Public Information Notice: IMF Concludes Article IV Consultation with Madagascar
March 2, 1999
|Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.|
On February 8, 1999, the Executive Board concluded the Article IV consultation with Madagascar1.
Following the adoption of a broad-ranging adjustment strategy in 1994, Madagascar tightened financial policies and made significant progress during 1995 and 1996 with the deregulation of key economic sectors, the liberalization of external sector transactions, and the strengthening of banking supervision. As a result, confidence was restored, as reflected in rising domestic financial savings; in addition, output recovered, the rate of inflation declined significantly, and the external position strengthened. Although in 1997 the pace of structural reforms slowed and problems emerged in fiscal management, the government maintained prudent financial policies and made further gains in stabilizing the economy.
In 1998, the authorities started out with an ambitious program of structural reform and fiscal consolidation, but implementation suffered from delays, institutional capacity constraints, and weak fiscal management. On the structural front, reform implementation accelerated only in the second half of the year, following the parliamentary elections, which had been conducted on the basis of a new constitution voted in March 1998. In December 1998, the privatization of one of the two state-owned banks was completed and the petroleum company was tendered for sale. On the fiscal front, the government laid the basis for stronger revenue collection through a series of measures, including a streamlined VAT legislation, an adjustment of excise and petroleum taxes, and a reorganization of the tax department. At the same time, a comprehensive program of institutional and procedural reforms was introduced, with a view to enhancing transparency, accountability, and efficiency of budget execution and treasury cash management. However, continued granting of tax exemptions undermined revenue collection efforts, and the necessary pruning of expenditures was not achieved. As a result, fiscal performance deteriorated during the year. This, together with both delays in disbursement of foreign aid and the central bank’s passive stance in the face of lower-than-anticipated domestic financial savings of the private sector, prompted market sentiment against the Malagasy franc and led to a decline in foreign official reserves. In the latter months of the year, the authorities introduced changes in tax legislation and administration aimed at reducing tax evasion and they signaled a tightening of the monetary stance by raising the central bank base rate.
In 1998, economic activity continued to respond favorably to reforms, with real GDP growth estimated at almost 4 percent, up from 3.5 percent in 1997. The rate of consumer price inflation is estimated to have risen moderately to 6.3 percent, mainly as a result of the broadening of the VAT base, the increase in petroleum taxation, and, more generally, strong domestic demand.
The government’s program for 1999 focuses on public sector reforms, and on cautious financial policies to promote fiscal consolidation, maintain appropriately tight monetary conditions, and ensure exchange market stability. Along with efforts to boost revenues and strengthen expenditure control, the authorities plan to prioritize public expenditure and improve the delivery of public services, including through a process of political and administrative decentralization of government. For this purpose, an institutionally and financially viable framework of decentralization is being developed, which would include a revamped civil service reform strategy. The authorities also intend to complete all the major privatization projects; make further progress toward reducing import tariffs; take steps to streamline the regulatory framework, including those governing activities in such key sectors as mining, fishing, petroleum, air transport, and telecommunications; and improve adherence to rules in the public administration.
Executive Board Assessment
Executive Directors recognized that the pursuit of economic policy reforms since 1994 had led initially to a steady economic expansion, a decline in inflation, and a marked improve ment in Madagascar’s external position. However, Directors expressed concern that since 1997, largely in connection with the political transition process, the pace of structural reforms had slowed and macroeconomic management had weakened significantly resulting in rising inflation and pressures on Madagascar’s external reserve position. In this regard, Directors observed that the authorities’ announced economic policies for 1999 contained necessary key elements to restore higher economic growth with less inflation, but that success would hinge on establishing a record of firm adherence to financial discipline and strict enforcement of government regulations in a fair and evenhanded manner. They stressed the importance of resuming the path of fiscal consolidation and pressing ahead with structural reforms that would open up the economy and provide a transparent and predictable regulatory framework for private sector activity. Directors pointed to the likely positive impact of these actions in sustaining the higher economic growth needed to address Madagascar’s pervasive poverty.
