On behalf of the Malagasy authorities, we would like to thank Executive Directors, Management, and staff for their continued support to Madagascar. Over the past years, IMF assistance through emergency financing and an Extended Credit Facility (ECF) arrangement has been essential in ensuring the success of the authorities’ policy response to shocks and broader reform efforts.

Madagascar is in the middle of a 12-month electoral cycle. President Rajoelina was reelected in November 2023 and reappointed Prime Minister Christian Ntsay in January 2024. Parliamentary elections followed on May 29, 2024, and preliminary results indicate that the presidential coalition won 49 percent of the seats, two seats shy of majority. Most other seats were taken by independent candidates. Municipal elections are scheduled for November 2024.

Upon their inauguration, the Malagasy authorities presented to Parliament their general policy statement (Politique Generale de 1’Etat—PGE) that outlines key structural reforms and policies to build resilience over the next five years. The PGE rests on three main pillars: (i) human capital development and social protection, (ii) industrialization and economic transformation, and (iii) good governance and the rule of law.

To consolidate their achievements in reform implementation in the context of the PGE, the Malagasy authorities are requesting the (i) cancellation of the existing ECF arrangement which is set to expire in July 2024 after four completed reviews, and (ii) approval of a new 36-month ECF arrangement in the amount of SDR 256.62 million (105 percent of quota). The new ECF-supported program would play a catalytic role in mobilizing support from other Madagascar's technical and financial partners.

In March 2024, the country’s high vulnerability to extreme climate events affecting infrastructure and food security was again demonstrated by the impact of the Tropical Cyclone Gamane that hit the North-East regions of the country. Against this background, the authorities are also requesting financing under the Resilience and Sustainability Facility (RSF) in the amount of SDR 244.4 million (100 percent of quota) to support reforms aimed at strengthening climate resilience and addressing related balance of payments needs.

The Malagasy authorities are committed to implementing the policies and reforms contemplated in both Fund arrangements, which they believe will help put in place the fundamentals for faster, more sustainable, and more inclusive growth. To demonstrate their ownership of, and commitment to, the proposed new Fund-supported programs, they implemented three important prior actions: (i) adoption of a revised budget law for 2024, consistent with the programs’ objectives, (ii) establishment of an automatic fuel price-setting mechanism to further contain fuel subsidies, and (iii) recruitment of the CEO for the national utility company (JIRAMA). Based on their commitment and the strength of the reform program, the authorities are seeking Directors’ favorable consideration of their requests.

I. Recent Developments and Outlook

Economic growth averaged 4 percent in 2022 and 2023, mainly reflecting continued recovery of tourism. Growth is projected at 4.5 percent for 2024 and to gradually accelerate to above 5 percent over the medium term, underpinned by reforms under the ECF and the RSF arrangements. Inflation peaked at 12.4 percent year-on-year (y-o-y) in March 2023, mostly driven by a 43-percent increase in fuel prices in July 2022, but eased to 7.3 percent (y-o-y) in April 2024 and should further decline to 6 percent by 2028. Despite the decline in vanilla and mining exports, the current account balance improved in 2023. Key drivers include the recovery in tourism and decline in food imports following a good domestic rice harvest. Foreign exchange reserves increased more than expected from 4.2 months at end- 2022 to 5.7 months of import at end-2023. The stability of the current account balance over the medium term should help strengthen external buffers and maintain foreign exchange reserves around 5.8 months of imports. The banking system was resilient during the pandemic and remains healthy, profitable and liquid.

Fiscal consolidation efforts are continuing, and public debt is sustainable. The primary deficit narrowed from 5.0 percent of GDP in 2022 to 3.6 percent in 2023 notwithstanding a revenue shortfall from delayed settlement of cross-arrears with oil distributors, lower-than-expected imports, and higher-than-programmed transfer spending, notably to JIRAMA. The country's debt level remains sustainable with a moderate risk of debt distress.

The central bank, Banky Foiben'i Madagasikara (BFM), pursues a prudent monetary policy and has sustained its management reform momentum. BFM increased its policy rates by 50 basis points in August 2023, to 9 percent (deposit facility rate) and 11 percent (marginal lending rate), and has since maintained them unchanged, contributing to an easing of inflationary pressures. The central bank’s new interest rate targeting operational framework came into effect in February 2024, together with the validation and publication of various BFM strategic and operational documents, including a money market intervention guide.

Delays in the implementation of key reforms under the ECF and RSF arrangements and the occurrence of extreme climate events are the main risks to the growth outlook. The authorities agree that the lack of progress in energy sector reforms, one of the most important elements of the programs, would cloud the growth prospects and affect programs’ performance.

