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Republic of Madagascar and the IMF

The IMF's Poverty Reduction and Growth Facility (PRGF) -- A Factsheet

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Press Release No. 01/7
March 1, 2001
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Approves Three-Year, US$103 Million PRGF Loan for Madagascar

The Executive Board of the International Monetary Fund (IMF) today approved a three-year loan for SDR 79.4 million (about US$103 million) under the Poverty Reduction and Growth Facility (PRGF)1 to support Madagascar's efforts to foster macroeconomic stability, promote accelerated growth, improve social services, and reduce poverty. The decision will enable Madagascar to draw shortly up to SDR 11.4 million (about US$15 million).

Following the Executive Board discussion on Madagascar, Stanley Fischer, First Deputy Managing Director and Acting Chairman, said:

"Madagascar satisfactorily completed its first three-year PRGF supported program and reached the decision point under the enhanced HIPC Initiative in December 2000. Under the program, economic growth picked up, and inflation declined to single digit levels. Further, public finances were strengthened, the tax base grew, government revenues increased as a share of GDP, and there was progress in civil service reform. The banking system and the petroleum sector were privatized, and a comprehensive privatization plan for other sectors was launched.

"The new three-year PRGF-supported program focuses on promoting private sector development, reducing poverty, maintaining macroeconomic stability, and continuing to strengthen the quality and transparency of government operations.

"The authorities aim to further strengthen the public finances through improved tax administration and careful expenditure prioritization. This effort will focus on reallocating resources, including those released by the enhanced HIPC Initiative, to meeting priority social needs and building physical infrastructure in an efficient and transparent manner to the benefit of the poorest segments of the population. The authorities intend to improve the expenditure management system, including timely reporting and efficient financial controls. Directors strongly emphasized the need for prudence and full preparation before decentralizing responsibilities to regional institutions.

"A prudent monetary policy will continue with the aim of containing inflation while providing adequate room for private sector credit expansion. The level of official international reserves will be further strengthened, and a flexible exchange rate policy will be maintained to achieve this target.

"The broad framework of the poverty reduction and growth strategy, and the priority action programs, have been outlined in the Interim Poverty Reduction Strategy Paper, adopted by the authorities in November 2000.

"Executive Directors stressed that in the elaboration of the final Poverty Reduction Strategy paper, a full participatory process is important in order to secure the support of the civil society and development partners. The different sectoral strategies will need to be further specified, notably with regard to the agricultural sector and environmental concerns. In addition, it will be important to improve the collection and reporting of social and demographic data in order to monitor closely social and poverty indicators," Mr. Fischer said.

ANNEX

Recent Economic Developments

During the period November 1996-November 2000, Madagascar made substantial progress in restoring financial stability and achieving satisfactory growth on the basis of programs supported by a PRGF arrangement. Real GDP growth averaged 4.3 percent in those years and accelerated to an average of 4.8 percent in 1999-2000, despite the effect of three cyclones that damaged the country in early 2000. Inflation declined to 8.7 percent during 2000, and the country's external situation improved with a sizable increase in official reserves that reflected significant capital inflows.

Madagascar made progress in strengthening public finances, with an increase in the revenue/GDP ratio of 3.3 percentage points since 1996 to 12 percent in 2000 and a prudent expenditure policy. In 2000, however, government revenue fell somewhat short of the program objective because of the impact of trade liberalization and some appreciation of the exchange rate. With total expenditure also below expectations under the program, the deficit target was nearly met. The overall balance of payments improved, owing to a strong export performance, in particular in 1999 and 2000, and private capital inflows have contributed to a significant increase in the official reserves of the central bank in the past two years.

In 1999-2000, substantial progress was made in implementing a comprehensive privatization program, including privatization of the state petroleum company. The full divestiture of the government of ownership of the banking system was completed in 1999, and the banks' capital positions and banking supervision were strengthened. The government launched civil service reform, and initiated institutional reforms, including decentralization. In the areas of social policy and poverty alleviation, the authorities made progress in implementing sectoral strategies in education and health, and an Interim PRSP was prepared based on a wide participatory process.

