Republic of Madagascar and the IMF |
Press Release: IMF Completes Third Review of Madagascar's PRGF-Supported Program, Approves US$15.9 Million Disbursement
June 30, 2003
Country's Policy Intentions Documents
Madagascar—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding|
Antananarivo, June 10, 2003
Mr. Horst Köhler
1. The attached memorandum on economic and financial policies describes the policies and measures that the government of Madagascar has adopted and pursued since October 2002, in the wake of the severe political crisis that affected the country in the first half of 2002, and describes in detail Madagascar's economic and financial policies for the remainder of 2003. All the performance criteria for end-2002 were observed. The government requests that this document serve as the basis for the Fund's completion of the third review under the Poverty Reduction and Growth Facility (PRGF) approved on March 1, 2001.
2. The fourth review of the arrangement is expected to be completed by end-December 2003, with subsequent reviews occurring every six months. The government of Madagascar will continue to provide the Fund with any information deemed necessary to monitor program implementation.
3. The government of Madagascar believes that the policies described in the attached memorandum are sufficient to achieve the program objectives, but is prepared to take any additional steps that may become necessary to achieve these objectives.
Memorandum on Economic and Financial Policies for 2003
June 10, 2003
I. Introduction and Economic and Financial Developments in 2002
1. For several years, the government of Madagascar has been implementing a program of macroeconomic and structural reforms supported by the PRGF and aimed at restoring domestic and external viability, boosting growth, and reducing poverty. The program was interrupted by a serious political crisis in 2002, which was triggered by the presidential elections of December 2001 and led to a serious economic setback and an increase in poverty. However, the new government began a recovery effort, with a view to making up for the delays in program implementation. It endeavored to restore the confidence of economic agents and the users of public services, and to lay the groundwork for sustainable development that will produce a significant reduction in poverty. Moreover, the government strengthened the consultation and participation framework so as to enhance program ownership.
2. Macroeconomic performance for 2002, which was seriously affected by the crisis, was unsatisfactory, and it was not possible to achieve the original program objectives, although all the revised performance criteria for December 2002 were observed. Real GDP declined by 12.7 percent, while inflation, as measured by the consumer price index (CPI), rose to 13.5 percent on a year-on-year basis at end-2002. The external current account deficit (including official transfers) increased from 1.3 percent of GDP in 2001 to 5.9 percent of GDP in 2002, following a sharp decline in exports (of 50.5 percent in SDR terms). Disbursements by donors, including the World Bank and the European Union, were smaller than projected, and foreign direct investment inflows dropped sharply. The central bank's external reserves decreased from SDR 317.5 million at end-2001 to SDR 266.6 million at end-2002 (the equivalent of 4.1 months of 2002 imports).
A. Public Finance
3. Fiscal developments in 2002 were gravely affected by the crisis, but were in line with the program. However, at end-2002 budgetary revenue amounted to the equivalent of 8 percent of GDP (FMG 2,403 billion), exceeding the program target of 7.3 percent of GDP. Current nonpayroll expenditure remained below the program projections. Capital expenditure remained well below initial forecasts (4.8 percent of GDP, as against the original forecast of 11.2 percent of GDP), both in respect of the domestically financed component and the externally financed component. The fiscal deficit (on a commitments basis, excluding grants) was reduced from 8.2 percent of GDP in 2001 to 7.7 percent of GDP in 2002, in line with the program.
4. The level of domestic arrears was substantially reduced by payments amounting to about FMG 455 billion, notwithstanding the faster pace of commitments following the opening of budget appropriations. Net repayments amounted to FMG 212.6 billion, compared with the program projection of FMG 197 billion. However, outstanding arrears of about FMG 244 billion remained at end-2002.
5. As regards structural commitments for 2002, the draft budget execution law for 1999 was submitted to the Audit Court, treasury balances for 2000 were completed as planned, and the program to computerize the Treasury was completed. In early 2003, a contract with the preshipment inspection firm (SGS) was signed, and the company began its activities on April 1, 2003.
6. The 2002 crisis had a severe impact on the most vulnerable population groups and reduced their access to health care and education. To limit this negative social impact, the government eliminated school fees for a six-month period beginning in October. Essential care and medications at public health facilities are also being provided free of charge for a six-month period. The cost of these measures, estimated at FMG 64 billion (0.2 percent of GDP), is covered by the Initiative for Heavily Indebted Poor Countries (HIPC Initiative) budget.
