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Press Release No. 99/33
July 23, 1999
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Approves Second Annual ESAF Loan for Madagascar and Extends ESAF Commitment Period

The International Monetary Fund (IMF) today approved the second annual loan under the Enhanced Structural Adjustment Facility (ESAF)1 to support Madagascar's economic and financial program, and extended the commitment period of the three-year loan under ESAF until July 27, 2000. The three-year ESAF program was approved on November 27, 1996, in an original amount of SDR 81.36 million (about US$108.11 million), of which SDR 27.12 million has been disbursed. Today's decision provides Madagascar with SDR 27.12 million (US$36.04 million) during the second annual economic and financial program supported by the ESAF, with SDR 13.56 million available as of July 30.

In commenting on the Executive Board's discussion of the request by Madagascar, Shigemitsu Sugisaki, Deputy Managing Director of the IMF, made the following statement:

"Directors welcomed the government's recent efforts to strengthen the implementation of its reform strategy. Directors considered the program to be appropriately aimed at increasing growth and supporting an ambitious poverty reduction plan. They concurred that continued fiscal reform, a reduced role for government in the production of marketable goods and services, and a transparent regulatory framework were crucial to ensuring macroeconomic stability and creating an environment for much-needed foreign investment.

"Directors noted that reform of public finances was central to the success of the program. To this end, they welcomed the recent fiscal reforms, including increases in some taxes and the tightening of tax and customs administration, and encouraged the authorities to build on these efforts. The authorities' intention to shift the emphasis of public expenditure further towards key priorities in health and education, and to take steps to improve the efficiency of public spending was also supported. Fiscal consolidation had to be complemented by prudent monetary management and financial sector modernization as a way to attract private savings and investment, both domestic and foreign.

"Directors attached particular importance to advancing civil service reform. They stressed that a well educated, properly paid, and efficient public service would facilitate the timely implementation of the government's reform strategy. Directors also welcomed the authorities' commitment to reforms for strengthening the budgetary process through enhanced financialaccountability and transparency.

"Directors noted that the expeditious implementation of the privatization strategy--with attention to its social effects-and of the regulatory and legal reform agenda, together with stricter enforcement of rules, would help improve the climate for private sector activity and modernize the economy. They welcomed the recent privatization of two banks, and noted the importance of collecting on their nonperforming loans; privatization efforts in other areas, especially of the utilities, should also strengthen economic infrastructure. Pointing to the heavy debt burden faced by Madagascar, Directors supported the authorities' desire to secure early debt relief. To this end, Directors underscored the importance of establishing a strong policy track record, through full implementation of the envisaged macroeconomic and structural measures."

ANNEX
Program Summary
Madagascar's macroeconomic performance was satisfactory during the program that was supported by a first annual ESAF, which ended in November 1997. Cautious financial policies and deregulation of the economy, supported by major aid flows, helped revive economic growth, reduce inflation, and improve the country's external position. The fiscal deficit was reduced significantly in 1996 and 1997, notwithstanding some persisting weaknesses in tax administration and expenditure control. In the course of 1997, however, the implementation of key structural reforms, in particular in the areas of civil service and privatization, began to slip. It was only in the second half of 1998, when the authorities took steps to accelerate structural reforms, redress the public finance position, and tighten monetary policy. In the early months of 1999, financial performance has been in line with the government's program, and major headway has been made in privatization and tax administration.

Medium-Term Strategy
The program2 for 1999-2001 is designed to provide a strong signal to potential investors and an impetus for growth. It seeks to accelerate real GDP growth from 3.9% in 1998 to 4.5% in 1999 and 5.3% in 2000; reduce annual inflation from an expected 6.6% in 1999 to 4.8% in 2000; and narrow the external current account deficit from 7.9% of GDP in 1998 to 7.3% of GDP in 1999 and 7.0% of GDP in 2000. Rising aid flows and foreign exchange receipts from privatization are expected to help replenish gross official reserves, to a level equivalent to 3 months of imports.

