Public Information Notice No. 00/69

Public Information Notice: IMF Concludes Article IV Consultation with Madagascar

August 30, 2000

On June 23, 2000, the Executive Board concluded the Article IV consultation with Madagascar.¹

Background

Performance in 1999 was satisfactory in the areas of economic growth, exports, and the narrowing of the external current account deficit. The fiscal deficit also fell significantly, with lower capital expenditure and continued improvement in tax revenue. However, inflation rose significantly, as monetary expansion was higher than programmed and exogenous shocks affected the supply of foodstuffs.

Real GDP growth in 1999 reached 4.7 percent, driven by higher exports and investment, up from 3.9 percent in 1998, and the external current account deficit, excluding grants, narrowed by 1.4 percentage points to 6.5 percent of GDP. This performance reflects mainly a 13.6 percent expansion in exports, owing to a sharp rise in free trade zone exports and precious stones, as well as traditional exports. The overall fiscal deficit, on a commitment basis and excluding the cost of restructuring operations, was 1.2 percent of GDP, 3.5 percentage points below the 1998 deficit. Government revenue rose to 11.4 percent of GDP, up from 10.6 percent in 1998, because of the broadening of the base for the value-added tax, higher excise taxes, including petroleum products, and the strengthening of tax administration. Current expenditure was below the program target, although there was a wage bill overrun. However, slippages in the timetable of privatization of the state petroleum and airlines companies led to delays in securing privatization receipts; this factor and the related shortfall in disbursements of external assistance increased government’s recourse to bank credit above the program objective. This development, combined with a substantial increase in net foreign assets, contributed to a money growth rate of 19.5 percent, up from 8.4 percent in 1998. Together with losses of livestock due to an epidemic, the monetary expansion contributed to an increase in the rate of inflation to 14.4 percent on a year-end basis, up from 6.4 percent at end-1998. Despite a shortfall in privatization receipts and related foreign assistance, gross official reserves rose from 7.8 weeks of imports of goods and services at end-1998 to 9.6 weeks at end-1999, reflecting both the favorable current account and positive private capital inflows.

In early 2000, three cyclones hit the country causing loss of human life, severe damage to housing and infrastructure, and extensive food and export crop damage. Reconstruction costs are estimated in the range of US$80 to US$100 million, to be spread over a 24-month period, with outlays in 2000 in the range of US$30 million. As a result, projected GDP growth has been reduced by 0.5 percent to 4.8 percent, and the external current account deficit in 2000, excluding grants, is projected to widen to 9.1 percent of GDP.

Madagascar made significant progress on structural reforms in 1999-2000. Privatization of the second state-owned bank, the agricultural bank, was completed, and a number of measures to improve private sector regulation, and to liberalize economic activity were adopted in the telecommunications, fisheries and mining sectors. In addition, a new budgetary and treasury classification system to improve fiscal management was introduced. The privatization of the state petroleum sector was finalized in June 2000, with some delay in comparison to the initial schedule, because of environmental and legal issues and the time needed to define a new retail price formula for petroleum products. The airline company is slated for privatization in the second half of the year.

Executive Board Assessment

Executive Directors observed that, since the last Article IV consultation, and despite several natural disasters, many aspects of economic performance had been favorable: the economy had grown, export performance had improved, the external current account deficit had been reduced, international reserves had risen, most fiscal targets for 1999 had been attained, and the privatization of the banking system had been completed.

Directors expressed sympathy for the loss of human life and material damage resulting from the three natural disasters that had recently hit the country. They welcomed the authorities’ timely actions to alleviate the impact on the population, as well as the sizable assistance provided by bilateral donors and multilateral agencies to initiate the reconstruction process. Directors underscored the importance in the near term of efforts to rehabilitate infrastructure, as well as the need for prudent macroeconomic policies and accelerated structural reforms to promote the sustainable long-term growth on which a successful attack on Madagascar’s widespread poverty fundamentally depends.

Regarding the near-term macroeconomic outlook, Directors emphasized the need to continue to monitor inflation closely and welcomed the authorities’ willingness to take further action if signs of excess demand pressures emerge. They welcomed the measures taken in mid-1999 and early 2000 to correct the overshooting of the monetary targets, including the increases in interest rates and reserve requirements.

On fiscal policy, Directors welcomed the measures to expand the tax base and improve tax and customs administration, including the broadening of the coverage of the value-added tax and the increase in excise taxes on petroleum and other products. Directors considered a further increase in the revenue-to-GDP ratio indispensable if high priority social expenditure is to be raised from its current relatively low level without compromising macroeconomic stability. They therefore saw it as essential that ongoing efforts to strengthen tax administration and the tax system be sustained. In this connection, Directors referred in particular to the desirability of reducing tax incentives, collecting tax arrears, and eliminating transactions without invoices.

Also with a view to providing resources for higher social spending, Directors underlined the importance of containing low-priority expenditure. They expressed concern about slippages in the wage bill, and strongly encouraged the authorities to step up their ongoing efforts to control public sector wages, including through improvements in compensation systems.

Directors welcomed the government’s commitment to improving governance and the transparency of government budgetary operations. They also welcomed progress regarding privatization, even though it had been slower than planned. Directors strongly encouraged the authorities to complete expeditiously the privatization under way of the air transport and telecommunications sectors, and further improve the regulatory framework.

Directors welcomed the authorities’ measures to promote trade liberalization and regional integration, including the reduction of the tariff structure to four rates, and the granting of the full preferential rate to two neighboring countries. They considered that Madagascar’s external competitiveness should be kept under close review.

Directors noted that the country’s external debt burden remains heavy. They stressed that continued progress in implementing the authorities’ medium-term program and preparing an interim Poverty Reduction Strategy Paper on the basis of wide consultation should help mobilize the needed international support, including under the enhanced HIPC Initiative, to alleviate Madagascar’s heavy debt burden. Directors looked forward to early preparation of a preliminary HIPC document, which will provide the basis for reaching a decision point as soon as possible.