June 28, 1999
Mr. Michel Camdessus
International Monetary Fund
Washington, D.C. 20431
Dear Mr. Camdessus:
1. On November 27, 1996, the Executive Board of the International Monetary
Fund approved a three-year arrangement under the enhanced structural adjustment facility
(ESAF) in support of Madagascar's macroeconomic and structural adjustment program, as well as
the first annual arrangement thereunder. While the macroeconomic aspects of the program were
successfully implemented during the first annual arrangement, which ended in November 1997, in
the intervening period, the government encountered difficulties in boosting the collection of tax
revenue and maintaining strict control over government expenditure execution, while the
implementation of some key structural reforms slipped behind schedule. Since the latter part of
1998, substantial progress has been made in all these areas. In particular, the tax base has been
broadened significantly and tax and customs administration has been tightened; an action plan is
being implemented to strengthen budget control; and key enterprises are in an advanced stage of
privatization, including the remaining public bank, the petroleum company, the national airline,
and the telecommunications corporation. One of Madagascar's public banks, BFV, was privatized
in December 1998.
2. The attached memorandum on Madagascar's
economic and financial policies describes the economic objectives and policies which the
Malagasy Government intends to pursue for the three-year period 1999-2001, and, more
specifically, the objectives and specific measures for the economic program covering July 1,
1999-June 30, 2000. In support of these objectives and policies, the Malagasy Government hereby
requests a second annual arrangement under the ESAF, in an amount equivalent to SDR 27.12
million (22.3 percent of quota). The Government also requests an eight-month extension of the
original three-year ESAF commitment period to accommodate the twelve-month period covered
under the second annual arrangement.
3. The Malagasy Government, in cooperation with the staffs of the Fund and
the World Bank, has updated and extended the policy framework paper to cover the 1999-2001
period. This paper is being sent to you under separate cover.
4. On the basis of a debt sustainability analysis formulated in collaboration with
Fund and World Bank staff, Madagascar is expected to face a heavy external debt burden. To
reduce this debt to sustainable levels, the Malagasy Government hereby requests assistance under
the HIPC Initiative at the earliest possible date.
5. The Malagasy Government will provide the Fund with any information it may
request regarding the progress achieved by Madagascar in implementing its economic and
financial policies and in attaining the objectives of the program.
6. The Malagasy Government believes that the policies and measures set forth
in the attached memorandum are adequate to achieve the objectives of its program, but it stands
ready to take any additional measures that may prove necessary for this purpose. During the
period of the second annual arrangement, the Malagasy Government will consult with the Fund on
the adoption of any additional measures that may be appropriate, either at its own initiative or at
the request of the Managing Director. In addition, after the period covered by the second annual
ESAF arrangement, and while Madagascar has outstanding financial obligations to the Fund
arising from loans granted under this arrangement, Madagascar will consult with the Fund
periodically, at the government's initiative, or whenever the Managing Director requests such a
consultation, on Madagascar's economic and financial policies.
7. In any event, the Fund and the Malagasy Government will carry out a first
review of the 1999-2000 program, which will be completed no later than March 31, 2000. There
will also be a final review of the program to be completed no later than July 22, 2000.
Prime Minister, Head of Government,
and Minister of Finance and Economy
Memorandum on Economic and Financial Policies for 1999-2000
June 28, 1999
1. The Malagasy government began to implement market-oriented reforms in
1994. It liberalized the exchange, trade, and price systems; eliminated restrictions in key economic
sectors, such as petroleum, food, and transportation; and began to tighten fiscal and monetary
policies. In the course of 1996, the government adopted a medium-term adjustment strategy,
which has been supported by a three-year arrangement under the Enhanced Structural Adjustment
Facility (ESAF) that was approved in November 1996.
2. This memorandum briefly reviews the implementation of policies under the
first annual arrangement; summarizes economic and financial developments in 1998; highlights
key elements of the authorities' medium-term strategy, which is detailed in the Policy Framework
Paper for 1999-2001; lays out the economic policies and structural reforms for 1999; and
describes the key elements of the policies to be implemented in 2000. In support of its program
for 1999-2000, the government is requesting assistance from the IMF in the form of a second
annual arrangement under the ESAF, from the World Bank through a second Structural
Adjustment Credit (SAC-II), as well as from other multilateral institutions and bilateral donors
and creditors, including through debt relief.