II. Proposed New Extended Credit Facility Arrangement

The authorities’ program that could be supported by a new ECF arrangement focuses on four important pillars: (i) anchoring fiscal sustainability by increasing domestic revenues, reducing fiscal risks, creating buffers to improve resilience to shocks, and strengthening fiscal institutions and public financial management (PFM), (ii) strengthening governance and fighting corruption, (iii) consolidating monetary and financial stability, and (iv) supporting stronger and more inclusive growth through improved social safety nets and greater financial inclusion.

Anchoring Fiscal Sustainability (Pillar 1)

Over the next three years, fiscal policy will be anchored by a debt ceiling of 60 percent of GDP. This debt target, together with improved revenue and expenditures forecasts, will help determine the debt-stabilizing domestic primary balance in annual budget laws and help preserve the country’s debt servicing capacity. The implementation of the debt anchor will require further strengthening the medium-term fiscal framework and public financial management institutions and processes, including through digitalization, to improve budget execution, increase fiscal policy credibility and ensure compliance with the public debt trajectory. Consistent with this approach and considering the revenue shortfall and the higher-than-proj ected transfers to JIRAMA in the first half of2024, the revised budget for 2024 targets a primary deficit of 2.9 percent, mostly supported by a reduction in non- essential spending.

The fiscal program targets an improvement in the primary balance in accrual terms of around 1.6 percentage points of GDP by 2027 while efforts will be pursued to strengthen debt management. The targeted adjustment will be achieved through stronger revenue mobilization and a reduction of current expenditures. Social spending and resilient public investment outlays will, however, be protected. Fiscal measures to advance revenue mobilization include streamlining tax expenditures, including VAT exemptions; enhancing tax compliance; pursuing modernization of tax and customs administrations including through enhanced digitization; strengthening operational controls; and reinforcing interagency collaboration. On the expenditure side, efforts will continue to contain the wage bill, transfers to SOEs and fuel subsidies; and to reduce fiscal risks, with the view to increasing fiscal space for higher social and investment spending. Likewise, pension funds reforms will be stepped up to ensure their sustainability. The authorities are committed to seeking concessional external borrowing while at the same time strengthening their debt management capacity and developing the domestic bond market to diversify funding sources and reduce exchange rate risks. Work is already in train to reduce contingent liabilities.

Progress in addressing JIRAMA’s difficult financial situation will be critical to the program’s success. In the past few years, growing transfers to JIRAMA and hefty fuel subsidies to the company had crowded out public investment spending and social transfers and negatively affected customs revenue collection. Going forward, the authorities are determined to step up efforts to turn around JIRAMA’s management and governance, improve the company’s revenue performance, reduce operating costs, and consequently curtail the burden on public finances. In this perspective, the new CEO has been tasked with developing by end-November 2024 a new government-approved recovery plan. Implementation will be closely monitored through various operational and financial indicators.

Strengthening Good Governance and the Fight Against Corruption (Pillar 2)

The authorities are determined to ensure that Madagascar’s anti-corruption entities have needed human and financial resources to effectively carry out their missions. They have requested an IMF Governance Diagnostic Assessment (GDA) to support the development and operationalization by January 2025 of an anti-corruption strategy for 2025- 2035. The GDA will help identify corruption vulnerabilities, notably in public financial governance, the rule of law, and market regulation. The authorities also plan to begin implementing the 2023 law on anti-money laundering and countering the financing of terrorism (AML/CFT) and continue strengthening the related framework in line with the recommendations of the Financial Action Task Force (FATF).

Transparency in public financial management will be stepped up during the ECF arrangement period. The focus will be on further strengthening access to information on public procurement contracts and ultimate beneficial owners, budget execution, and audited financial accounts of public enterprises. Discussions with civil society organizations have started on the establishment of an economic, social and cultural council provided for in the 2010 Constitution, to facilitate civil society participation in the debate on the country's policies.

Business climate will be further improved to support economic activity. In this perspective, the authorities plan to review and amend as may be needed key business-related legislations including the Investment Law, the Tourism Code, the Foreign Exchange Code, and the Labor Code. They are also committed to continue expanding digitalization of business procedures, notably as regards business creation and building permit issuance, and government financial transactions (tax payments and VAT reimbursements). Progress in energy sector reforms together with continued infrastructure development is expected to increase energy supply and support economic productivity and competitiveness, nurturing stronger and more inclusive growth. Also, importantly, with UNDP support, the authorities are working on strengthening transparency and limiting the fiscal risks from the Malagasy Sovereign Fund.

Strengthening Monetary and Financial Sector Stability (Pillar 3)

BFM remains committed to price stability and will continue implementing reforms already in train to strengthen the operational framework of monetary policy. After completing the transition to an interest-rate targeting monetary policy framework, the authorities will focus on developing the secondary market for government securities, improving communication on monetary policy decisions, and reviewing the strategy for BFM's interventions in the foreign exchange market while continuing to improve the functioning of the interbank currency market. Performance of the new monetary policy framework will be monitored through a consultation clause based on an agreed path for broad money (M3) consistent with price stability. As regards foreign exchange (FX) buffers, BFM remains committed to continuing to diversify its gold reserves in accordance with the updated FX reserve management strategy and revised memorandum of understanding with the ministry of mining.