Directors welcomed the envisaged tightening of the fiscal stance in 1999, stressing that it was crucial to address weaknesses in fiscal management in order to achieve the authori ties’ deficit reduction target. They indicated the enforcement of the new strict rules on tax privileges, significant improvements in tax and customs administration, and timely action in case collection shortfalls developed would be instrumental in meeting the overall fiscal objectives. Directors urged the authorities to maintain expenditure discipline by closely tracking budget execution and enforcing expenditure controls. They welcomed the authorities’ plans to safeguard health and education spending and to monitor their imple mentation with quantitative and qualitative indicators.
Directors urged the authorities to press ahead with civil service reform, taking into account the need to develop an efficient and reliable civil service. For the near term, Directors cautioned that general increases in government employment and public sector wages must be strictly limited, and in that context stressed the need to implement a policy of wage decompression.
In the area of monetary policy, Directors observed that a prudent monetary stance would require that the central bank actively manage domestic liquidity by coordinating its opera tions with the government’s seasonal cash flow requirements; this would help avoid erratic interest rate movements. In the event of exchange market pressures, they stressed that the central bank should use its policy instruments to tighten monetary conditions instead of resorting to sustained exchange market intervention.
Directors welcomed the authorities’ efforts to move decisively forward with structural reforms with a view to reaping efficiency gains and creating a more attractive environment for private investors. They urged the authorities to continue the process of trade liberalization, to follow up the recently completed sale of the state-owned bank (BankyFampandrosoana Ny Varotra) with the divestiture of the remaining public bank (Bankin’Ny Tantsaha Mpamokatra) as well as of key enterprises in the air transport, petroleum, and telecommunications sector in 1999. It was also considered important to strengthen the judicial and legislative systems and the allocation mechanism of user rights for natural resources and land.
Directors agreed that timely implementation of the privatization agenda and of important administrative reforms, together with strong fiscal performance in the coming months, would establish the basis for concluding discussions for a second annual arrangement under the ESAF and also unlock much-needed donor support, particularly to address the high external debt burden and help fund poverty reduction programs.
Directors noted that the quality and coverage of economic and financial data remain weak. They stressed the importance of strengthening the statistical data base necessary to assess the macroeconomic performance, and considered that provision of adequate technical assistance from the Fund and other donors would be essential.
|Madagascar: Selected Economic and Financial Indicators, 1994-98|
|Domestic economy||(Annual percentage change)|
|GDP at constant prices||0.0||1.7||2.1||3.5||3.6||3.6||3.9|
|Consumer prices (end-of-period)||61.2||37.3||8.3||7.0||4.8||5.6||6.3|
|External economy||(In millions of SDRs)1|
|Current account balance2|
|(in percent of GDP)||-7.0||-7.0||-3.7||-1.6||-2.4||-3.7||-4.0|
|Gross official reserves|
|(in weeks of imports of goods and services)||3.6||5.9||12.3||14.9||4.0||13.6||9.3|
|Financial variables||(In percent of GDP)|
|Primary balance3 4||-3.0||-1.1||-0.2||1.0||0.6||-0.7||-1.8|
|Overall Fiscal Balance (on a cash basis)||-8.5||-5.8||-4.9||-2.3||-3.2||-4.2||-4.5|
|Change in broad money (in percent)||48.3||16.2||18.1||12.0||19.8||11.4||10.9|
|Interest rate (in percent)5||23.8||33.0||17.0||...||9.0||...||10.0|
|Sources: Malagasy authorities; and IMF staff estimates.
|1Unless otherwise indicated.|
|3Does not include the cost of structural reforms incurred in 1998, estimated at 0.8 percent of GDP.|
|4Overall balance, excluding interest obligations.|
|5Central bank rate.|
1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.