II. Performance under the Adjustment Program in
3. Real GDP growth reached 3.7 percent in 1997, up from 1.7 percent in 1995.
Inflation dropped to approximately 5 percent in 1997, from 49 percent in 1995. During the same
period, the Malagasy franc remained stable, while the country's external position improved
substantially. Fiscal consolidation supported financial stabilization, with the fiscal deficit (on a
commitment basis and including grants) declining from 6.2 percent of GDP to less than
2.5 percent of GDP between 1995 and 1997. A broadening of the tax base and
strengthening of tax administration achieved a major increase in tax revenue, whereas spending
overruns attested to unresolved problems in expenditure monitoring and control. Returning
confidence, nurtured by steady progress in financial stabilization and some advances in structural
reforms, boosted domestic financial savings and investment. Key accomplishments in the area of
structural reforms included the elimination of export taxes and the remaining restrictions on
external transactions; the strengthening of banking supervision; the rehabilitation of the two
state-owned banks; the liquidation of the state-run vanilla marketing company; the adoption of
legislation allowing the privatization of key public enterprises; and the start of civil service
III. Economic and Financial Developments in
4. The government's economic program for 1998 charted a faster pace for
structural reforms, emphasized institutional improvements aimed at strengthening public finances,
and established an agenda for enhancing regulatory frameworks and enforcing rules in public
administration so as to provide an attractive environment for investors and encourage the efficient
use of resources. The government's objectives for 1998 in terms of economic growth and inflation
were broadly achieved, whereas the central bank's foreign reserve position deteriorated sharply in
the wake of a major shortfall in foreign aid, triggered mainly by delays in implementing the
privatization program and strengthening tax administration. In the latter months of 1998, decisive
progress in both areas helped recover some of the lost ground and set the course for improved
results in 1999.
5. Real GDP growth of almost 4 percent in 1998 (an increase of more
than 1 percent of GDP per capita) was led by a rise in investment, and an expansion in
export zone manufacturing and services (including tourism). The moderate rise in inflation to an
average of 6.2 percent in 1998 is explained by the broadening of the VAT base, temporary
price hikes in anticipation of crop damage, and, more generally, by strong domestic demand
boosted by rising household incomes, and, at times, exchange rate pressures.
Weaker-than-anticipated domestic financial savings of the private sector, together with
lower-than-expected export growth, left the external current account deficit (excluding official
grants) virtually unchanged at close to 8 percent of GDP. To stem exchange rate pressures,
the central bank intervened in the interbank foreign exchange market and, in September 1998,
tightened monetary conditions by raising its base rate from 9 percent to 10 percent. The
situation was exacerbated by the deferment of balance of payments aid, so that the central bank
lost SDR 87.0 million in international reserves (equivalent to 1½ months of imports),
reducing its holdings to SDR 121 million (2 months of imports).
6. In the course of 1998, major fiscal reforms were initiated, aimed at
strengthening, for the medium term, the government's capacity in revenue collection and
expenditure monitoring and control. The underlying budget deficit (including grants and on a
commitment basis) reached 4.6 percent of GDP, compared with a deficit of
2.4 percent in 1997. In addition, the budgetary accounts also incorporated the (mostly
transitory) costs of structural reforms. Including those costs, and the repayment of domestic
arrears as well, the overall budget deficit amounted to 6.3 percent of GDP, and was
financed mainly domestically. The main weakness of the 1998 budget execution was the failure to
achieve the tax revenue target. It was mainly the granting of ad hoc exemptions from VAT and
customs duties, terminated only in late 1998, and the late abolition of the VAT exemptions
granted under the old investment code that eroded the revenue gains expected from a streamlined
VAT and increases in excise and petroleum taxes. Recognizing the weaknesses in customs and tax
administration, the government began, in the latter part of 1998, to reorganize the tax department
and improve coordination between revenue-collecting units on the basis of an action plan
developed with technical assistance from the Fiscal Affairs Department (FAD) of the Fund.
7. On the expenditure side, there were spending overruns and problems with
adherence to the budgeted expenditure structure. During the second half of 1998, the government
began to implement a comprehensive program of institutional reforms, defined with assistance
from FAD, so as to enhance transparency, accountability, and efficiency in budget execution and
to modernize treasury cash management. Expenditures for structural reform in 1998 were related
mainly to the upgrading of judicial services, the start of a program of wage decompression in the
civil service, and the restructuring of one state-owned bank (BFV). To facilitate budget financing
and tap the growing interest of the nonbank sector in government financial instruments, in
November 1998, the government decided to make the treasury bill market more attractive
by broadening access to auctions, allowing more flexibility in satisfying demand across different
maturities, reducing the required good-faith deposit and the minimum subscription, and enhancing
information dissemination on auction results.
8. In the latter part of 1998, the preparation of key structural reforms gained
momentum. One of the two insolvent banks, BFV, was financially restructured and privatized. To
minimize the costs of the financial restructuring of the two banks and ensure observance of
contractual obligations, the government instituted special chambers in the lower courts in May
1998, offering fast-track procedures to accelerate the recovery of nonperforming loans of the two
banks. In the course of the privatization of the BFV, its nonperforming loans were transferred to a
debt workout unit (SOFIRE), which is responsible for continuing the recovery effort. The second
public bank (BTM) was offered for sale in November 1998. The petroleum company (SOLIMA)
was also put up for sale in November 1998. By contrast, preparations for civil service reform
continued to lag behind the schedule set out in the first annual ESAF arrangement. The census of
employees was completed only in the pilot ministries (education, health, justice, public works, and
the two finance ministries); job audits and preparations for both new job profiles in the pilot
ministries as well as for a new merit-based remuneration system, were not carried out. On the
positive side, the government began preparations to reform the civil service statutes and laid the
groundwork for a new disciplinary code of conduct.