Efforts to strengthen financial stability will continue. The authorities have requested a Financial Sector Stability Review by the IMF to identify potential vulnerabilities in the banking sector. In the meantime, they will continue the implementation of the Basel III framework and the new banking law and pursue the adoption of the financial stability law before June 2025. BFM is also working on the implementation of the National Payment Switch to facilitate the interoperability of existing digital payment systems and further help advance financial inclusion.

Fostering Inclusive, Strong, and Sustainable Growth (Pillar 4)

The authorities are committed to further strengthening the social protection system and promoting financial inclusion. Over the past three years, significant progress was made in strengthening social protection with the help of technical and financial partners. In particular, the number of individuals and/or households benefiting from social protection has increased and a single social registry has been set up to serve as a reference for all social protection activities undertaken in the country. The authorities have updated their social protection strategy and prepared a directory to guide future interventions. To consolidate these advances, the authorities will continue to notably expand the coverage of the social registry and extend their food bank program.

Financial inclusion progressed under the financial inclusion strategy that expired in 2022. The rise of mobile money has supported the expansion and diversification of financial services in the wider public, including in obtaining loans. In addition, access to information has been improved with the establishment of public credit registers and private credit bureaus. The authorities plan to develop a new national inclusion strategy to make further progress in the access rate to financial services.

III. The Proposed Resilience and Sustainability Facility Arrangement

Strengthening Madagascar's resilience to climate change remains a top priority for the authorities. The country is one of the countries most exposed and affected by climate change. The 2021 Climate Risk Index ranks Madagascar 12th out of 180 countries in terms of weather-related losses (cyclones and floods). Effects of climate change, including longer and more severe droughts, heat waves and cascading impacts on water resources, are expected to worsen going forward. Mindful of these challenges, the authorities formalized their National Adaptation Plan (NAP) in 2021 and updated the Nationally Determined Contribution (NDC) in 2022 while developing several related implementing sectoral strategies.

The RSF-supported program will monitor 12 critical reform measures (RMs) in the following five areas to help advance the authorities’ ambitious climate reform agenda: (i) strengthening climate governance and integrating climate into PFM and public investment management processes, (ii) strengthening climate change adaptation and resilience to natural disasters, notably in the water and agriculture sectors, (iii) curbing the growth of greenhouse gas emissions, (iv) strengthening the protection of forests and biodiversity, and (v) mobilizing climate finance. This agenda benefits from diagnostics carried out by the IMF in 2022 under the Climate Macroeconomic Assessment Program (CMAP) and by the World Bank under the upcoming Country Climate and Development Report (CCDR). The authorities have secured assistance in implementing RMs with the World Bank and other partners, particularly in areas that are not covered by the IMF's core expertise and technical assistance (TA).

Reform measures to strengthen the overall climate governance framework are frontloaded with the expectation to be major catalysts for further progress on the climate agenda. These reforms include (i) reactivating the Inter-Ministerial Committee for the Environment (CIME) to oversee all climate policies and monitor their implementation; (ii) greening PFM and public investment management processes; and (iii) improving budget reporting on climate-related spending. As climate change may lead to a significant increase in poverty, the authorities will address adaptation issues that are particularly important in several sectors, including water and agriculture, two priorities of the PGE. The authorities are also determined to develop urban and rural development plans mandating the observance of building standards that are resilient to extreme weather events and establishing early warning systems for more frequent and intense natural disasters to enable rapid evacuation and response. Although Madagascar’s GHG emissions are still at a very low level, the authorities are committed to significantly reduce emissions, including by expanding hydropower and renewable energy sources, eliminating fuel price subsidies, and increasing taxation on diesel fuel to align them to the higher level already applicable to gasoline. As regards climate finance, the authorities will adopt a climate finance mobilization strategy that prioritizes key areas of investment stipulated in national climate framework documents.

IV. Conclusion

The Malagasy authorities have made commendable progress in the implementation of their 2021 ECF-supported reform program. However, Madagascar continues to face significant economic, social and climate challenges. To better address these as guided by the PGE, the authorities are requesting the cancellation of the soon-to-expire 2021 ECF arrangement and the approval of a new ECF-supported program and a RSF arrangement. The new arrangements will help further strengthen macroeconomic stability and step up the country’s structural and climate reform efforts. The completion of the three prior actions demonstrates the authorities’ ownership of, and commitment to, the programs’ objectives. Executive Directors’ approval of these requests will be highly appreciated.