Republic of Madagascar and the IMF
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IMF and World Bank Support US$836 Million in
Debt Service Relief for Madagascar
The World Bank's International Development Association (IDA) and the International Monetary Fund (IMF) have agreed that Madagascar has taken the necessary steps to reach its completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Madagascar is the fifteenth country to reach this point, joining Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Mali, Mauritania, Mozambique, Nicaragua, Niger, Senegal, Tanzania, and Uganda.1
Total debt relief under the enhanced HIPC Initiative from all of Madagascar's creditors is expected to amount to US$1.9 billion in nominal terms. 2 This assistance is equivalent to US$836 million in net present value (NPV) terms.3 In light of new information, the amount of debt relief calculated at the time of the decision point in December 2000 has been revised upward by US$22 million in NPV terms. Madagascar qualified under the export criterion and the debt relief was calculated to bring the NPV of debt-to-export ratio down to the HIPC threshold of 150 percent. The full delivery of HIPC assistance together with additional bilateral assistance will reduce the NPV of debt-to-exports ratio at completion point significantly to 137 percent.
Of the total HIPC relief of US$836 million in NPV terms, multilateral creditors will be expected to provide about US$362 million, Paris Club creditors about US$392 million, and non-Paris Club creditors and commercial creditors about US$82 million. The World Bank (IDA) will deliver its share of HIPC assistance by providing debt service relief amounting to US$444 million in nominal terms during 2001-2020. The IMF will deliver SDR 14.73 million (equivalent to US$19 million) in NPV terms on payments falling due to the IMF during 2001 to 2007. Most Paris Club creditors have also indicated that they will provide assistance beyond HIPC relief, estimated to present about US$612 million in end-2003 NPV terms.
Since 1997, Madagascar has undertaken structural reforms, created a more favourable environment for private investment, and has taken steps to integrate into the world economy. These policies have improved macroeconomic stability and sustained growth. This was in sharp contrast to the preceding decades that were marked by economic decline.
Highly contested first round presidential elections in December 2001 triggered a political crisis in 2002 with severe economic and social consequences. GDP declined by nearly 13 percent and the poverty rate climbed from an estimated 69.6 percent in 2001 to 80.6 percent in 2002.
In July 2002, the new Government moved quickly to deal with the effects of the crisis, especially on the poor. The government implemented a poverty reduction strategy, that includes scaling up the roads program, expanding access to primary education, improving governance, and creating an enabling environment for the private sector. The economy rebounded with a real GDP growth of 9.8 percent in 2003. However, 2004 was marked by exogenous shocks—including two cyclones and a deterioration in the terms of trade—and a sharp depreciation of the currency. The authorities have taken corrective actions to maintain macroeconomic stability and are committed to containing inflation, accelerating the implementation of structural reforms, and diversifying the export base to boost exports and economic growth.
Steps Taken To Reach the Completion Point under the Enhanced HIPC Initiative
Upon reaching its decision point under the enhanced framework of the HIPC Initiative in December 2000, Madagascar committed to undertake reforms to reach completion point, which makes them eligible to receive irrevocable debt relief under the enhanced framework:
(i) Preparation of a full Poverty Reduction Strategy Paper (PRSP) through a participatory process and implementation of its recommendations for at least one year.4
(ii) Maintenance of macroeconomic stability through the satisfactory implementation of macroeconomic and structural policies supported by an IMF Poverty Reduction and Growth Facility (PRGF) program.
(iii) Governance and institutional reforms—especially in the area of tax administration—including lower tariff barriers, broadening the revenue base, simplifying the tax system, and the introduction of anti-corruption measures in the country's tax and customs department.
(iv) Achievement of key social objectives, particularly in the following sectors: health, education, and infrastructure.
The HIPC Initiative
In 1996, the World Bank and the IMF launched the HIPC Initiative to create a framework for all creditors, including multilateral creditors, to provide debt relief to the world's poorest and most heavily indebted countries, and thereby reduce the constraint on economic growth and poverty reduction imposed by the debt build-up in these countries. The Initiative was modified in 1999 to provide three key enhancements:
Deeper and Broader Relief. External debt thresholds were lowered from the original framework. As a result, more countries became eligible for debt relief and some countries became eligible for greater relief.
Faster Relief. A number of creditors began to provide interim debt relief immediately at the "decision point." Also, the new framework permitted countries to reach the "completion point" faster.
Stronger Link Between Debt Relief and Poverty Reduction. Freed resources were to be used to support poverty reduction strategies developed by national governments through a broad consultative process.
To date, 27 countries—two-thirds of the HIPCs—have reached their "decision points" and are receiving debt relief from all sources that will amount to more than $54 billion over time, and an average NPV stock-of-debt reduction of nearly two-thirds.
1 The completion point under the enhanced HIPC Initiative is when creditors commit irrevocably to and fully deliver debt relief. The decision point, which precedes the completion point, is when debt relief is committed and begins on an interim and voluntary basis.
2 Nominal terms means the actual dollar value of debt service forgiven over a period of time.
3 The Net Present Value(NPV) of debt is the discounted sum of all future debt-service obligations(interest and principal). This measure takes into account the degree of concessionality of a country's debt stock. Whenever the interest rate on a loan is lower than the market rate, the resulting NPV of debt is smaller than its face value, with the difference reflecting the grant element.
4 Poverty Reduction Strategy Papers (PRSP) describe a country's macroeconomic, structural and social policies and programs to promote growth and reduce poverty, as well as associated external financing needs. PRSPs are prepared by governments through a participatory process involving civil society and development partners, including the World Bank and the International Monetary Fund (IMF).
IMF EXTERNAL RELATIONS DEPARTMENT