IV. The Medium-Term Policy Framework
9. The government's macroeconomic program for 1999-2001 assumes that (i)
real GDP growth would accelerate, reaching 6 percent (a level required to significantly reduce
poverty); (ii) inflation would decline to below 4 percent; and (iii) gross international
reserves of the central bank would be equivalent to 3½ months of imports of goods and
services, while Madagascar would make considerable progress toward reaching a viable external
position. To achieve these objectives, policies would be geared to generating a steady rise in total
investment from 13.8 percent of GDP in 1998 to 16.4 percent of GDP in 2001. This
increase would be accompanied by an improvement in national savings of more than
4.0 percentage points to at least 13.1 percent of GDP in 2001. Given Madagascar's
low income level, the high fiscal costs of the structural reforms and basic social infrastructure
needs, domestic savings will need to be supplemented with foreign savings, including direct
investment, aid flows, and debt relief. Rising domestic savings will hinge on improved public
sector management and tax revenue performance, as well as on financial sector modernization and
reforms that generate efficiency gains in the private sector.
10. To spur the development of Madagascar's productive capacities, the
government will focus on improving the quality of basic services by setting public expenditure
priorities, pressing forward with civil service reform, and proceeding with the decentralization of
government functions and the privatization program, which encompasses the liberalization of key
sectors such as telecommunications services, petroleum refining and distribution, and air
transport. Furthermore, to stimulate investment in key sectors such as export manufacturing,
mining, fishing, and tourism, new transparent regulatory frameworks will set clear rules and limit
the scope for discretionary administrative decisions. On a broader scale, the government's strategy
takes into account that a strengthened judicial system together with a modernized legislation on
economic matters are prerequisites for a strong expansion in efficient private sector activity.
V. Economic and Financial Policies for
11. The program for 1999-2000 assumes rates of economic growth of
4.5 percent in 1999 and 5.3 percent in 2000 and targets a reduction in
inflation1 to 6.4 percent in 1999 and
3 percent in 2000. The external current account deficit (excluding official grants) is
expected to narrow to 7.3 percent of GDP in 1999 and 7.0 percent in 2000,
reflecting a strong export performance and a slowdown in the growth of import volumes. With
the resumption of official disbursements of grants and concessional balance of payments loans,
and foreign receipts from privatization (the latter totaling 3.3 percent of GDP over 1999-2000),
gross official international reserves are to regain a level of 3½ months of imports, up
from 2 months at end-1998. Achievement of these objectives will require prudent
financial policies and a decisive implementation of structural reforms. The fiscal position will
benefit from the measures introduced in the 1998 supplementary budget and the 1999 budget
laws, further simplification of indirect taxation, continued improvements in tax and customs
administration, and strengthened budgetary discipline. Monetary policy will continue to be geared
toward reducing inflation and protecting the external sector. Structural reforms will focus on
completing the privatization of the major public enterprises and improving the business
A. Public Finance
12. The targeted reduction in the underlying fiscal deficit (on a commitment
basis, including grants, and excluding the net cost of structural reforms) to 2.5 percent of
GDP in 1999 and to 1.7 percent of GDP in 2000 hinges on a strong revenue collection
effort that should boost tax revenue by 3 percentage points of GDP over the next two
years to 12.7 percent of GDP in 2000. Concurrently, noninterest current expenditure will
be reduced from 7.8 percent of GDP in 1998 to 7.2 percent of GDP by 2000, while capital
expenditure should remain at approximately 8 percent of GDP during the period 1999-2000.
Taking into account the payment of domestic arrears and the net cost of structural reforms
(approximately 2.2 and 1.0 percentage points of GDP in 1999 and 2000, respectively), the
overall fiscal deficit on a cash basis would decline to 4.9 percent of GDP in 1999 and
further to 3.2 percent of GDP in 2000. Foreign flows from donor support and privatization
will permit a significant reduction in domestic public debt over the next two years, thus easing
13. For 1999, a large part of the revenue gains will come from measures
adopted in late 1998 (estimated at 0.7 percent of GDP)--the abolition of all ad hoc exemptions,
together with the lifting of authority to grant exemptions by administrative procedure; the
cancellation of VAT exemptions; and the full-year yield of the broadened VAT base (adopted in
the supplementary budget of August 1998). In addition, the 1999 budget includes
(i) selective increases in excise taxes; (ii) higher petroleum taxes; (iii) new excise
taxes, which, in total, more than compensate for a reduction in border taxation; and (iv) a number
of improvements in tax and customs administration (yielding together an estimated 0.7 percent of
GDP). The government introduced import duty rates of 5 and 25 percent (in addition to
the four-rate system of 10, 15, 20, and 30 percent under the 1998 structure) and shifted
many goods into lower-rate categories, which was in line with the objective of moving toward the
three-rate structure (5, 15, and 25 percent) envisaged under the Cross-Border Initiative
(CBI) for Eastern and Southern Africa. In light of the low revenue level recorded in 1998, the
National Assembly adopted a supplementary budget in March 1999 that further increased
petroleum and excise taxes, estimated to yield an additional FMG 75 billion (0.3 percent of GDP)
in 1999. Reflecting this petroleum tax increase, as well as rising petroleum prices on the world
market, the government raised consumption prices for petroleum products in April and June 1999.