To achieve these objectives, the government's program emphasizes higher tax revenue, a more efficient delivery of public services, and the development of key economic sectors. Therefore, reform of the civil service and the regulatory framework as well as privatization are key instruments in the government's strategy. The government is committed to keeping the fiscal deficit at 4.9% of GDP in 1999 and at 3.2% of GDP in 2000, which implies a revenue effort of about 3 percentage points of GDP over the two-year period and strict expenditure control. To achieve the tax revenue target, 12.7 percent of GDP by 2000, the government has increased excise and petroleum taxes, has tightened tax and customs administration, and will continue to phase out tax exemptions. At the same time, the authorities expect to contain government spending (excluding reform-related outlays) in 1999-2000 at 18% of GDP, while increasing outlays in priority areas, such as health, education, and physical infrastructure. As part of the civil service reform, the government is preparing a performance-oriented remuneration strategy, it plans to put in place a new code of conduct and revised statutes for civil servants in 2000, and it is adapting its medium-term reform agenda in light of the envisaged decentralization of government services over the coming few years.

Monetary policy will remain geared toward achieving the program's inflation and balance of payments targets. In managing liquidity, the central bank will closely monitor the government's financing needs, and it will use its monetary instruments to support exchange market stability while limiting intervention in the foreign exchange market to smoothing wide fluctuations. Moregenerally, the government will encourage financial sector modernization as a means to fostering domestic savings and a more efficient allocation of financial resources.

As part of its strategy to eradicate poverty, which is estimated to afflict 70% of the population, the government intends to raise budget allocations for health care and education by 0.4 percentage points of GDP in 2000 from 3.4% of GDP in 1999. The increase in spending will finance improvements in the areas of disease prevention and immunization, and educational programs targeting the poor, like the school lunch and adult literacy programs.

Given Madagascar's low income level, its domestic savings capacity will remain constrained, implying that the achievement of the high investment strategy will hinge on concessional foreign aid and foreign direct investment. The country's debt-to-export ratios over the next years suggest that Madagascar may qualify for assistance under the Heavily Indebted Poor Countries (HIPC) Initiative, assuming a decision point in 2001.

Structural Reforms
The authorities are committed to accelerating the implementation of structural reforms, particularly the privatization of key enterprises, the removal of barriers to competition in sectors with high growth potential, such as mining, fishing and tourism, and the creation of a more effective legal framework and judicial system. The first phase of the privatization program is to be completed by June 2000, when 46 enterprises are to be fully privatized, including key companies in the petroleum, air transport, and telecommunications sectors. In support of this privatization drive, the government is simplifying procedures for granting long-term land leases and company registration. It is also streamlining the business law and has cut judicial fees. Social aspects of the privatization program include making provisions for severance pay in the 1999 budget, establishing a regional development fund, and setting up a privately managed share-warehousing fund, endowed with equity participation in privatized companies that is to be gradually sold to small local investors. Proceeds from the privatization will be held in a central bank account with withdrawals restricted to the financing of privatization-related costs and the reduction of domestic public debt.

Madagascar joined the IMF on September 25, 1963, and its quota3 is SDR 122.20 million (about US$162.37 million). Its outstanding use of IMF financing currently totals SDR 36.09 million (about US$47.95 million).

Madagascar: Selected Economic and Financial Indicators, 1995-2001


1995 1996
1997
1998
1999      2000      2001
Prog. Act. Rev. Act. Target
Scenario
Act. Program
Prog.1