B. Money and Credit
7. As a result of a greater-than-projected reduction in net international reserves and a weak expansion of credit to the government by the central bank, the annual growth of reserve money in 2002 was 4.4 percent, as against the projected 12.3 percent, while the growth of broad money (including deposits in foreign exchange) was contained at 7.8 percent, compared with a target of 11.9 percent. Credit to the private sector declined by 2.6 percent, owing, in particular, to the crisis and the banks' concerns regarding the deterioration in the quality of their assets. The weighted-average auction rate on treasury bills rose from 8 percent at end-2001 to 12 percent in December 2002.
8. The nonperforming loans in banks' portfolios increased (to 19.2 percent of loans at end-2002 from 10.3 percent at end-2001), reflecting the downturn in private sector economic activity. As a result, there was an increase in net provisions against doubtful debts (to FMG 84 billion in 2002 from FMG 40 billion in 2001) and a contraction in bank profits after tax (from FMG 129 billion in 2001 to FMG 61 billion in 2002).
9. The monetary authorities continued to pursue a flexible exchange rate policy. During 2002, the exchange rate remained relatively stable after a correction immediately prior to the reopening of the foreign exchange market in July. The adjustment resulted in a depreciation of the currency to FMG 6,800 against the euro, compared with FMG 6,114 during the crisis.
II. The Program for 2003
A. Macroeconomic Objectives for 2003
10. The government has established the following macroeconomic objectives for 2003: real GDP growth of about 6 percent; a decline in CPI inflation to below 7 percent by December 2003, on a year-on-year basis; a narrowing of the external current account deficit (including grants) to 4.6 percent of GDP; and an increase in the central bank's gross official reserves by about SDR 57 million (to 3.5 months of projected imports). The main components of the government's economic policy aimed at achieving these objectives are described in the following paragraphs. The government recognizes that the Malagasy economy cannot be insulated from the prevailing global economic climate, and especially possible increases in oil prices (assumed to remain at $31 per barrel during 2003). If such an increase materializes, policies will be adjusted to ensure attainment of the government's macroeconomic objectives.
B. Public Finance
11. Fiscal policy will play an essential role in achieving macroeconomic objectives in 2003. The overall deficit (on a commitments basis, including the cost of structural reforms) will be limited to 7.6 percent of GDP, and recourse to banking system credit is programmed not to exceed 0.2 percent of GDP. As indicated in the paragraphs below, concerted efforts will be made to increase government revenue by broadening the tax base, improving tax policy, and increasing tax collections, particularly through administrative reforms. Expenditure control and treasury cash-flow management will be strengthened in order to enhance budget execution and facilitate the monitoring and reduction of arrears, both at the treasury and ministry levels, thereby increasing the likelihood that poverty reduction expenditures will be carried out as planned.
12. The 2003 budget law introduced two important tax measures aimed at promoting economic recovery: the marginal rates on income tax for individuals and companies (IBS and INRS ) were reduced from 35 percent to 30 percent; and tariffs on fertilizers, agricultural inputs and equipment, iron, steel, cement, selected other construction materials, paper, and inputs used by the textile sector (fabrics, thread, accessories, and capital equipment) were eliminated. The net impact of these measures on 2003 tax receipts is estimated at FMG 28 billion . To achieve the program objectives, including raising the tax ratio, the government will implement the recommendations of the recent technical assistance mission from the IMF (delineated below). The temporary tax relief measures announced in 2002 have now expired.
13. In addition, a duty on mining transactions (DSTM) has been introduced to replace the current extremely high royalties imposed on the sector, which had yielded little revenue. The new tax is aimed also at curtailing illegal exports of precious stones from Madagascar.
14. The government believes that there is room for improvement of the tax system. It has requested IMF technical assistance to examine the structure of external tariffs and domestic taxation, including the investment incentives system. The government would like to conduct the review before end-October 2003, so as to incorporate necessary changes into the 2004 budget law. In addition, the government will submit a new draft of the Organic Law on Public Finance to Parliament by end-2003, which is aimed at modernizing budgetary preparation and control procedures, treasury accounting, and audit functions.
Tax administration reform
15. The government recognizes that the bottlenecks and inefficiencies that continue to characterize the tax and customs administrations constitute major obstacles to the resumption of growth. In particular, these inefficiencies reduce tax receipts and lengthen the time required for customs clearance, as they increase the costs incurred by the private sector, hindering project implementation. An action plan will be introduced, with a view to improving the efficiency of tax and customs administration. For tax administration, the priority will be to ensure that the Large Enterprise Directorate (formerly the SGE) has been reorganized and strengthened. In the customs area, the focus will be on reducing fraud while accelerating customs clearance procedures. The action plan, drawing on the preliminary recommendations of an IMF technical assistance mission, is attached as Attachment II.
