## 1mdgea2020004

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### EXECUTIVE SUMMARY
- Global environment deterioration and COVID-19 deepened macro outlook; growth now projected negative in 2020.
- Urgent balance of payments needs estimated at 4.2 percent of GDP (compared to 1.8 percent).
- Authorities requested additional RCF disbursement of 50 percent of quota (SDR 122.2 million) under the “exogenous shock” window.
- Board approval on April 3, 2020 covered an earlier request for 50 percent of quota; April 6, 2020 doubling of annual RCF access to 100 percent of quota implies additional request, if approved, will bring total RCF disbursements to 100 percent of quota in 2020.
- Authorities requested temporary debt servicing relief under the G-20 Debt Service Suspension Initiative (DSSI), supported by the G-20 and Paris Club.
- Staff supports authorities’ request; Madagascar meets qualification criteria and other applicable requirements.
- Updated Debt Sustainability Analysis: risk of external debt distress increased from low to moderate; overall public debt risk remains moderate.
- Capacity to repay the Fund remains adequate.
- Date of staff report: July 15, 2020.

### RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK
- Real GDP: expected to contract by 1 percent in 2020 (down from +1.6 percent in previous staff report) and expand by 4.2 percent in 2021.
- Average inflation for 2020 expected to slow to 4.6 percent.
- Tax revenue expected to decline by more than 1.5 percentage points of GDP compared to 2019.
- Domestic primary balance expected to show a deficit of about 3.4 percent of GDP in 2020 (more than twice previous staff projection).
- Public debt projected to reach 44.8 percent of GDP (compared to 40.6 previously).
- 2020 goods trade deficit projected to improve slightly compared to 2019 (lower exports offset by lower imports, including a much lower oil bill).
- Current account deficit expected to widen from 2.5 to 3.6 percent of GDP, owing to a decline in tourism receipts to about half of 2019 level.
- Capital and financial account expected to be impacted by a 20 percent reduction in FDI.

### RECENT INDICATORS AND PANDEMIC IMPACT
- Exports and imports contracted by about 15 percent year-on-year (y-o-y) in the first five months of 2020, including drops of 34 and 29 percent y-o-y over April-May, respectively.
- Tourism revenue in 2019 equivalent to 5 percent of GDP has sharply declined.
- Inflation rose from 3.9 percent y-o-y in February to 4.3 percent in May.
- Tax revenue declined by 30 percent y-o-y in May and about 16 percent y-o-y during the first five months of 2020.
- COVID-19 cases as of July 15: 5,605 confirmed cases and 43 deaths; population about 27 million.

### MONETARY AND FINANCIAL CONDITIONS
- Outstanding central bank liquidity injections reached MGA 306 billion (about 0.6 percent of GDP) at end-May 2020.
- Credit to the private sector has started to slow; ratio of non-performing loans slightly increased at end-March 2020.
- Treasury bill auctions successful until April; mixed results in May with two auctions undersubscribed before normalization on May 29.
- Ariary depreciation: about 6 and 6.8 percent since the beginning of the year vis-à-vis the US dollar and the Euro, respectively (as of July 10, 2020).
- Central bank interventions: as of July 10, 2020, the BFM was a net seller of foreign exchange in the amount of about US$57 million, more than during the whole of last year.
- Reserves increased to SDR 1,356 million, equivalent to 5.9 months of projected imports (as of end-June, following recent external aid disbursements).