In addition, at end-May 1999, the government introduced a new system of controls on tax
privileges for free zone enterprises.
14. To safeguard the 1999 tax revenue target of FMG 2,567 billion, the
government will--in the event that total tax revenue falls short of the targeted levels2 for two consecutive months--implement the following
measures as required, listed in order of priority: (i) by way of a budget law, increase the tax
on petroleum products; extend the VAT to other, not yet covered products; increase the VAT
rate and introduce a statistical tax (taxe statistique) on imports and reclassify certain
goods into higher import tariff categories; (ii) step up the collection of tax and customs arrears
owed by both public and private enterprises.
15. In preparation for the 2000 budget, the government will, with technical
assistance from the World Bank, assess the economic impact and efficiency of the current system
of border taxes and excises, with a view to introducing simplified and economically efficient
systems. More generally, the revenue target for 2000 is to be attained through a further
broadening of the tax base reflecting the expiration and phasing out of the tax exemptions granted
prior to the abolition of the investment code in 1996. Further, the government expects that the
efforts now under way to improve tax and customs administration will begin to yield tangible
results in revenue collections.
16. The government will intensify its efforts to improve revenue collection
during 1999-2000 by: (i) strictly adhering to the newly established procedures for granting tax
exemptions, which require prior approval by the Council of Ministers and publication in the
Official Gazette; (ii) monitoring closely that previously tax-exempt enterprises actually pay
taxes; (iii) continuing to review the position of the enterprises enjoying exemptions under the
investment code and withdrawing the exemptions if the enterprises have not satisfied all legal
requirements or have accumulated tax arrears; (iv) strengthening sanctions against
enterprises that do not comply with the tax and customs legislation; (v) ensuring that the
refund mechanisms for VAT credits applicable to export or investment operations function
effectively, through enhanced supervision and a strengthening of collaboration between the
taxpayers and the tax administration service; (vi) simplifying the tax regime for small enterprises
with the introduction of a global tax (impôt synthétique) in 2000 that will
finance local governments; and (vii) reviewing the system of direct taxation and assessing the
effectiveness and revenue impact of the existing investment incentives.
17. The efforts to improve tax and customs administration will also continue by:
(i) recruiting and training new personnel (about 360 agents in 1999); (ii) regular
updating of the General Tax Code and Customs Code; (iii) informing taxpayers of their tax
obligations and rights (in cooperation with employers' associations); (iv) strengthening the
collaboration between the central and regional large taxpayer units; and (v) ensuring that
customs collections reflect the value assessed by the preshipment inspection company.
18. The government will aim at strengthening expenditure control, while shifting
resources toward basic social services and infrastructure. It will guard against expenditure
overruns by streamlining and computerizing budget execution procedures by end-1999 with
technical and financial support from donors. Following the introduction of a new harmonized
accounting and budget nomenclature in the 2000 budget law, the finance and budget ministries
will adopt a monthly reporting system for current and capital spending, on the basis of both
functional and economic classifications at the commitment and payment stages. This monitoring
system will make it possible to protect budgetary allocations for priority sectors (education,
health, and infrastructure), and help guard against the accumulation of new domestic payments
arrears. In line with the schedule for the elimination of domestic payments arrears, the government
will repay FMG 28 billion in 1999 and FMG 135 billion in 2000.
19. The government intends to raise pay levels in real terms to the extent that
budgetary resources permit. Consistent with this objective, the wage bill (excluding allocations for
wage decompression) would remain at around 4 percent of GDP in 1999 and 2000. The
government will recruit additional staff only in priority areas. The net increase will be limited to
3,000 staff in 1999, equivalent to about 2 percent of the civil service. The hiring
strategy for 2000 will take into account the requirements arising from decentralization as well as
the results of the physical census of civil servants and the job audits to be completed in
20. The investment program--developed in consultation with Madagascar's
donors--gives priority to the upgrading and expanding of basic infrastructure. For 2000, particular
emphasis will be given to meeting the infrastructure and support service needs of the 10 new
industrial and tourism zones.