(Annual percentage change, unless otherwise indicated)
National accounts and prices
     Real GDP at market
        prices
1.7 2.0 2.1 3.5 3.7 3.6 3.9 4.5 5.3 5.7
     GDP deflator 45.2 21.1 17.8 9.6 7.5 6.9 8.6 5.5 3.9 3.0
     Traditional consumer price index
          Average2 49.0 19.7 19.8 6.7 4.5 6.3 6.2 6.6 4.8 3.0
          End of period2 37.3 10.0 8.3 7.0 4.8 5.6 6.4 6.4 3.0 3.0
     Overall consumer
        price index
        (average)3
48.5 ... 20.0 ... 5.4 ... 7.8 7.1 5.1 3.0
Money and credit
     Net foreign assets4 10.4 11.6 20.6 11.9 18.6 2.0 -15.6 20.1 3.0 -0.5
     Net domestic
        assets4
5.5 -0.7 -1.6 3.9 1.9 8.3 24.1 -11.0 7.0 9.9
          Of which:
               net domestic
               credit5
7.8 3.4 0.3 4.9 3.4 14.2 23.8 -8.1 8.5 11.0
               government5 -1.1 0.0 -1.0 -2.9 -3.3 6.1 16.4 -19.5 -1.3 -0.2
               economy5 8.9 3.4 1.3 7.8 6.7 8.1 7.4 11.3 9.7 11.3
     Broad money (M3) 16.2 7.9 18.1 12.0 19.8 11.4 8.4 8.8 10.0 9.5
          Velocity of money
             (GDP/end-of-
             period M3)
5.0 5.7 5.1 5.5 4.7 4.7 4.9 5.0 4.9 4.9
External sector (in terms of SDRs)
     Exports, f.o.b. 10.3 2.8 4.6 4.7 1.7 6.5 4.3 9.0 8.5 9.7
     Imports, c.i.f. 8.7 2.1 7.2 6.5 11.6 -2.0 0.0 8.0 5.9 8.9
     Terms of trade
        (deterioration -)6
-0.8 -13.7 -17.3 0.7 -2.7 8.2 5.9 -2.9 0.4 -0.9
     Nominal effective
        exchange rate7
-36.3 5.9 7.2 -11.3 -12.3 -5.3 -5.6 ... ... ...
     Real effective
        exchange rate7
-9.3 24.7 27.3 -6.2 -8.7 -1.0 -0.4 ... ... ...
(In percent of GDP)
National accounts
     Gross domestic
        investment
10.9 10.0 11.6 12.3 11.8 13.3 13.8 14.3 16.0 16.4
          Private sector
             (including public
             enterprises)
4.9 4.0 4.9 5.4 5.6 6.1 5.7 6.7 8.2 8.5
          Public sector 6.0 6.0 6.8 6.9 6.3 7.2 8.1 7.6 7.8 7.9
     Gross national
        savings
3.9 6.0 7.9 10.6 9.4 9.6 9.0 10.7 12.5 13.1
          Private sector 3.8 5.2 5.6 4.4 5.3 5.9 4.9 6.4 6.5 6.5
          Public sector 0.1 0.8 2.4 6.3 4.1 3.7 4.1 4.3 6.0 6.5
Central government financial operations
     Total revenue 8.5 8.1 8.7 9.8 9.7 11.2 10.6 11.9 13.2 13.8
          Of which:
            tax revenue
8.3 7.8 8.5 9.3 9.4 10.8 9.7 11.4 12.7 13.3
     Total expenditure 17.6 16.6 17.8 16.9 17.4 18.1 18.7 17.9 18.1 18.1
          Interest obligations 5.1 4.3 4.7 2.6 3.0 3.0 2.7 2.6 2.6 2.4
          Noninterest current
             expenditures
6.2 6.1 5.8 6.7 7.8 7.4 7.8 7.3 7.2 7.4
          Capital
             expenditure8
6.3 6.2 7.3 7.5 6.5 7.6 8.2 8.1 8.2 8.3
     Primary balance9 -1.1 -1.1 -0.2 1.0 0.6 -0.7 -1.9 0.1 1.0 1.2
     Overall balance
        (commitment basis)
          Excluding grants -9.1 -8.5 -9.1 -7.0 -7.7 -6.9 -8.1 -6.0 -4.9 -4.3
          Including grants -6.2 -5.4 -4.9 -1.6 -2.4 -3.7 -4.6 -2.5 -1.7 -1.2
     Overall balance
        (cash basis)
-5.8 -5.4 -4.9 -2.3 -3.2 -4.2 -5.1 -2.7 -2.2 -1.5
     Net balance of
        structural reforms
0.0 0.0 0.0 0.0 0.0 -2.0 -1.2 -2.2 -1.0 -0.9
     Total overall balance
        (cash basis)