### BALANCE OF PAYMENTS, FINANCING NEEDS, AND IMF EMERGENCY FINANCING
- Compared to IMF Country Report No 20/100, updated projections show an additional urgent balance of payments need of about 2.4 percent of GDP in 2020.
- Estimated external financing gap in 2020—before IMF emergency financial assistance—of SDR 440 million (4.2 percent of GDP), compared to SDR 194 million (1.8 percent of GDP) at time of first RCF request.
- With committed budget support, April RCF disbursement, proposed second RCF disbursement, and DSSI debt service suspension (about 0.1 percent of GDP for bilateral official creditors in 2020), official reserve drawdown will be SDR 81 million, leaving reserves at about 4.8 months of prospective imports.
- As of July 14, and without accounting for IMF financing, total budget support committed for 2020 reached US$278 million (1.9 percent of GDP).
- Additional IMF emergency financing under the RCF (which will reach 100 percent of quota, equivalent to about US$335 million) will be redirected to the budget through on-lending by the central bank.
- Total budget financing (with IMF and donors) would reach about US$612 million, equivalent to 4.2 percent of GDP—equivalent to 45 percent of the projected tax revenue for 2020.
- The IMF emergency financing alone is equivalent to 5 months of the public wage bill.
- April RCF disbursement of US$166 million and World Bank budget financing of US$100 million under the Investing in Human Capital Development Policy Operation (DPO) were needed to alleviate most immediate financing needs.
- Proposed second RCF disbursement and planned World Bank emergency DPO disbursement, followed by expected disbursements from AfDB, AFD, and EU, are expected to cover remaining financing gaps.
- Phasing of disbursements consistent with current Treasury cash plans; committed spending with payment orders to come (“float”) has increased.

### POLICY MEASURES, MULTISECTORAL RESPONSE, AND SOCIAL SUPPORT
- Priority measures implemented:
  - Targeted investments to strengthen the health system.
  - Implementation of a social emergency plan to support the most vulnerable.
  - Support to the private sector (tax exemptions, deadline extensions, moratorium on bank credits for companies facing temporary difficulties).
  - Regular provision of liquidity by the central bank to commercial banks.
- Multisectoral National Response (MNR) covers health, social protection, water and sanitation, food security, gender violence, and the private sector.
- World Bank estimates: support to social sectors would reach 1.1 percent of GDP; support to private sector would reach 1.6 percent of GDP.
- Social safety net measures include government in-kind donations and an unconditional cash transfer program; some bill payments to utility company JIRAMA were rescheduled.
- Private sector support: tax relief and deadline extensions; temporary salary subsidies and capacity building; credit easing or partial guarantee schemes and technical assistance to SMEs; assistance for market access and international communication campaigns for tourism.
- Central bank committed to use all instruments to ensure sufficient liquidity; banks and microfinance institutions encouraged to reschedule SME and household loan repayments for 3 months and may deduct a similar amount from reserve requirements.

### REVISED BUDGET LAW, INVESTMENT, AND STAFF CONCERNS
- Draft revised budget law (Loi de Finances Rectificative, LFR) approved by the Council of Ministers on June 13 and by the National Assembly on June 25.
- LFR based on revised growth projection of 0.8 percent for 2020 (more optimistic than IMF staff), and reduced tax revenues by 26 percent compared to the initial 2020 budget.
- LFR priorities: social sectors (health, education, water and sanitation, transfers to the most vulnerable) and supporting economic activity via an ambitious investment program.
- Budget for four social ministries set at MGA 2,207 billion (4.2 percent of GDP, or 23 percent of total spending). Excluding salaries and externally financed investment, amount set at about MGA 724 billion (1.4 percent of GDP), more than twice the 2019 outcome, and higher than MGA 555 billion in the 2020 initial budget law.
- Revised budget law projects public investments at about MGA 4,980 billion or 9.8 percent of GDP, of which 4.5 percent of GDP is for domestically financed investment (as in the initial budget law).
- Staff projects a more realistic level for total public investment at 6.5 percent of GDP, of which 2.1 percent is for domestically financed projects, given recent implementation rates and limited 2020 commitments.
- Staff cautioned that projected increases in domestically financed public investment may be over-optimistic, could create additional financing gaps if committed, and questioned prioritization of some infrastructure projects given critical social needs (domestically financed investments by social ministries accounted for about 1 percent of GDP, less than one fourth of planned domestic investments in the LFR).