21. The 1999 budget has made provisions for the costs of structural reforms,
corresponding to about 2.2 percent of GDP, which relate to asset restructuring in the banking
sector (0.8 percent of GDP), privatization, civil service reform, and modernization of
judicial services. These costs are projected to decline to 1 percent of GDP in the year 2000, when
they mainly refer to civil service reform and privatization.
22. As part of the process toward autonomy of the provinces, as envisaged in
the Constitution, the government is preparing for administrative decentralization which aims at
increasing the capacity for efficiently delivered public services. To this end, the government is
seeking technical assistance from bilateral donors and multilateral organizations such as the IMF
and World Bank. In the context of the decentralization, the civil service reform strategy will be
recast with a new agenda for the medium term to be announced in the context of the 2000 budget.
In the interim, a workshop in July 1999 will take stock of the technical preparations for the reform
carried out since 1997. In specific, these preparations will make it possible to:
(i) implement measures, as of August 1999, that realize wage bill savings drawing on the
results of the physical census of civil servants (completed at end-April 1999); (ii) adopt a
new code of conduct before end-February 2000; (iii) prepare a draft law establishing a new civil
service statute to be submitted to the National Assembly for adoption during its May 2000
session--this statute should standardize treatment across ministries and remove obstacles to the
regional redesignation of civil servants; (iv) design strategies for the employment and
performance-based remuneration that are to be applied on a priority basis to key posts in pilot
ministries in the 2000 budget; and (v) continue the policy of wage decompression in the
2000 budget, provided a target pay scale and remuneration system have been developed in
reference to international standards in time for the 2000 budget preparations. In the 1999 budget,
FMG 62 billion (equivalent to 7.5 percent of the 1998 wage bill) have been set aside
for wage decompression with the aim of achieving a ratio between the minimum and maximum
base salaries of 1 to 6 in 1999.
B. Monetary and Exchange Rate Policies
23. Monetary policy will remain geared toward containing inflation and
achieving the balance of payments targets. The monetary program cautiously assumes that the
velocity of money remains virtually constant, with broad money growing by 8.8 and 10 percent in
1999 and 2000, respectively. The net domestic assets of the central bank will remain the key
aggregate in steering monetary policy, but the central bank also will continue to closely monitor
developments in reserve money and broad money. Progress in fiscal consolidation, supported by
foreign aid disbursements and substantial privatization receipts from abroad will facilitate a
rebuilding of net international reserves, leaving scope for adequate growth in credit. A
25.8 percent increase in credit to the private sector (excluding the impact of bank
restructuring) in 1999 will support expanding private sector activity and facilitate the purchase of
shares in privatized firms.
24. The central bank (BCM) will actively manage liquidity. It will limit its
intervention in the foreign exchange market to achieving its net foreign asset targets and to
smooth fluctuations. In the event of exchange market pressures, the central bank will use its
instruments to tighten the monetary stance, while avoiding sustained exchange market
intervention. In the reverse situation of sustained appreciation pressures, consultations with Fund
staff on the appropriate course of action will be triggered if broad money or net foreign assets
exceed specified margins (see the attached Table 1). To facilitate external
arrangements are in place ensuring that foreign exchange receipts from privatization are directly
lodged in government accounts at the central bank.
25. In its decisions to raise funding through treasury bills, the government will
take account of monetary policy constraints and the need to avoid erratic interest rate movements.
The treasury's domestic financing needs will be met through treasury bill auctions; in this context,
the treasury cash management system (developed with Fund technical assistance) should help
fine-tune budget financing. The central bank will also regularly consult with the government on
the projected amounts of domestic sales proceeds from privatization so as to adapt its liquidity
26. The second public bank, BTM, is scheduled to be privatized by September
1999, on the basis of a memorandum of understanding signed in April 1999. The government
intends to make a vigorous effort to collect the nonperforming loans of BFV and BTM that have
been or will be transferred to debt workout units (SOFIRE in the case of BFV). The intention is
to recover a substantial part of the costs of the financial restructuring of the two banks and to
send a clear signal on the enforcement of contractual rights. Following up on announcement
letters sent to the delinquent debtors of BFV and BTM in mid-1998, the names of debtors whose
loan obligations are being litigated by SOFIRE will be published in June 1999 and there will be
regular updates, and the same procedure will be followed for delinquent debtors of BTM
immediately after the transfer of their obligations to the debt workout unit. The government is
also taking important steps to strengthen the jurisdiction of the special courts for loan recovery:
the Ministry of Justice will (i) monitor on a monthly basis the judicial proceedings on cases
submitted to the special courts; (ii) continue to emphasize to judges that court decisions
should be swiftly enforced; (iii) introduce draft legislation in September 1999 that
authorizes the special courts to pass judgement on foreclosure on fixed assets.
