Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with the Republic of Madagascar

June 27, 2007

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

Public Information Notice (PIN) No. 07/72
June 27, 2007

On June, 25, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Madagascar.1


Madagascar is one of the poorest countries in sub-Saharan Africa (SSA). The country has suffered for decades from macroeconomic instability arising from political crises, vulnerability to exogenous shocks, and poor macroeconomic management. Beginning in 2002, the government embarked upon political and economic reforms aimed at stabilizing the economy. While there has been some progress in the reduction of inflation, it remains in double digits. Tax revenue (as a share of GDP) remains among the lowest in SSA. Under the Multilateral Debt Relief Initiative (MDRI), Madagascar received about US$2.3 billion (about 42 percent of GDP) in debt relief from the IMF, the World Bank, and the African Development Bank, including flow relief of about US$31 million in 2006 which have been used mainly to finance additional poverty-reducing expenditures.

In 2006, economic growth has rebounded moderately, while inflation has declined. Growth was stimulated by the startup of construction of a large mining project, sizeable investments in public infrastructure, and strong performance in the telecommunication and financial sectors. Inflation continued on its downward path in 2006 aided by tight monetary policy, low rice prices, a decline in world oil prices during the second half of the year, and the recent appreciation of the nominal exchange rate. In spite of some expenditure overruns owing to higher-than-projected obligatory expenditures, the fiscal deficit was reduced in 2006 because of some improvement in domestic revenue mobilization, an increase in grants, and tight control on discretionary expenditure. The overall balance of payments shifted to a surplus owing to large foreign direct investment inflows, strong export performance, and MDRI debt relief.

Executive Board Assessment

Directors welcomed the increase in economic growth and the lowering of inflation in recent years, reflecting the important progress being made in macroeconomic policy implementation and structural reform. At the same time, Madagascar remains vulnerable to exogenous shocks, institutional capacity constraints, and uncertainty regarding donor assistance. The recent large foreign direct investment inflows into the mining sector indicate an important shift in the structure of the economy that, if not appropriately managed, could affect competitiveness and pose a macroeconomic challenge.

Against this background, Directors agreed that, in the period ahead, emphasis should be placed on increasing tax revenues to provide resources for social and development needs, strengthening public financial management, and improving transparency and the business environment, to enhance the prospects for sustained growth and achieving the Millennium Development Goals. They supported the authorities' new poverty reduction strategy, the Madagascar Action Plan (MAP), which presents a framework for addressing the remaining obstacles to growth and poverty reduction.

Directors called on the authorities to maintain a prudent fiscal stance and improve public expenditure management and budget execution and control. They underscored the necessity of keeping domestic financing of the budget low so as not to crowd out credit to the private sector and place pressure on domestic interest rates. Efforts to increase domestic revenues should be intensified, including by broadening the tax base and implementing the tax policy and revenue administration reforms. Future budget submissions should include contingency plans for spending reduction to address possible revenue shortfalls. They also saw the need for a timely civil service pension reform.

Directors welcomed the recent recapitalization of the central bank. They called for further efforts to reduce the central bank's operating costs and improve its internal controls and financial reporting. They encouraged the authorities to continue pursuing a monetary policy aimed at increasing foreign reserves and achieving single-digit inflation. The recent creation of a new monetary policy instrument for open market operations should help improve liquidity management. Directors welcomed the authorities' intention to develop and implement a financial sector strategy, including expansion of microfinance institutions, with a view to increasing the sector's contribution to economic development.

Directors agreed that the existing exchange rate regime of a managed float with no predetermined path for the exchange rate remains appropriate, as it has allowed the exchange rate to move in line with macroeconomic fundamentals. At the same time, they saw some scope for central bank intervention in the interbank foreign exchange market, if needed to avoid an overshooting of the exchange rate. They recommended that capital account liberalization be sequenced carefully with efforts to strengthen banking supervision and prudential regulations.

Directors considered that the recent trend of exchange rate appreciation underscores the need for structural reforms and improved governance to maintain competitiveness and promote private sector development. High priority should be given to reforming the electricity sector and alleviating the financial problems of the national public utility company, in order to ensure the reliable provision of electricity. Trade liberalization on a most-favored-nation basis should continue to be pursued. Directors supported the authorities' intention to adhere to the principles of the Extractive Industries Transparency Initiative.

Directors observed that debt relief under the Heavily Indebted Poor Countries Initiative and Multilateral Debt Reduction Initiative has set Madagascar's external debt on a broadly sustainable basis. To preserve this progress, future borrowing should be limited to concessional terms, and the authorities should choose large investment projects carefully. Directors also recommended that the authorities scale their spending plans in the context of the MAP to conservative assumptions about the availability of donor assistance, until the timing of donor disbursements comes clearly into view.

Directors welcomed the authorities' initiative to publish the statistical appendix on the government's official website. They encouraged them to continue to work to improve the quality and timeliness of data for surveillance.

Madagascar: Selected Economic Indicators, 2003-07
(Annual percent change, unless otherwise indicated)


2003 2004 2005 2006 2007
     Est. Proj.

National accounts and prices


Real GDP

9.8 5.3 4.6 4.9 6.5

CPI (end of period)

-0.8 27.3 11.4 10.9 7.9

Money and credit


Broad money

8.2 23.8 3.1 25.6 26.7

External sector (in terms of SDRs)


Exports of goods, f.o.b.

79.4 0.1 -13.9 14.2 3.8

Imports of goods, c.i.f.

73.7 20.1 1.1 5.3 31.0

Current account balance (percent of GDP)

  • Including official transfers

-4.9 -9.1 -10.9 -8.8 -17.5
  • Excluding official transfers

-7.5 -12.9 -12.1 -10.0 -18.2

Gross official reserves (millions of SDRs)

284.4 330.4 337.4 381.6 460.3
  • Months of imports

2.7 2.8 2.9 3.0 2.7
  • Months of imports, excluding large mining projects

... ... ... ... 3.3

Public finance (percent of GDP)


Overall government balance

  • Including grants

-4.8 -5.7 -4.3 -3.8 1 -5.8
  • Excluding grants

-9.9 -13.9 -10.1 -10.5 -10.7

Tax revenue

10.0 10.9 10.1 10.7 10.9



Overall national poverty rate (percent of population) 2

... 72.1 68.7 ... ...

Source: Malagasy authorities and IMF staff estimates.

1 Excluding capital account transfers linked to the Multilateral Debt Relief Initiative (MDRI).
2 Poverty threshold defined as income required to purchase minimum daily calorie intake.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the June 25, 2007 Executive Board discussion based on the staff report.


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