### SOCIAL INFRASTRUCTURE, IMPLEMENTATION CAPACITY, AND TRANSPARENCY
- Priority social infrastructure investments: construction and equipment of hospitals, basic health centers, buildings and sports complexes, and of university campuses and classrooms.
- Additional provisions for social spending set in the budget at the level of the Ministry of Finance and to be reallocated to social ministries depending on needs.
- Important non-social ministry investments related to social priorities:
  - Post office modernization to improve money transfers to landlocked areas and ease salary payments.
  - Installation of solar energy systems at basic health centers.
- Prime minister’s announcement on June 27, 2020 of extension or strengthening of social measures (supply of basic staples to vulnerable population; cash transfers program to the most vulnerable).
- Authorities argue planned investments can be committed in the second part of the year and financed, including through more favorable domestic financing than assumed by staff.
- Contingency plans: actively seeking additional budget support from BADEA and potential higher-than-projected support from the World Bank and the African Development Bank; if financing does not materialize, implement only projects underway and postpone those not yet begun.
- Initial allocation of about 0.5 percent of GDP to the COVID-19 Pandemic Response Fund; Fund will also receive contributions of Technical and Financial Partners.

### TRANSPARENCY, PUBLIC FINANCIAL MANAGEMENT, AND ACCOUNTABILITY
- Government commitments to ensure financial assistance is used for intended purposes, including publication of:
  - List of financial transfers.
  - Full text of procurement contracts related to the pandemic response and their beneficiaries.
  - Post-crisis audits of pandemic-related procurement contracts and of the Pandemic Response Fund.
- Multisectoral National Response Plan adopted to group initiatives, sources of financing, and unmet needs; execution remains responsibility of line ministries.
  - A Steering Committee will monitor compliance, achievement of results, and approve evaluation reports based on periodic operational, sectoral and financial monitoring reports prepared by the Technical Secretariat.
  - Committee will determine prioritization of activities as contingency in event of insufficient financial resources.
- Decree adopted on July 1 establishing a dedicated COVID-19 Pandemic Response Fund and defining associated control and accountability framework; IMF remote technical assistance reviewed the draft decree and advised on adapting budget nomenclature for tracking COVID-19 related expenditure.
- Pandemic-related procurement contracts will publish legal entities and beneficial owners online with ex post delivery reports and be subject to an independent, third-party audit.
- Staff recommended channeling all emergency financing through the Pandemic Response Fund to enhance transparency.
- CSBF adopted Instruction 001/2020-CSBF on May 19, 2020 on simplified customer due diligence to facilitate remote account opening for government payments; Instruction includes safeguards against money laundering and requires regularization of accounts or restriction to withdrawals only within 6 months of expiration of the Instruction. Staff urged close monitoring and publication of regular information on implementation.

### FISCAL, MONETARY, AND GOVERNANCE REFORMS BEYOND THE CRISIS
- Authorities committed to continuing reforms outlined in IMF Country Report No 20/100 once the crisis abates.
- Key reform priorities:
  - Determining an appropriate fiscal adjustment path to maintain public debt at prudent levels.
  - Strengthening customs and tax revenue mobilization to create space for priority investment and social spending.
  - Continuing reforms to mitigate fiscal risks related to public utility JIRAMA and other SOEs, and risks related to fuel pricing.
- Measures discussed with the World Bank to improve JIRAMA’s operational and financial situation, including planned repayment to suppliers of about 0.8 percent of GDP.
- Authorities taking advantage of fall in international oil prices to repay accumulated liability to oil distributors (currently reduced to less than 0.2 percent of GDP), which could be fully repaid by October 2020 given decision to maintain pump prices unchanged.
- On monetary policy, central bank should continue to actively manage bank liquidity and implement reform agenda to transition to an interest rate targeting framework.
- Emphasis on promoting better governance and improving the business climate through enforcement of new anti-corruption legal framework, strengthened Public Financial Management, and progress in regulatory framework and rule of law.