16. The following measures have been taken to ensure proper implementation of the action plan: a committee composed of six private sector representatives and six government representatives, chaired by the Minister of Finance, was established by presidential decree in May 2003 to monitor implementation of the action plan for the tax and customs administrations. The committee, which will be in place for two years, has already approved the action plan for these reforms, and a number of measures in the action plan are being implemented, including the wider use of the computerized customs information system (ASYCUDA) at the Tamatave pilot office and the installation of ASYCUDA++, with UN Conference on Trade and Development (UNCTAD) assistance, by end-2003. To ensure that the reforms will be carried out, the following procedures will be implemented:
17. The 2003 budget measure eliminating value-added tax (VAT) reimbursement for exporters and investors will be revoked. Accounting for the VAT on imports of capital goods valued in excess of the established threshold payable by enterprises, including those in the export processing zone (EPZ), will be deferred until the exporters' next VAT returns, beginning in April 2003. EPZ operators will be required to make VAT payments only after verification by the tax authorities that imported goods have not been used in exports or are not still being held in inventory at the EPZ's local establishments. This system will effectively obviate the need for EPZ operators to pay VAT on their imported inputs, unless the final product has been sold on the domestic market.
18. To improve monitoring of budget execution at the stages when services are rendered (liquidation) and payment orders are issued (ordonnancement), the provincial budget directorates will be strengthened with the support of the World Bank and other donors. The quarterly "flash" reports on budget execution, currently limited to the Ministries of Education and Health, will be extended during 2003 to cover the Office of the Deputy Prime Minister in charge of Economic Programs, Transportation, Public Works, and Territorial Development, the Ministry of Agriculture, Livestock, and Fisheries, the Ministry of the Environment, Water, and Forests, and the Ministry of Justice. Quarterly HIPC expenditure execution reports will be drawn up as well, beginning with the report covering 2002.
19. The Treasury is moving forward with its efforts to accelerate the preparation of annual treasury balances. Balances for 2001 and 2002 will be prepared in 2003. From the beginning of 2004 onward, balance sheets will be drawn up within the regulatory deadline of three months. Furthermore, the delays in the preparation of budget execution laws will be made up: the draft budget execution law for 1999 was submitted to the Audit Court, and the draft laws for 2000 and 2001 will be submitted during 2003.
20. A major factor behind the accumulation of arrears has been the shortage of budgetary resources to cover expenditure commitments known at the time of budget preparation. As a result of this shortcoming, those payment orders for the expenditures incurred that exceed budgetary allocations are frequently held by the spending ministries instead of being forwarded to the treasury for payment. To resolve this problem, the full amount of known expenditure commitments will be budgeted first before other expenditure items are budgeted. This procedure will be strictly applied beginning with the 2004 budget.
21. In view of the relatively lengthy reimbursement practices, all non-VAT-related arrears (FMG 244 billion at end-December 2002) will be paid by September 30, 2003. All VAT credit reimbursement arrears to the free zone, which amounted to FMG 92 billion at end-March 2003, have been cleared. The arrears to a preshipment inspection company operating in Madagascar until April 1, 2003 have also been cleared.
22. A new mechanism for monitoring the availability of resources relative to the expenses authorized on a monthly basis will be instituted before end-May 2003. In case available resources are deemed inadequate to cover the authorized expenditure, measures will be announced to block some expenditures by the ministries in order to avoid an accumulation of arrears. In addition, the integrated public finance management system installed in Tamatave will be gradually extended to three other areas in 2003 and another three in 2004.
23. In view of the potential impact of the fiscal measures, the latest projections for 2003 indicate that the budget deficit, on a commitments basis and including grants, will amount to about 3.3 percent of GDP; the deficit on a cash basis is expected to amount to 4.3 percent of GDP, and should be financed by external resources equivalent to 3.6 percent of GDP and domestic resources of 0.7 percent of GDP, including privatization receipts of 0.2 percent of GDP. Tax revenue is expected to total 10.6 percent of GDP, as compared to 8 percent in 2002. Capital expenditure is expected to be substantially higher than in 2002, amounting to 7.3 percent of GDP compared with 4.8 percent in 2002. Current expenditure will be maintained at 10.4 percent of GDP, including priority expenditure provided in the total expenditures of about FMG 360 billion, or 1.1 percent of GDP, under the HIPC Initiative.
24. Personnel expenditure reflects a 12 percent increase in wages. This increase, planned under the 2003 budget law and agreed during the discussions on the second program review in October 2002, will enable the government to honor its commitments to improve the compensation of military personnel, which has not changed in years. In general, the government's wage policy is to grant increases on the basis of merit and resource availability.