27. Measures will be adopted in 1999-2000 to protect the soundness of the
banking and financial sectors: (i) the maximum exposure in terms of loans extended to a
single or related borrower will be reduced gradually from 40 percent to 30 percent of a bank's
capital by March 2001 (ii) solvency requirements will be kept in line with international standards;
(iii) any mismatch between the maturities of assets and liabilities will be closely monitored;
and (iv) a number of accounting procedures for commercial banks will be revised. All prudential
rules will continue to be strictly and uniformly applied. Financial institutions--in particular credit
unions and institutions in the emerging micro-finance sector--will be governed by prudential
regulations similar to those applicable to banks. Furthermore, in 1999 the government will launch
a program to modernize the insurance sector. The government will adopt a revised Insurance
Code establishing a competitive and market-oriented framework. On the basis of a financial and
technical audit of the insurance sector, two state-owned insurance companies will be privatized.
Furthermore, an organizational, financial, and actuarial audit of the social security (CNAPS) and
of the civil service pension systems (Caisse de Retraites Civiles et Militaires--CRCM and Caisse
de Prévoyance et de Retraite--CPR) will be conducted in 1999-2000 in preparation for
C. External Sector Policies
28. The balance of payments projections indicate that Madagascar will need
substantial external assistance to reach targeted economic growth, notwithstanding progress in
improving its external current account balance and large capital inflows related to privatization
and direct investment in both 1999 and 2000. After taking into account disbursements under
existing loans and expected grants, as well as the targeted level of gross international reserves, the
external financial gap for 1999-2000 is expected to reach SDR 915.4 million. New
commitments of balance of payment assistance from multilateral institutions and bilateral donors,
together with debt relief, are expected to cover this gap. To this end, the government will seek an
extension of the current rescheduling agreement from Paris Club creditors as well as an extension
of the deadline for signing bilateral agreements.
29. In light of the country's heavy external debt burden, the government will not
contract or guarantee any non-concessional loans, except for normal short-term import-related
credits. The government will continue to attach priority to remaining current with its external
financial obligations, and will avoid incurring new external payments arrears. It will also normalize
its relations with its creditors by concluding all bilateral agreements with Paris Club creditors
(including Russia) and by seeking comparable agreements with other bilateral creditors.
30. The government will continue to liberalize trade and investment under the
Cross-Border Initiative; in particular, it remains committed to reducing tariffs on intra-regional
trade, subject to reciprocity of treatment. As indicated earlier, in the 2000 budget the government
will reduce the number of customs duty rates in line with CBI objectives. The government will not
impose any restrictions on payments and transfers for current international transactions, and will
not impose or intensify any import restrictions for balance of payments reasons.
D. Structural Policies
31. The structural reform agenda focuses on: (i) the privatization of the key
public enterprises; (ii) the removal of impediments to growth and barriers to competition,
particularly in high potential growth sectors, such as mining, fishing, and tourism; and
(iii) the improvement of the legal framework and the strengthening of the judicial system.
The government intends to work in these areas closely with the World Bank in the context of the
Structural Adjustment Credit and sector-related lending.
32. The government plans to complete by June 2000 the sale or liquidation of
the remaining 37 small and medium state-owned enterprises that were included in the list of the 46
firms slated for privatization published in 1997. A new list of firms scheduled for privatization in
2000-2001 will be prepared at that time. Regarding the three large enterprises that are well
advanced in the process of privatization, the various distribution and refining activities of
SOLIMA are expected to be privatized by mid-1999. In July 1999, the government will publish
the new retail price formula for gasoline products, which will apply following SOLIMA's
privatization. This formula establishes ceilings below which the private petroleum companies will
set the prices freely. These ceilings will be adjusted monthly by the "Office Malgache des
Hydrocarbures"(OMH) to reflect movements in oil import prices, the exchange rate and
taxation, while taking into account distribution costs and margins. After offering Air Madagascar
for sale in February 1999, a sales contract is likely to be concluded by the end of the third quarter
of 1999. While the charter air transport segment has been fully liberalized over the past five years,
Air Madagascar will continue to have exclusive rights for another five years on its current routes
(i.e., precluding the entry of other Malagasy couriers whereas foreign companies can continue to
operate on the basis of existing bilateral agreements). Thereafter, open skies will prevail. In the
telecommunications sector, since end-1998, four cellular operators have been sharing the market.
The government will reduce its share in the only fixed network operator, TELMA, below a
controlling minority stake. The privatization of TELMA is expected to be concluded by early
2000, and bids will be launched for a second fixed network operator in the subsequent few
33. Concerning the net costs associated with privatization, the 1999 budget
provisions FMG 494.9 billion (about 2.2 percent of GDP) for expenses on
severance payments, administrative outlays, transfers to a regional social development fund to
cushion the social impact of privatization, and compensation payments for former expropriation,
as well as the costs of the financial restructuring of the BTM. All the financial transactions related
to privatization will be recorded in a transparent fashion in the government budget, with the
proceeds from the sale of assets or shares deposited in a special account with the BCM.