### DEBT SUSTAINABILITY ANALYSIS (DSA) AND FINANCING STRATEGY
- Madagascar classified as having medium debt carrying capacity and assessed at moderate risk of external debt distress and moderate overall debt distress (change from prior assessment of low risk of external debt distress).
- COVID-19 adjusted baseline does not breach external PPG debt thresholds; however:
  - Under an export shock the debt service-to-revenue ratio breaches the 18 percent threshold in 2026, rising to 21 percent.
  - Debt service to the IMF (with planned RCF and ECF repayments) projected to reach more than 4.5 percent of government revenue in 2026 and 2027 before decreasing to 2 percent in 2029.
- Shocks could introduce liquidity problems: debt-service-to-revenue ratio could exceed 70 percent over the long term under the growth shock.
- Total public debt below benchmark under baseline, but a commodity price shock drives PV of debt to GDP above benchmark at end of projection period.
- Composite Indicator score: 2.81.
- Estimated amount of delayed bilateral official debt servicing under DSSI is less than 0.1 percent of GDP.
- Assessment assumes debt relief to the IMF under the Catastrophe Containment window of the CCRT through April 2022 (subject to availability of CCRT resources for next 18 months).
- Financing strategy:
  - Share of external to total debt does not exceed authorities’ upper limit of 85 percent.
  - Use of concessional loans is maximized in near term; portfolio of new external financing expected to shift towards more balanced concessional and non-concessional over medium to long term.
  - Short-term local currency treasury bills remain main source of domestic financing; medium-term local currency bond issuance expected to scale up from a low base (15 percent of locally issued debt).

### STRESS TESTS, SHOCK ASSUMPTIONS, AND OUTLOOK
- Export shock uses default settings; size and impact on growth broadly match 2009 crises; delivers most severe stress scenario.
- Commodity price shock: illustrative fall in prices equivalent to 10 percent of commodity exports, no mitigating effect on imports; shock occurs in 2020 and unwinds by 2029.
- Growth shock magnitude adjusted to match March 2020 DSA for comparability and conservatism.
- Since RCF-1 disbursement on April 3, 2020, COVID-19 continued to spread; new cases and fatalities rose following relaxation of initial restrictions in May–June 2020, prompting reimposition of stricter lockdown in early July 2020.
- Macroeconomic outlook for 2020 weakened compared to April 2020 projections: contraction more likely, inflation will slow, current account should improve mainly due to lower petroleum prices, sharper decline in fiscal revenue and higher COVID-19-related expenditures will double fiscal deficit, and balance of payments needs for 2020 have almost doubled.
- Additional financing gap for 2020 estimated at 2.4 percent of GDP and should be closed by combination of RCF-2 resources, a reserves drawdown, additional budget support already committed by development partners, and freed resources from debt service suspension under CCRT and G-20 DSSI.

### IMF SAFEGUARDS, PROGRAM MODALITIES, AND AUTHORITIES’ COMMITMENTS
- Authorities committed in line with IMF safeguards policy (LOI, ¶7).
  - New Memorandum of Understanding (MoU) between central bank and government to be signed, respecting same modalities as previous RCF disbursement.
  - Central bank committed to undergo a safeguards assessment before approval of any new subsequent arrangement by the IMF.
  - Following RCF disbursement on April 3, 2020, an MoU was signed on April 30, 2020 aligning repayments from the Treasury to the central bank with planned repayments from the central bank to the IMF.
- A disbursement of 50 percent of quota would result in Fund exposure to Madagascar of 5.3 percent of GDP.
- Annual repayments projected to peak at 0.6 percent of GDP and 4.6 percent of government revenue in 2026.