C. Balance of Payments and External Debt
25. Exports are expected to increase by roughly 56 percent in SDR terms in 2003, thanks to a rebound in the activities of EPZ enterprises and an anticipated increase in the volume of vanilla exports. The increase in imports in SDR terms could amount to 45 percent, in particular as a result of purchases of capital goods and petroleum products. Gross external aid, including debt relief, is expected to total SDR 387 million.
Medium-term trade strategy
26. The medium-term strategy aims at enabling Madagascar to regain the market share it lost because of the political crisis and to reduce vulnerabilities by diversifying the export base within the EPZ and promoting the growth of non-EPZ exports. The latter action is of particular importance for the future growth of government revenue, which itself is essential in order to reduce the country's dependence on external assistance in the medium term.
27. The government recognizes that it is essential to preserve the competitiveness of Madagascar's exports and to restore Madagascar's reputation as a country that welcomes foreign investment. To give the country a sustainable competitive advantage, the government will implement a strategy aimed at (i) reducing transaction costs of foreign trade, which are high owing to the inadequate industrial infrastructure and the dysfunctional nature of customs administration; (ii) broaden the range of exports through diversification and integration; (iii) facilitate access to industrial land and manufacturing facilities; and (iv) provide incentives to improve the quality of human resources. Moreover, to ensure that textile exports continue to benefit from the U.S. African Growth and Opportunity Act (AGOA), it will be necessary to restructure Madagascar's cotton sector (as indicated in para. 44), in particular by privatizing the major components of the supply chain while attracting strategic investors.
28. The government will continue to maintain its flexible exchange rate policy. The central bank (BCM) will intervene on the exchange market solely to dampen temporary shocks and to achieve its external reserves objectives in the context of the PRGF-supported program. For the exchange rate to be fully market determined, the BCM will reform the interbank foreign exchange market. The current open outcry system will be replaced by a continuous interbank trading system by end-December 2003. This new arrangement will enable banks to trade foreign exchange freely and continuously among themselves within their foreign exchange exposure limits. Moreover, the foreign exchange control regulations will be revised by end-December 2003, and the BCM will be entrusted with full responsibility for foreign exchange policy. Its Exchange Operations Directorate will be reorganized by end-June 2003 with technical assistance from the IMF in order to support the interbank market.
29. As regards the provision of assistance under the HIPC Initiative, the government has finalized most of the bilateral agreements with Paris Club creditors on the basis of the Agreed Minutes of March 1997 and March 2001. It will continue its contacts with non-Paris Club creditors, with a view to concluding similar agreements. An agreement on easing the government's debt vis-à-vis the European Union is being finalized. Interim assistance has been received from the World Bank, the African Development Bank, the Paris Club, and the IMF.
D. Monetary Policy and the Banking System
30. The monetary policy objective for 2003 is to reduce inflation while ensuring adequate scope for the expansion of credit to the economy, which is essential for recovery. Accordingly, broad money growth (M3, including deposits in foreign exchange) will be limited to 13.4 percent, with a view to achieving the growth and inflation targets set for 2003. Taking into account the expected increase in the net foreign assets of the banking system, net credit to the government will remain at moderate levels in order to permit a 17.6 percent expansion in credit to the private sector, which is in line with the projected growth of nominal GDP.
Liquidity management and forecasting
31. Measures will be taken in 2003 to strengthen monetary management and to set the stage for the active use of monetary policy as an effective anti-inflation instrument. The BCM will mop up excess bank liquidity through sales of its own bills or treasury bills of various maturities; the latter in close consultation with the Minister of Finance. The resources obtained through the sales of treasury bills for mopping-up purposes will not be used by the government. In this regard, the central bank is determined to enhance the efficiency of its liquidity forecasting unit. The treasury will provide its monthly cash-flow forecasts to the BCM's liquidity forecasting unit beginning in April. The BCM's Foreign Department will provide the liquidity forecasting unit with daily information on foreign exchange purchases and sales, as well as its own forecasts. In addition, the bimonthly meetings of the monetary committee, which had been suspended, resumed in April 2003. This committee will henceforth take the liquidity forecasts into account when recommending monetary policy initiatives.
32. In 2003, the government intends to reintroduce currency notes denominated in ariary, the old currency of Madagascar, which continues to be legal tender. One ariary is equivalent to five Malagasy francs. The old and new notes will circulate freely in parallel for a sufficiently long period to ensure full familiarity of the public with the new currency. Preparations are being made for the conversion with technical assistance from the IMF, on the basis of which the date for the introduction of the new currency will be decided.
Credit availability and bank soundness
33. The following measures will be taken to promote financial intermediation. The Credit Guarantee Fund, financed in part by external resources, will cover bank lending risks and facilitate access to credit on the part of small and medium-sized enterprises. A proposal will be made to Parliament by year's end to amend the Property Act, enabling the banks to accept real estate as collateral. A draft law establishing the legal framework for microfinance operations will be prepared shortly.