-5.8 -5.4 -4.9 -2.3 -3.2 -6.2 -6.3 -4.9 -3.2 -2.4
(In percent of GDP)
External current account
     Excluding official
        transfers
-10.2 -7.7 -7.1 -7.2 -7.8 -7.2 -7.9 -7.3 -7.0 -6.6
     Including official
        transfers
-7.0 -4.0 -3.7 -1.6 -2.4 -3.7 -4.8 -3.6 -3.5 -3.3
External capital account -1.8 -0.8 1.0 3.5 3.2 0.0 0.2 3.6 1.7 1.9
External public debt (after
   debt relief)10
140.9 110.3 111.9 99.2 86.8 105.1 78.7 75.3 73.2 67.7
External debt (before
   debt relief)9
140.9 110.3 111.9 116.1 95.4 121.1 85.4 88.0 84.0 77.3
Public domestic debt11 11.0 ... 10.0 9.1 8.8 9.6 11.9 9.2 8.7 7.6
(In percent of exports of goods and services)
Scheduled external debt
   service10
     Before debt relief 53.6 45.2 41.3 28.7 29.7 30.4 29.2 22.7 24.1 20.1
     After debt relief 53.6 45.2 41.3 18.0 21.8 23.4 22.8 16.5 24.1 20.1
External public debt (after
   debt relief)
584.2 607.4 545.7 497.1 398.0 471.4 368.3 332.5 323.2 301.8
(In millions of SDRs, unless otherwise indicated)
Trade balance (f.o.b.) -69.4 -82.1 -83.4 -94.4 -128.8 -95.3 -112.9 -118.2 -114.3 -120.7
Overall balance of
   payments
-183.3 -136.8 -76.8 52.1 19.7 -98.8 -126.6 0.4 -57.5 -48.1
Net official reserves -3.9 ... 88.7 118.8 128.2 121.9 51.6 151.1 168.0 168.9
Gross official reserves 73.7 121.7 167.6 211.9 207.8 204.8 120.9 225.0 251.6 251.2
In weeks of imports of goods and nonfactor services 5.4 9.3 12.3 14.9 14.0 13.6 7.8 13.6 14.5 13.4
External debt10 2,933.2 3,109.2 3,085.1 2,726.9 2,234.4 2,825.1 2,174.0 2,136.3 2,245.9 2,297.7
Exchange rates
   (period average)
     Malagasy francs
        per SDR
6,474.4 5,976.6 5,882.4 6,706.2 7,016.1 7,442.5 7,381.7 ... ... ...
     Malagasy francs
        per French franc
855.0 800.7 792.5 886.7 874.3 915.5 922.9 ... ... ...
Nominal GDP at
   market prices
     (in billions of
     Malagasy francs)
13,479 16,852 16,224 18,435 18,078 20,008 20,406 22,501 24,624 26,790

Sources: Malagasy authorities; and IMF staff estimates and projections.
1 EBS/97/159 (8/21/97).
2 Based on the traditional household consumption basket.
3 Based on the overall consumption pattern, 75 percent of which representing the traditional basket and 25 percent accounting for the modern consumption basket.
4 In percent of beginning-of-period stock of broad money.
5 The scenarios and estimate for 1998 and 1999 exclude the effect of asset restructuring at two state-owned banks. In 1999, the high rate of growth of credit to the economy reflects the financing of the purchase of shares in public enterprises by resident investors.
6 Based on 1993 trade weights.
7 Depreciation (-).
8 Including foreign loans on-lent to public enterprises.
9 Overall balance, excluding interest obligations.
10 Including the Fund.
11 Excluding domestic arrears.

1The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5% a year and are repayable over 10 years with a 5 -year grace period.
2Details of the program will be available on the IMF's website:
http://www.imf.org.external/np/loi/mempub.asp.
3A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.


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