Privatization proceeds will be classified as a financing item below the line, and the uses of these
proceeds to cover the costs of privatization operations will be registered as expenditure items
above the line, implying that the unspent balance will be saved. Monthly transfers will be made
from the privatization account with the central bank to a commercial bank account of the
privatization committee to cover privatization-related expenses. The remaining credit balances in
the privatization account at the central bank will be used--after consultation with the central bank
on liquidity requirements in the banking system--to repay domestic public debt. As a result of the
privatization process, the government will reduce the total of its own shares and those held by the
share warehousing fund to no more than 32 percent of a company's capital. This warehousing
fund will begin in 2000 to gradually sell its shares to local investors and small savers.
34. The government will work in close collaboration with the World Bank and
the European Union on developing competitive fishing and mining sectors by establishing
transparent and competitive allocation systems for licenses and regulatory frameworks. This work
will lead to a bidding system for fishing licenses as of 2000; in the meantime no new fishing
licenses will be granted. Moreover, the role of the Fishing and Agricultural Development Fund
(FDHA) has been redefined, with most of the receipts from license fees now accruing to the
government budget rather than to the FDHA. Fishing license fees were, on average, doubled for
1999, and the recovery of overdue license fees was made a condition for license renewal. The
National Assembly should approve shortly a new mining code, which offers standardized
procedures for the granting of mining rights and sets forth a legal and tax framework that will
enter into force shortly. For very large mining projects, the government will submit to the
National Assembly a bill to establish a special tax regime that will constitute the legal framework
for all such investments.
35. With a view to facilitating private economic activity and investment, the
government will streamline the procedures for the concession of long-term land leases, so that the
delay in the government's response to a lease request does not exceed three months. The
procedures for company registration will be simplified and the business law will be streamlined by
end-1999. The National Assembly recently passed legislation governing arbitration procedures
and dispute resolution.
VI. Social Issues
36. A key component of the government's strategy to eradicate poverty in
Madagascar is the targeted improvement in the delivery of essential services, such as health care,
primary education, and basic infrastructures. The 1999 budget has raised the allocations for these
sectors to 3.4 percent of GDP, and the government intends to increase them by at least
0.4 percentage point of GDP in the 2000 budget. An in-depth review of health and
education expenditure, carried out in 1998 with the World Bank and other donors, serves as a
basis for improving the quality of service delivery and cost-effectiveness. The soon-to-be-applied
improved expenditure monitoring system will help ensure that these spending areas receive the
highest priority and that allocations are in fact used for increasing the operating resources of
primary schools and the effectiveness of the services of health care districts. Moreover, the
government will continue to encourage the activities of non-governmental organizations (NGOs)
and charitable institutions working to improve the welfare of the most vulnerable groups.
VII. Program monitoring
37. Program monitoring will be carried out, inter alia, by means of quantitative
criteria, indicative limits, and structural benchmarks for the period July 1999-July 2000, and by
means of two reviews. The quantitative criteria (set forth in the attached Table
1) will constitute
benchmarks for September 1999 and March 2000, and they will represent performance criteria for
December 1999 and June 2000. The structural benchmarks and performance criteria as
documented in the attached Table 2 will apply during the program
38. The government of Madagascar will conduct a first review with the Fund
before end-March 2000, which will focus on the 2000 budget and its macroeconomic framework;
review the reform strategy for the civil service, which the Government intends to adopt in view of
the decentralization of the public administration; and examine the financial framework governing
the decentralization of the public administration to be defined before end-1999. The quantitative
criteria for June 2000 will be set definitively in the context of the first review. The second review,
to be completed before July 22, 2000 will analyze economic and financial performance throughout
the first half of 2000, evaluate progress in civil service reform, and review the plan for the reform
of the civil servants' pension system, which is to be completed by July 2000.
39. With a view to facilitating the formulation and monitoring of economic and
financial policies, the government will give priority to statistical development and data
dissemination. In this regard, it will seek technical assistance from the international community,
will increase the authority and resources of the compiling units, and will implement necessary
measures to improve the quality and timeliness of macroeconomic statistics and social data.
1As measured by the index of traditional household consumption.
2Cumulative tax revenue collected from January 1, 1999 through: April 1999 FMG
701 billion; May FMG 910 billion; June FMG 1,127 billion; July FMG 1,357 billion; August FMG
1,593 billion; September FMG 1,806 billion; October FMG 2,084 billion; November FMG 2,322
billion; and December FMG 2,567 billion.
|Table 1. Madagascar:
Quantitative Performance Criteria and Benchmarks Under the Second Annual ESAF
(In billions of Malagasy francs)
| I. Quantitative
benchmarks and performance|
Ceiling on external arrears (in millions of
Floor on net foreign assets (NFA) of the
Ceiling on domestic financing of the
Ceiling on net domestic assets (NDA) of
the central bank7,8,10,16
Ceiling on nonconcessional external public
Floor on tax revenue
| II. Indicative limits
Minimum petroleum tax payments to the
Ceiling on reserve money16
Ceiling on broad money (including foreign
Quantitative indicators of health
Quantitative indicators of education
Disbursement of balance of payments
1Cumulative change since the beginning of each year.