34. At present, the banks are well capitalized, but their profits are falling and nonperforming loans rising. This deterioration is a source of concern and poses a challenge to banking supervision. The Banking and Financial Supervision Commission will remain vigilant in its surveillance of banks' financial viability and ensure that they establish adequate provisions against loan losses. It will also ensure that the activities of the Credit Guarantee Fund do not lead to less rigorous loan appraisals on the part of financial institutions. In addition, the commission will obtain adequate data and information on banks and enhance the technical skills of its personnel, so that they can detect and control excessive risk taking by bank. It will also establish an early warning system for bank fragility by end-September 2003.
Transparency of the BCM and CCP balance sheets
35. In order to regularize financial relations between the central bank and the government and to improve the transparency of the central bank's balance sheet, an action plan to securitize government debt to the BCM (amounting to FMG 2,137.4 billion at end-2002, of which FMG 1,100 billion in special bonds with little remuneration and FMG 524 billion in foreign currency) will be developed by end-May 2003. The securitization will be completed by end-January 2004. In addition, the central bank will discontinue granting foreign exchange loans to the government. Outstanding government debt to the BCM in foreign exchange and the government's foreign exchange deposits at the central bank not associated with donor agreements will be converted at the market exchange rate. These measures will also enable the central bank to enjoy a measure of independence vis-à-vis the government and to conduct monetary policy using indirect instruments, as well as to stimulate transactions on the money market.
36. With assistance from the Monetary and Financial Systems Department of the Fund, the central bank has begun to implement the main recommendations of Stage One safeguards assessment report. The internal audit of the central bank's foreign exchange reserves management, originally scheduled for completion by end-June 2003, has already been completed. The banking system will adopt International Accounting Standards (IAS) by 2005, the deadline set by the Malagasy High Council on Accounting for adoption of the new framework by all enterprises. In the meantime, the central bank will publish its financial statements for 2002, together with explanatory notes on the differences between its accounting method and the IAS.
37. The members of the BCM Board of Directors were named on March 20, 2003. The board has recently reviewed the BCM accounts for fiscal years 2000 and 2001, and the accounts for 2002 will be reviewed before end 2003. The central bank will create an audit committee that will approve, before end-June 2003, the action plan for the internal audit department. In addition, with technical assistance from the IMF's Legal Department, the government will submit to the Parliament, by end-2003, a new law to strengthen the regulatory framework for combating money laundering.
38. A financial and operational audit of the Postal Savings Bank (CCP) will be initiated by end-June 2003. The purpose of the audit will be to make recommendations on the management of CCPs, including separation of the CCP funds from those of the post office, and any other measures necessary to ensure the viability of the CCP system.
E. Structural Reforms
39. The financial position of the major public enterprises has weakened because of the crisis of early 2002 and serious management deficiencies. The restructuring program for the key enterprises will be pursued vigorously, aiming at opening up their capital or rehabilitating them. These enterprises play a key role in the priority areas of transportation and rural development.
40. The debts of the state oil company (SOLIMA) to the central bank amounted to FMG 338 billion at end-December 2002. The 2003 budget law provides for the assumption of these debts by the government. A repayment agreement between the government and the BCM will be drawn up by end-June 2003. SOLIMA's accounts for 2000 will be closed, finalized, and examined by the company's auditors by end-March 2003. The general meeting of the company's shareholders will examine the accounts for that year by end-April 2003, and the 2001 accounts before end-July 2003.
41. Regarding Air Madagascar, management was turned over in September 2002, in consultation with the World Bank, to a team from Lufthansa Consulting. In the framework of a two-year agreement, measures have been taken to improve management, and a different aircraft was leased at a lower cost in April when the current lease contract expired. For its part, the government will transfer an additional US$7 million to the company (in addition to the US$10 million provided in 2002).
42. The northern railroad system is being operated by a concession company. The government's contribution for rehabilitation investments and severance pay amounted to FMG 55 billion in 2002. An additional contribution of FMG 32 billion is planned in 2003. The concession holder was expected to begin operations in June 2003. The southern railroad system will be included in the management concession for the port of Manakara.
43. The successful bidder for purchase of the telecommunications company, TELMA, has been chosen. Discussions on the final terms of the sale agreement are under way. However, the privatization process runs the risk of being delayed or even reconsidered in view of a number of conditions laid down by the purchaser. In the event the process is reconsidered, other solutions for completing the privatization of this firm will be considered.
44. The government assumed the debt of the cotton company (HASYMA) to farmers, amounting to FMG 13 billion in 2002 and FMG 10 billion in 2003, to facilitate the operations of the 2002/03 crop season. A foreign company has expressed interest in taking over HASYMA's capital. In the meantime, a strategy for restructuring and privatizing HASYMA will be developed by end-June 2003.
45. The financial position of the electricity and water company (JIRAMA) has been weakened by its inability to recover claims on public entities, and by management inefficiencies. The government provided FMG 55 billion in December 2002 to settle oil companies' claims on JIRAMA. Plans are being finalized to place the company under contract with a specialized foreign firm. An audit of the company's operations and financial condition will begin by June 15, 2003 and be completed by mid-August. The audit firm has been chosen, and financing secured by the World Bank. The contract for the management of the company will be put up for tender by early September 2003, and the selection process will be terminated by the end of the year. The company will be placed under new management in January 2004. Several foreign firms have expressed interest in managing JIRAMA, and a speedy selection process is expected. In the meantime, a consultant has been recruited with World Bank assistance to study JIRAMA's tariff structure. JIRAMA's tariffs will be adjusted on the basis of the findings of this study.
46. A medium-term civil service reform strategy will be prepared by end-2003. Civil service reform is essential to enhance the efficiency and transparency of public services, and it may also contribute to curbing the growth of this sector's wage bill in the medium term.
III. Preparation of the Poverty Reduction Strategy Paper
47. The poverty reduction strategy paper (PRSP) has been finalized. It presents an in-depth diagnostic analysis of poverty trends in recent years, the main areas of focus, the key medium-term objectives, and the costs of the programs required to achieve them. The objectives and actions have been prioritized in light of resource availability. The government hopes to be able to attain the completion point under the HIPC Initiative in 2004, after one year of implementation of the PRSP.
48. Two medium-term scenarios are outlined in the PRSP. The high-growth scenario seeks to achieve a growth rate of 7 percent a year on average during 2004-06. Under this scenario, the private sector savings rate will be substantially higher than in the recent past, and the country's absorptive capacity will expand sufficiently to allow productive utilization of the larger resources. The low-growth scenario assumes average annual growth during 2004-06 will be 4.5 percent, almost the same as that during 1998-2001.
IV. Program Monitoring
49. The program supported by the IMF under the PRGF will be monitored through the semiannual reviews and quantitative and structural performance criteria, indicative targets, structural benchmarks, and quarterly monitoring indicators shown in Tables 1 and 2. The performance criteria for end-June 2003 and end-December 2003 relate to the net foreign and domestic assets of the BCM, domestic financing of the budget deficit (bank financing, nonbank financing, net change in the deposits of treasury correspondents, privatization receipts, and the net accumulation of domestic arrears), tax receipts, the nonaccumulation of external arrears (to be followed on a continuous basis), and a ceiling on nonconcessional external government borrowing. The targets for these variables for end-September 2003 constitute benchmarks for program monitoring.
50. The following measures constitute prior actions for completing the third review under the PRGF arrangement with the IMF: (i) VAT reimbursement arrears to the free zone in the amount of FMG 92 billion (as of end March 2003) will be settled; (ii) external commercial arrears to a preshipment inspection company will be settled; (iii) a bipartite (private-public) committee will be established by presidential decree to monitor implementation of the action plan for the reform of the tax and customs administration (Appendix III, Attachment II); (iv) an audit of JIRAMA's operations and financial condition will be initiated; (v) the general shareholders' meeting of the oil company (SOLIMA) will examine the accounts for fiscal 2000; and (vi) a repayment agreement will be reached between the government and the BCM covering SOLIMA's debt for petroleum imports to the BCM assumed by the government.
Technical Memorandum on Monitoring the 2002–2003
1. This technical memorandum defines the variables used to establish the quantitative performance criteria and benchmarks for the program, how they are calculated, and any adjustments deemed necessary. It also explains the monitoring variables, that is, anticipated balance of payments assistance and direct investment flows connected with the privatization of public enterprises. Unless otherwise indicated, in the case of stocks variables for end-December 2002 are expressed as cumulative variations from December 31, 2001, and in the case of flows as cumulative flows from January 1, 2002. Variables for 2003 are expressed as cumulated variations from December 31, 2002 in case of stocks, and cumulated flows from January 1, 2003 in case of flows. The objectives for end-March and end-September 2003 are benchmarks; those for end-June 2003, and end-December 2003 are performance criteria.
I. Quantitative Criteria
A. Ceiling on External Payments Arrears
2. This variable is expressed in terms of the stock of arrears. These arrears will consist of all overdue debt-service obligations (i.e., payments of principal and interest) arising in respect of loans contracted or guaranteed by the government or the BCM including unpaid penalties or interest charges associated with these arrears, excluding arrears resulting from nonpayment of debt service for which rescheduling negotiations are under way. This performance criterion should be observed on a continuous basis.
B. Ceiling on Nonconcessional External Borrowing
3. The nonaccumulation of nonconcessional debt contracted or guaranteed by the government is a performance criterion. Nonconcessional external debt is defined as having a grant element of less than 35 percent. This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (IMF Executive Board Decision No. 12274-00/85, August 24, 2000), but also to commitments contracted or guaranteed for which value has not been received. Under the program, nonconcessional debt includes financial leasing and any other instrument giving rights to a current financial liability, under a contractual arrangement by the government of Madagascar or guaranteed by the government of Madagascar, but excludes debt contracted under rescheduling agreements and normal import-related credits of less than one year.
4. Calculation of the degree of concessionality of new external borrowing is based on the 10-year average of the OECD's commercial interest reference rate (CIRR) for loans with maturities greater than 15 years and the six-month average CIRR for loans maturing in less than 15 years.
C. Floor for Net Foreign Assets (NFA) of the Central Bank of Madagascar
5. NFA are defined as the difference between gross international reserves and all foreign liabilities of the Central Bank of Madagascar (BCM), including debt to the IMF and other short- and long-term liabilities of the BCM. Gross international reserves are defined as assets in convertible currency which readily available to and controlled by the BCM for financing payments imbalances, excluding assets that are pledged, collateralized, or otherwise encumbered.
6. For purposes of calculating this criterion, NFA must be converted into Malagasy francs (FMG) at the program exchange rate.
D. Ceiling on Net Domestic Assets (NDA) of the Central Bank of Madagascar
7. The BCM's NDA include net credit to the government, credit to enterprises and individuals, claims on banks, liabilities to banks in the form of central bank deposit auctions (appels d'offres négatifs), and the other items net, excluding the foreign exchange adjustment item.
8. Foreign exchange deposits must be converted into FMG at the program exchange rate.
E. Ceiling on the Net Domestic Financing Requirements
9. Net domestic financing requirements of the central government are defined as the sum of (a) the variation in the stock of the central government's domestic debt to the banking system and nonbank, and variation in net debt to treasury correspondents; (b) domestic or foreign receipts from privatization operations as defined in Section III-B of this Technical Memorandum; and (c) the variation in central government domestic arrears. Central government (CG) corresponds to the scope of operations of the treasury as indicated in the Overall Treasury Operations table (Opérations globales du Trésor, or OGT) .The change in deposits of the treasury correspondents (correspondants du Trésor) is considered a component of domestic financing.
10. The variation in the stock of domestic payments arrears consists of the amount to be recommitted and net payments delays (clearings, items in process of payment, expenditure committed but with no payment orders issued), as defined in the OGT.
11. Net bank claims consist of BCM and commercial bank claims on the CG, including auctioned treasury bills (BTAs) and other treasury bills and liabilities, net of CG deposits with the BCM and commercial banks, including foreign currency deposits. The change in net bank claims is defined excluding the impact of exchange rate changes on net bank claims on the government.
12. Nonbank claims consist of BTAs and other treasury bills (BTs) and bonds placed with nonbank institutions and the public. The valuation of nonbank claims is based on the change in outstanding conventional treasury bills (maturities of 1 to 5 years), auctioned treasury bills (maturities of 1 month to 3 years), and outstanding domestic government loans (Lova and Hasimbola).
13. Deposits in foreign exchange must be converted into FMG at the program exchange rate.
14. BTAs must be posted at their net value at time of initial issue.
F. Floor on Tax Revenue
15. Tax revenue includes that received by the treasury, but also suspense items, including those related to the public investment program.
II. Indicative Limits or Ceilings
A. Ceiling on Reserve Money
16. Reserve money consists of notes and coins issued and demand deposits of commercial banks with the BCM (including both required and excess reserves).
17. Central bank deposit auctions (appels d'offres négatifs) are excluded from reserve money and are classified in NDA.
B. Ceiling on Broad Money
18. Broad money (M3) includes notes and coins in circulation, demand and time deposits with banks, including foreign currency deposits of residents, and bonds issued by banks.
19. Foreign currency deposits must be converted into FMG at the program exchange rate.
C. Floor on Payment of and Ceiling on Accumulation of Payments Arrears
20. Payments arrears consist of (1) all expenditure for which payment orders have been issued but have not been paid by the treasury within three months, and (2) the amount of VAT reimbursable to taxpayers which has not been reimbursed after three months.
III. Monitoring Variables and Memorandum Items
A. Projected Balance of Payments Assistance
21. External balance of payments assistance is defined as loans and grants (nonproject) provided as structural adjustment financing and resulting in funds available to the treasury. It excludes the assistance that gives rise to counterpart funds for the treasury with a delay longer than one year.
22. Financial assistance in foreign exchange must be converted into FMG at the program exchange rate. Assistance in kind must be posted when the counterpart funds are deposited with the treasury.
B. Projected Investment Flows Connected with the Privatization of Public Enterprises
23. The cost of privatization operations is included above the line in central government operations. Apart from covering reform-related costs, gross receipts from the privatization of public enterprises (PEs) will be used to reduce outstanding domestic debt.
A. Excess/Shortfall in Balance of Payments Assistance
24. In the event that net external financing (balance of payments assistance less public debt service on a cash basis) exceeds the amount programmed: (i) the floor on the BCM's NFA will be adjusted upward (the adjustment will be converted at the program exchange rate); (ii) the ceiling on the BCM's NDA will be adjusted downward (the adjustment will be converted into FMG at the exchange rate used in the operation); and (iii) the ceiling on the net domestic financing requirements of the central government will be adjusted downward (the adjustment will be converted into FMG at the exchange rate used in the operation).
25. In the event of a shortfall in net external financing at end-March, end-June, end-September, or end-December 2003 against the programmed amount for the corresponding period of 2003, the floors and ceilings will be adjusted as follows: by a maximum of SDR 12 million for the first quarter 2003; by a maximum of SDR 45 million for the first half of 2003; and by a maximum of SDR 55 million for the first nine months of 2003 and for the full year 2003, according to the following method: (i) the floor on the BCM's NFA will be adjusted downward by the amount indicated above (the adjustment will be converted at the program exchange rate); (ii) the ceiling on the BCM's NDA will be adjusted upward by the same amount (the adjustment will be converted into FMG at the program exchange rate); and (iii) the ceiling on the central government's net domestic financing requirements will be adjusted upward and capped at the above-mentioned maximum amount (the adjustment will be converted into FMG at the program exchange rate).
B. Privatization-Related Transactions
26. Adjustments will be made for any deviation in (a) privatization receipts; and (b) current privatization-related expenditure. The floor on net foreign assets will be adjusted upward or downward by a maximum of SDR 12 million from the programmed floor if net disbursed foreign resources from privatizations are higher or lower than programmed. The adjustment will be limited to a maximum of SDR 5 million for the periods from end-2002 to end-March, end-June, end-September, and end-December 2003. Similarly, the BCM's NDA will be adjusted downward or upward (at the average exchange rate of the pertinent quarter). The ceiling on domestic government financing will be adjusted to take account of any discrepancies between actual privatization-related expenditures and those programmed (upward adjustment if expenditure exceeds the amount programmed and downward, in the opposite case, up to the difference reported).
C. Program Exchange Rate
27. Amounts of balance of payments assistance and debt service denominated in SDRs will be converted into FMG at the FMG/SDR exchange rate of FMG 9,108, FMG 9,240, FMG 9,372, or FMG 9,514 = SDR 1 for each of the four quarters of 2003, respectively. Corresponding amounts denominated in U.S. dollars and in euro will be converted by applying the rate of US$1.38 = SDR 1 and US$1.09 = €1, and the FMG/SDR rate indicated above.
V. Consultations with Fund Staff on the Performance Criterion
28. In the event that demand for money is stronger than expected and the exchange rate appreciates, the central bank should intervene on the interbank foreign exchange market (MID) to offset this appreciation, taking into account programmed limits (floor/ceiling) on the accumulation of net foreign assets and the level of broad money. Given the program limits on these criteria and benchmarks, if broad money growth since end-December 2002 exceeds 15 percent and/or if the level of net foreign assets exceeds the programmed level by more than 5 percent of broad money at end-2002, the authorities will consult Fund staff on measures to be taken in the context of exchange market and monetary policy management.
VI. Information and Data to be Supplied to Fund Staff
29. The Malagasy authorities will provide Fund staff with the following information and data according to the schedule provided, either directly (e-mail or facsimile) or through the Fund's resident mission.
A. The Central Bank of Madagascar will report the following statistics:
B. The Ministry of Economy, Finance, and Budget will report the following information:
Weekly report of the customs and tax directors to the committee monitoring the customs and tax administration reforms.
34. Moreover, information on important measures adopted by the government in the economic and social areas that would have an impact on program development, changes in legislation, including laws passed by the National Assembly and new rules established by the Banking Supervision Commission (CSBF), and any other pertinent legislation will be reported to Fund staff on a timely basis for consultation or information, as appropriate.