To help Madagascar reach a sustainable external debt position, the IMF and the World Bank Group's International Development Association (IDA) agreed to support a comprehensive debt reduction package under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative (see Press Release No. 00/81). Total debt relief from all of Madagascar's creditors amounts to about US$1.5 billion in nominal terms, or to about US$800 million in net present value terms.

Program Summary

Madagascar's new PRGF-supported program is designed to strengthen macroeconomic stability and sustain growth, while contributing to the reduction of poverty and the improvement of key social services. Management of public resources is to be improved through a major effort to strengthen the budgetary process and budgetary monitoring, and overall governance is to be strengthened through reforms of the judiciary system.

The key macroeconomic objectives of the program for 2001-03 are to promote an increase in the GDP growth rate to 6 percent, contain inflation to 5 percent, increase gross international reserves to three months of imports and limit the external account deficit, including grants, to an annual average of 7.5 percent of GDP.

A key element of the government's macroeconomic policy over the medium term is a steady reduction in the fiscal deficits and a further decrease in the stock of domestic public debt, which is expected to provide adequate room for the expansion of private sector credit. Fiscal policy for 2001 envisages an overall deficit of 4 percent of GDP, compared with 1.6 percent in 2000, reflecting increases in social and investment expenditure. The reduction in domestic debt will be facilitated by the proceeds expected from privatization. To achieve the fiscal target, the ratio of government revenue to GDP is programmed to rise to 12.6 percent in 2001 from 12 percent in 2000. Total expenditure in 2001 is projected to rise by 2.3 percentage points of GDP to 20.5 percent, with investment expenditure rising substantially to 10.3 percent in 2001 of GDP from 8.7 percent in 2000.

Monetary policy for 2001 aims at reducing inflation to about 5 percent. Broad monetary aggregates are expected to grow by about 9 percent, which is consistent with the envisaged increase in nominal GDP growth. Monetary policy will continue to be conducted through indirect monetary control instruments, particularly open market operations using repurchase agreements for treasury bills. The authorities will continue to reduce interest rates gradually and consistently with the envisaged reduction of inflation. The central bank will continue to maintain exchange rate flexibility.

In the area of structural reforms, the government is committed to completing an ambitious privatization program and strengthening the judicial regulatory system. Madagascar is determined to advance the decentralization of institutions, which, with the creation of six autonomous provinces, is an essential element of the government's strategy to provide the population, and in particular the poor, with more accessible and accountable services. The government's social policies are outlined in the Interim PRSP developed in close consultation with civil society. It contains detailed measures for the improvement of social services, including education, health, rural development, and access to potable water and key infrastructures.

Madagascar joined the IMF on September 25, 1963. Its quota2 is SDR 122.2 million (about US$158 million), and its outstanding use of IMF credit currently totals SDR 79.96 million (about US$103 million).


Table 4. Madagascar: Selected Economic and Financial Indicators, 1996-2003


   

1996

1997

1998

1999

2000

 

2001

2002

2003

 
           

Rev.

Est.

Prog.

Projections

 
           

Prog. 1

 

 

 

 

 

 

(Annual percentage change, unless otherwise indicated)

National accounts and prices

                     

Real GDP at market prices

 

2.1

3.7

3.9

4.7

4.8

4.8

6.0

5.8

5.9

 

GDP deflator

 

17.8

7.3

8.4

9.8

7.3

7.1

5.8

4.0

3.0

 

Traditional consumer price index

                   

Average 2

 

19.8

4.5

6.2

9.9

9.5

11.9

5.0

3.5

3.0

 

End of period 2

 

8.3

4.8

6.4

14.4

8.5

8.7

3.5

3.3

2.8

 

Overall consumer price index (average) 3

 

20.0

5.4

7.8

9.7

9.9

11.8

5.0

3.6

3.0

 
                       

Money and credit

                     

Net foreign assets, excluding long-term external liabilities

 

20.6

18.6

-15.6

12.9

9.0

7.6

8.4

...

...

 

Net domestic assets

 

-1.6

1.9

24.1

7.7

1.1

7.0

0.5

...

...

 

Of which: net domestic credit

 

0.3

3.4

20.5

9.3

2.6

9.0

2.9

...

...

 

government

 

-1.0

-3.3

20.1

6.3

-7.7

1.7

-2.4

...

...

 

economy

 

1.3

6.7

0.4

3.1

10.3

7.3

5.3

...

...

 

Broad money (M3)

 

18.1

19.8

8.4

19.5

10.0

15.4

9.0

...

...

 

Velocity of money (GDP/end-of-period M3)

 

5.1

4.7

4.9

4.7

4.8

4.8

5.4

...

...

 
                       

External sector (in terms of SDRs)

                     

Exports, f.o.b.

 

4.6

1.7

4.3

11.3

5.0

21.5

7.5

10.0

11.3

 

Imports, c.i.f.

 

7.2

-3.7

0.0

5.1

18.0

46.9

8.9

5.1

3.2

 

Terms of trade (deterioration -) 4

 

-17.3

5.6

5.9

-25.2

-10.3

-8.9

2.4

1.7

-0.1

 

Nominal effective exchange rate (2000 to end-October)

 

8.9

-12.1

-3.7

-10.4

...

-2.2

...

...

...

 

Real effective exchange rate (2000 to end-October)

 

27.2

-10.1

0.9

-2.7

...

1.3

...

...

...

 
                       
 

(In percent of GDP)

National accounts

                     

Gross domestic investment

 

12.2

12.8

14.8

14.9

...

17.1

18.6

19.4

20.0

 

Public sector

 

7.3

6.5

7.9

6.9

...

8.7

10.3

11.1

11.7

 

Private sector (including public enterprises)

 

5.0

6.3

6.9

8.0

...

8.3

8.3

8.3

8.3

 

Gross national savings

 

7.2

7.3

7.3

9.5

...

9.5

11.1

12.5

13.3

 

Public sector

 

0.2

1.1

0.8

3.1

...

3.9

3.5

4.1

5.3

 

Private sector (including public enterprises)

 

7.0

6.2

6.5

6.5

...

5.6

7.6

8.4

8.0

 
                       

Central government financial operations

                     

Total revenue

 

8.7

9.7

10.6

11.4

12.7

12.0

12.6

12.9

13.3

 

Of which: tax revenue

 

8.5

9.4

9.8

11.0

12.2

11.7

12.2

12.5

12.9

 

Total expenditure

 

17.8

17.4

18.8

16.2

18.9

18.2

20.5

21.2

21.6

 

Interest obligations

 

4.7

3.0

2.7

2.1

2.5

2.0

1.9

2.1

1.9

 

Noninterest current expenditures

 

5.7

6.9

7.4

7.2

7.0

7.0

8.1

7.9

7.8

 

Capital expenditure

 

7.3

6.5

8.2

6.9

9.0

8.7

10.3

11.1

11.7

 
                       

Primary balance 5

 

-0.2

0.6

-1.9

0.9

1.0

0.4

-2.1

-1.3

-0.4

 
                     

Overall balance (commitment basis; excl. restructuring operations)

           

Excluding grants

 

-9.1

-7.7

-8.1

-4.8

-6.3

-6.2

-7.9

-8.3

-8.3

 

Including grants

 

-4.9

-2.4

-4.7

-1.2

-1.5

-1.6

-4.0

-3.4

-2.9

 

Overall balance (cash basis; excl. restructuring operations)

 

-4.9

-3.2

-5.2

-0.9

-1.9

-2.0

-4.4

-3.4

-2.9

 

Net balance of structural reforms

 

0.0

0.0

-1.2

-1.6

-2.7

-2.1

-2.1

-0.5

-0.5

 

Total balance (cash basis; including restructuring operations)

 

-4.9

-3.2

-6.3

-2.5

-4.6

-4.0

-6.5

-3.9

-3.4

 
                       
                       
 

(In percent of GDP)

External current account

                     

Excluding official transfers

 

-7.1

-7.8

-7.9

-6.3

-8.7

-8.9

-8.6

-8.2

-8.0

 

Including current official transfers

 

-5.0

-5.5

-7.4

-5.4

-7.2

-7.5

-7.5

-6.9

-6.7

 

External capital account

 

1.2

3.0

2.7

3.5

4.2

3.4

3.1

3.8

4.3

 
                       

Public domestic debt

 

9.7

9.6

12.0

11.7

8.2

10.1

6.4

...

...

 

Net present value (NPV) of external debt 6 7

 

...

...

...

55.3

55.0

55.0

52.2

48.5

45.3

 
                       
 

(In percent of exports of goods and services)

Scheduled external debt service 6

                     

Before debt relief

 

40.3

27.2

26.5

17.5

18.2

15.4

17.2

16.0

15.7

 

After debt relief 6 8

 

40.3

19.3

20.0

11.4

15.4

9.3

11.2

10.2

9.8

 

After enhanced HIPC Initiative

 

...

...

...

...

...

...

6.3

5.0

5.5

 

NPV of external debt 6 7

 

...

...

...

248.1

239.7

239.7

229.0

220.4

210.0

 
                       
 

(In units indicated)

                       

Gross official reserves (in millions of SDRs)

 

164.8

209.1

110.3

161.3

146.3

191.0

265.8

304.1

390.7

 

In weeks of imports of goods and

                     

nonfactor services

 

12.5

14.1

7.1

9.6

7.4

9.1

11.5

12.3

14.4

 

Exchange rates (period average)

                     

Malagasy francs per SDR

 

5,882.4

7,016.1

7,381.7

8,585.8

8,969.8

8,951.2

...

...

...

 

Malagasy francs per French franc

 

792.5

874.3

922.9

1,020.4

1,080.4

953.8

...

...

...

 

Nominal GDP at market prices

                     

(in billions of Malagasy francs)

 

16,224

18,051

20,343

23,379

26,274

26,242

29,430

32,382

35,322

 

GDP per capita (U.S. dollars)

 

291

251

258

255

263

258

277

300

322

 
                       

Sources: Malagasy authorities; and Fund staff estimates and projections.

1 EBS/99/116 (7/8/99) for 1999-2000; and EBS 100/105 (6/12/00).

2 Based on the traditional household consumption basket.

3 Based on the overall consumption pattern, 75 percent of which is represented by the traditional basket and 25 percent by the modern consumption basket.

4 Based on 1993 trade weights.

5 Overall balance, including grants and excluding interest obligations.

6 Reflects Paris Club flow rescheduling on Naples terms obtained for the period January 1997 - November 2000 and assumes similar terms for non-Paris Club creditors.

7 Provisional. NPVs of debt from debt sustainability analysis (DSA), which assumes stock-of-debt operations at end-1999.

8 Actual cash debt-service payments in 1996; Madagascar had no rescheduling agreements in place in 1996. For 2001-03, the debt service is calculated

assuming the full application of traditional debt relief mechanisms but excludes HIPC Initiative relief.


1 On November 22, 1999, the IMF's concessional facility for low-income countries, the Enhanced Structural Adjustment Facility (ESAF), was replaced by the Poverty Reduction and Growth Facility (PRGF), and its purposes were redefined. It was intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a poverty reduction strategy paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. At this time for Madagascar, pending the completion of a PRSP, a preliminary framework has been set out in an interim PRSP, and a participatory process is underway. It is understood that all policy undertakings in the interim PRSP beyond the first year are subject to reexamination and modification in line with the strategy that is to be elaborated in the PRSP. Once completed and broadly endorsed by the Executive Boards of the IMF and World Bank, the PRSP will provide the policy framework for future reviews under this PRGF arrangement.
PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5 year grace period on principal payments.

2 A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.


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