2The criteria for June 2000 are indicative and will be set as performance criteria in
the context of the first review under the program.
3Excludes all debt service outstanding that is subject to rescheduling. During the
program period, the government will not accumulate any new arrears.
4Net foreign assets of the Central Bank of Madagascar (BCM) are defined as gross
reserves minus all foreign liabilities of the BCM, both long and short term, including use of Fund
5If the level of the NFA of the central bank exceeds, as of September 1999, the
programmed level by more than 5 percent of broad money stock at end-1998, the authorities will
consult Fund staff.
6This amount should be valued at the exchange rates that were set for the purposes
of this program.
7The floor on NFA of the central bank will be adjusted upward, and the ceilings on
NDA of the central bank and on domestic financing of the government will be reduced, by the
amount of any excess disbursements of balance of payment assistance relative to the cumulative
timetable indicated in III. In case of a shortfall in balance of payments assistance at
end-December 1999, the floor on NFA of the central bank will be reduced by a maximum amount
of SDR 7.5 million, and the ceiling on NDA of the central bank and on net domestic financing of
the government will be raised on a cumulative basis to the same maximum amount.
8NFA and NDA of the central bank will be adjusted for any deviation from
programmed amounts of privatization receipts from abroad, net of privatization-related outlays. In
case of a shortfall in net privatization receipts, the downward adjustment of the NFA (and the
upward adjustment of the NDA) will be capped at the equivalent of SDR 40 million.
9The ceiling on domestic financing of the government will be adjusted for deviations
from programmed privatization-related outlays.
10NDA of the central bank are defined to exclude the foreign currency
11Excluding normal import-related credits.
12Defined as debt with concessionality level of less than 35 percent, calculated using
the 10-year average of the OECD's commercial interest reference rate (CIRR)-based discount rate
for loans of a maturity greater than 15 years, and the six-month average CIRR-based discount
rates for maturities below 15 years.
13If broad money grows at an annual rate of more than 11.2 percent as of
September 1999, the authorities will consult Fund staff.
14In the context of the first review of the program, quantitative quarterly indicators
will be defined on the basis of the new nomenclature to be introduced with the 2000 budget.
15Defined as nonproject funding in the form of loans and grants minus external debt
service on a cash basis.
16The program includes technical assumptions regarding the financial restructuring
of the two public banks. The concerned monetary and financial aggregates will be adjusted in
consultation with Fund staff after the financial restructuring has been completed.
2. Madagascar: Prior Actions, Structural Benchmarks, and Structural Performance
Under the Second Annual ESAF Arrangement, 1999-2001
Prior Actions, Benchmarks, and Criteria
A. Prior Actions
1. Tax Administration
- Fully implement the new value-added tax
(VAT) reimbursement system for free export zone producers.
|June 1, 1999
- Modify and implement the new contract with
the preshipment inspection company, BIVAC, in line with Fund staff recommendations, and
instruct the customs administration to collect customs taxes in an amount that equals, as a
minimum, the level assessed by BIVAC.
- Implement an effective tax audit program
within the large-taxpayer unit (SGE) that will be the basis of a program to combat tax
|July 1, 1999
- Adjust the prices for petroleum products, that
is, increase super gasoline price by 10 percent and regular gasoline price by 5 percent.
2. Budgetary Management
- Complete the harmonization of the budget and
the public accounting nomenclatures (in accordance with Fund technical assistance
|June 30, 1999
- Obtain the approval of the AFH group
shareholders for the memorandum of agreement on the purchase of the state-owned bank
- Obtain a sales contract for the oil company
1. Tax Administration
- Install the new version of the SYDONIA
software in the customs administration.
- Publish in the official gazette the new formula
for pump prices for gasoline, which will be applicable as of SOLIMA's privatization.
2. Budgetary Management and Civil
- Apply the new nomenclature in the
preparation of the budget law for 2000.
|August 1, 1999
- Integrate the administrative personnel
database and pay systems.
|June 1, 2000
- Implement a new code of conduct for the civil
3. Privatization and Regulatory
- Obtain a sales contract for either the national
airline (Air Madagascar) or the telecommunications company (TELMA).
- Ensure passage of legislation that authorizes
foreclosure on fixed assets in the event that debtors in default to one of the two banks being
privatized are ordered by one of the special court chambers to pay their debts.
C. Performance Criteria
1. Budgetary Management and Civil
- Correct the budgetary wage bill for
"ghost" workers identified in the civil service census of April 1999.
2. Privatization and Regulatory
- Complete the organizational, financial, and
actuarial audits of the pension systems for government workers (CRCM and CPR).