### STAFF APPRAISAL AND SUPPORT
- Pandemic severely impacts economy and increased external financing needs since RCF disbursement on April 3, 2020.
  - Growth expected to reduce from 4.8 percent in 2019 to -1.0 percent in 2020.
  - Estimated external financing needs for 2020 are 2.4 percent of GDP higher than at time of first RCF request.
- Staff expressed reservations about high level of projected investment spending in the revised budget law and urged authorities to take into account implementation capacity and available financing, prioritize projects with highest social impact, and be ready to implement contingency measures.
- Staff supports Madagascar’s request for SDR 122.2 million (50 percent of quota) under the Rapid Credit Facility based on additional urgent balance of payments needs, authorities' policies to address the shock, additional budget support of about 0.9 percent of GDP from other partners secured since first RCF disbursement, and expectation that proposed second disbursement will close immediate external needs in combination with additional budget support and a limited reserve drawdown.
- Staff welcomes authorities’ commitment to preserve fiscal sustainability after the crisis and willingness to remain engaged with the Fund; staff ready to initiate discussions on future engagement, including a successor arrangement.

### ANNEX I — MADAGASCAR’S SOCIAL EMERGENCY PLAN (SUMMARY)
- State of emergency declared and containment measures extended several times, lately until the end of July.
- Social Emergency Plan measures include:
  - “Tsena Mora” (cheap shop) initiative.
  - Option to delay payment of electricity bills without penalties and to pay by installments later for households and companies.
  - Fiscal measures aimed at preserving companies’ financial viability and employment.
  - Financial measures supporting companies and temporarily laid off workers through postponement of mortgages or consumer credit payments.
- Social protection initiatives: primarily in-kind donations (“Vatsy Tsinjo”) and unconditional cash transfers (“Tosika Fameno”); three quarantined regions initially targeted with intention to extend assistance.
- Execution responsibility: Ministry in charge of Population, Social Protection and Gender Promotion, and the National Bureau in charge of Risk and Disaster Management (BNGRC).
- Financing of the Social Emergency Plan being finalized; likely to include public funds and external financing from donors including the World Bank, the United Nations system, and the European Union.

### BOX 1 — GOVERNMENT IN-KIND DONATIONS “VATSY TSINJO”
- Objective: supply basic necessities to most vulnerable and those whose activities directly impacted by confinement measures.
- Per beneficiary pack:
  - 5 kg of rice
  - 2.5 kg of pulses
  - 1 kg of sugar
  - 1 bottle of cooking oil
  - 250 gr of fine salt
  - 500 gr of corn flour
  - 6 pieces of soap
- Led by Ministry of Industry, Commerce and Handicrafts (MICA) and Ministry of Environment and Sustainable Development (MEDD); supported by municipalities, “Association Fitia”, Members of the National Assembly, and about a thousand volunteers.
- Initial target groups: homeless, the elderly, workers in the informal sector severely affected by confinement measures; extended groups include university students, artists, journalists, associations, persons with disabilities, public-school teachers.
- Coverage to date:
  - Around 225,000 individuals in Analamanga (including about 700 homeless, 1,000 artists and 3,000 teachers)
  - 32,000 persons in Antsinanana
  - 35,000 persons in Haute Matsiatra
- Beneficiaries identification: community level (“Fokontany”) for elderly and laundrywomen; association databases for other groups.
- Distribution: door-to-door privileged for “Fokontany”-identified beneficiaries; municipalities or “Association Fitia” for others.
- Exact operational costs not finalized; expected financing sources: public funds and grants from individuals, associations, and external donors.

### RISKS, UNCERTAINTIES, AND CONTINGENCY MEASURES
- Downside risks: prolonged disruptions in tourism, additional tax revenue shortfalls, more prolonged COVID-19 outbreak, social discontent, rising costs from heightened protectionism (e.g., export bans).
- Current estimates and projections subject to high degree of uncertainty; contingency measures called for.
- Authorities stand ready to rationalize spending and delay some public investment projects if fiscal and financing resources fall short.

*Source: EXECUTIVE SUMMARY and related sections (1mdgea2020004).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- Further deterioration of the global environment and a deepening impact of the COVID-19 pandemic have worsened the macroeconomic outlook, with growth now projected to be negative in 2020.
- Urgent balance of payments needs arising from the pandemic are now estimated at 4.2 percent of GDP (compared to 1.8 percent).
- Authorities requested an additional disbursement under the Rapid Credit Facility (RCF) of 50 percent of quota (SDR 122.2 million) under the “exogenous shock” window of the RCF.
- Board approval on April 3, 2020 covered an earlier request for 50 percent of quota; the April 6, 2020 doubling of annual RCF access to 100 percent of quota implies that the additional request, if approved, will bring total disbursements under the RCF to 100 percent of quota in 2020.
- Authorities have requested temporary debt servicing relief under the G-20 Debt Service Suspension Initiative (DSSI), supported by the G-20 and Paris Club.

### Policy recommendations (authorities’ commitments in the LOI)
- Reaffirm commitment to the policies discussed in IMF Country Report No 20/100, with temporary loosening of fiscal and financial policies to mitigate the crisis and support recovery.
- Additional commitments to strengthen coordination and transparency to ensure aid is efficiently spent addressing the crisis.
- Once the crisis abates, avoid lasting fiscal imbalances to preserve medium-term macroeconomic stability.
- The catalytic role of the Fund is emphasized given persistent external medium-term projected financing gaps.

### Staff support, assessment, and debt outlook
- Staff supports the authorities’ request and assesses that Madagascar meets the qualification criteria and other applicable requirements.
- Updated Debt Sustainability Analysis: risk of external debt distress increased from low to moderate; overall public debt risk remains moderate.
- The capacity to repay the Fund remains adequate.
- Date of staff report: July 15, 2020.

### Recent economic developments and outlook
- Real GDP is now expected to contract by 1 percent in 2020 (down from +1.6 percent in previous staff report) and expand by 4.2 percent in 2021.
- Average inflation for 2020 is expected to slow to 4.6 percent.
- Tax revenue is expected to decline by more than 1.5 percentage points of GDP compared to 2019.
- Domestic primary balance is expected to show a deficit of about 3.4 percent of GDP in 2020 (more than twice that projected in the previous staff report).
- Public debt is projected to reach 44.8 percent of GDP (compared to 40.6 previously).
- 2020 goods trade deficit projected to improve slightly compared to 2019 (lower exports offset by lower imports, including a much lower oil bill).
- Current account deficit expected to widen from 2.5 to 3.6 percent of GDP, owing to a decline in tourism receipts to about half of 2019 level.
- Capital and financial account expected to be impacted by a 20 percent reduction in FDI.

### Recent indicators and pandemic impact
- Exports and imports contracted by about 15 percent year-on-year (y-o-y) in the first five months of 2020, including drops of 34 and 29 percent y-o-y over April-May, respectively.
- Tourism revenue in 2019 equivalent to 5 percent of GDP has sharply declined.
- Inflation rose from 3.9 percent y-o-y in February to 4.3 percent in May.
- Tax revenue declined by 30 percent y-o-y in May and about 16 percent y-o-y during the first five months of 2020.
- As of July 15, there were 5,605 confirmed cases of COVID-19 and 43 deaths for a total population of about 27 million.

### Monetary and financial conditions
- Outstanding central bank liquidity injections reached MGA 306 billion (about 0.6 percent of GDP) at end-May 2020.
- Credit to the private sector has started to slow; the ratio of non-performing loans slightly increased at end-March 2020.
- Treasury bill auctions were successful until April; mixed results in May with two auctions undersubscribed before normalization on May 29.
- Ariary depreciation limited: about 6 and 6.8 percent since the beginning of the year vis-à-vis the US dollar and the Euro, respectively (as of July 10, 2020).
- Central bank interventions: as of July 10, 2020, the BFM was a net seller of foreign exchange in the amount of about US$57 million, more than during the whole of last year.
- Reserves increased to SDR 1,356 million, equivalent to 5.9 months of projected imports (as of end-June, following recent external aid disbursements).

### Balance of payments and financing needs
- Compared to IMF Country Report No 20/100, updated projections show an additional urgent balance of payments need of about 2.4 percent of GDP in 2020.
- Estimated external financing gap in 2020—before IMF emergency financial assistance—of SDR 440 million (4.2 percent of GDP), compared to SDR 194 million (1.8 percent of GDP) at time of first RCF disbursement request.
- With committed budget support, the April RCF disbursement, the proposed second RCF disbursement, and DSSI debt service suspension (about 0.1 percent of GDP for bilateral official creditors in 2020), the official reserve drawdown will be SDR 81 million, leaving reserves at about 4.8 months of prospective imports.

### IMF emergency financing and donor support
- Fund staff coordinated closely with development partners on macro assumptions and financing needs.
- As of July 14, and without accounting for IMF financing, total budget support committed for 2020 reached US$278 million (1.9 percent of GDP), almost twice the amount committed at time of previous staff report.
- Additional IMF emergency financing under the RCF (which will reach 100 percent of quota, equivalent to about US$335 million) will be redirected to the budget through on-lending by the central bank.
- Total budget financing (with IMF and donors) would reach about US$612 million, equivalent to 4.2 percent of GDP—an unprecedented level in Madagascar, equivalent to 45 percent of the projected tax revenue for 2020.
- The IMF emergency financing alone is equivalent to 5 months of the public wage bill.

### Cash-flow and disbursement phasing
- April RCF disbursement of US$166 million and World Bank budget financing of US$100 million under the Investing in Human Capital Development Policy Operation (DPO) were needed to alleviate most immediate financing needs.
- Proposed second RCF disbursement and planned World Bank emergency DPO disbursement, followed by expected disbursements from AfDB, AFD, and EU, are expected to cover remaining financing gaps.
- Phasing of disbursements is consistent with current Treasury cash plans; committed spending with payment orders to come (“float”) has increased.

### Policy measures, multisectoral response, and social support
- Authorities implemented priority measures: (i) targeted investments to strengthen the health system; (ii) implementation of a social emergency plan to support the most vulnerable; (iii) support to the private sector (tax exemptions, deadline extensions, moratorium on bank credits for companies facing temporary difficulties); and (iv) regular provision of liquidity by the central bank to commercial banks.
- Multisectoral National Response (MNR) covers health, social protection, water and sanitation, food security, gender violence, and the private sector.
- World Bank estimates: support to social sectors would reach 1.1 percent of GDP; support to private sector would reach 1.6 percent of GDP.
- Social safety net measures include government in-kind donations and an unconditional cash transfer program; some bill payments to utility company JIRAMA were rescheduled.
- Private sector support includes tax relief and deadline extensions; temporary salary subsidies and capacity building; credit easing or partial guarantee schemes and technical assistance to SMEs; assistance for market access and international communication campaigns for tourism.
- Central bank committed to use all instruments to ensure sufficient liquidity; banks and microfinance institutions encouraged to reschedule SME and household loan repayments for 3 months and may deduct a similar amount from reserve requirements.

### Revised budget law and staff concerns
- Draft revised budget law (Loi de Finances Rectificative, LFR) approved by the Council of Ministers on June 13 and by the National Assembly on June 25.
- LFR based on revised growth projection of 0.8 percent for 2020 (more optimistic than IMF staff), and reduced tax revenues by 26 percent compared to the initial 2020 budget (broadly in line with staff projections).
- LFR priorities: social sectors (health, education, water and sanitation, transfers to the most vulnerable) and supporting economic activity via an ambitious investment program.
- Budget for four social ministries set at MGA 2,207 billion (4.2 percent of GDP, or 23 percent of total spending). Excluding salaries and externally financed investment, amount set at about MGA 724 billion (1.4 percent of GDP), more than twice the 2019 outcome, and higher than MGA 555 billion in the 2020 initial budget law but lower than anticipated at the time of the first RCF disbursement.
- Revised budget law projects public investments at about MGA 4,980 billion or 9.8 percent of GDP, of which 4.5 percent of GDP is for domestically financed investment (as in the initial budget law).
- Staff projects a more realistic level for total public investment at 6.5 percent of GDP, of which 2.1 percent is for domestically financed projects, given recent implementation rates and limited 2020 commitments.
- Staff cautioned that projected increases in domestically financed public investment may be over-optimistic, could create additional financing gaps if committed, and questioned prioritization of some infrastructure projects given critical social needs (domestically financed investments by social ministries accounted for about 1 percent of GDP, less than one fourth of planned domestic investments in the LFR).

### Risks and uncertainties
- Considerable uncertainty persists: downside risks include prolonged disruptions in tourism, additional tax revenue shortfalls, a more prolonged COVID-19 outbreak, social discontent, and rising costs from heightened protectionism (e.g., export bans).
- Current estimates and projections remain subject to a high degree of uncertainty, calling for contingency measures.

*Source: EXECUTIVE SUMMARY (1mdgea2020004).*

### 13.      The authorities noted that social infrastructure is a key priority of this investment

### 13.      The authorities noted that social infrastructure is a key priority of this investment

### Social infrastructure priorities and planned measures
- Priority investments include the construction and equipment of hospitals, basic health centers, buildings and sports complexes, and of university campuses and classrooms.
- Additional provisions for social spending are set in the budget at the level of the Ministry of Finance and not accounted as spending by social Ministries; these will be reallocated to social ministries depending on their needs.
- Important investments by non-social ministries are related to social priorities, including:
  - Post office modernization to improve money transfers to landlocked areas and ease payments of salaries for teachers, nurses, caregivers and security forces.
  - Installation of solar energy systems at basic health centers.
- Prime minister’s announcement on June 27, 2020 of extension or strengthening of social measures (supply of basic staples to vulnerable population; cash transfers program to the most vulnerable).

### Implementation capacity, financing sources, and contingency plans
- Authorities argued planned investments can be committed in the second part of the year and can be financed, including through more favorable domestic financing than assumed by staff.
- As part of contingency plans, authorities are actively seeking additional budget support, including from:
  - Arab Bank for Economic Development in Africa (BADEA).
  - Potential higher-than-projected support from the World Bank and the African Development Bank.
- If needed financing does not materialize, authorities would implement only projects underway and postpone those not yet begun.
- The government indicated an initial allocation of about 0.5 percent of GDP to the COVID-19 Pandemic Response Fund, which will also receive contributions of Technical and Financial Partners supporting Madagascar in the fight against the impact of the pandemic.

### Transparency, public financial management, and accountability measures
- Government commitments to ensure financial assistance is used for intended purposes, including publication of:
  - List of financial transfers.
  - Full text of procurement contracts related to the pandemic response and their beneficiaries.
  - Post-crisis audits of pandemic-related procurement contracts and of the Pandemic Response Fund.
- Multisectoral National Response Plan adopted to group existing initiatives, sources of financing, and unmet needs; execution remains responsibility of line ministries.
  - A Steering Committee will monitor compliance, achievement of results, and approve evaluation reports, based on periodic operational, sectoral and financial monitoring reports prepared by the Technical Secretariat.
  - The Committee will determine prioritization of activities as a contingency in the event of insufficient financial resources.
- Decree adopted on July 1 establishing a dedicated COVID-19 Pandemic Response Fund and defining associated control and accountability framework; IMF remote technical assistance reviewed the draft decree and advised on adapting budget nomenclature for tracking COVID-19 related expenditure.
- Pandemic-related procurement contracts will publish legal entities and beneficial owners online with ex post delivery reports and be subject to an independent, third-party audit.
- Staff recommended channeling all emergency financing through the Pandemic Response Fund to enhance transparency.
- Commission de Supervision Bancaire et Financière (CSBF) adopted Instruction 001/2020-CSBF on May 19, 2020 on simplified customer due diligence to facilitate remote account opening for government payments (social cash transfers, salaries, pensions, education grants) to vulnerable individuals without national identification.
  - