol cooking stoves for reduced GHG emissions in Madagascar. The Madagascar - Least-Cost Electricity Access Development Project - LEAD (P163870) and the Digital and Energy Connectivity for Inclusion in Madagascar Project (P178701) are implementing grid-based renewable energy solutions. The Safety Nets and Resilience Project (P179466) supports climate change adaptation including agroforestry, landscape management, irrigation, and reforestation, as well as rapid safety net response to climate shocks. The Support to Resilient Livelihoods in Southern Madagascar Project (P171056) covers a range of resilience measures including resource and landscape management. The Madagascar National Water Project (P174477) is financing investments in water supply in major cities across the country and several cyclone-affected areas. The Regional Climate Resilience Project (P180171) will fund the remaining stages of the preliminary drafts study of the Mandrare Multipurpose Transformative Project (MMTP), currently being financed by the Madagascar National Water Project (P174477). The first Madagascar Equitable and Resilient Growth Development Policy Operation (P180288) aims to mitigate Madagascar's climate risks through climate-smart and decentralized fiscal management, climate-sensitive new investment law and mining codes, and reforms emphasizing renewable energy generation.

• Operations under preparation: The World Bank is preparing the Madagascar Second Equitable and Resilient Growth Development Policy Operation (P500386) which aims to strengthen governance and climate-smart and decentralized fiscal management and foster an enabling investment environment and supporting structural reforms in key sectors. The Regional Emergency Preparedness & Access to Inclusive Recovery (P181014) will strengthen the financial preparedness of vulnerable governments, firms and households against climate shocks.

• Analysis and technical assistance: The World Bank is finalizing the Country Climate and Development Report, which provides policy- and investment-related recommendations on climate change.¹⁵ Moreover, the Country Environmental Analysis (CEA) report assesses key areas to promoting Green, Resilient, and Inclusive Development in Madagascar. The World Bank also continues to provide technical assistance on climate-related areas, including a macro-modeling considering climate feature, integration of climate aspect in public investment management, under the Madagascar Macro-Fiscal and Equitable Growth Programmatic ASA (P501380). The recommendations of these analytical works and the supports provided through technical assistances are in concordance with the reforms supported by the RSF, that focus on reinforcing governance and mainstreaming the climate agenda into public financial management processes, enhancing adaptation to climate change and resilience against natural disasters, supporting efforts to curb the growth of GHG emissions, reinforcing the protection of forests and biodiversity, and mobilizing climate finance.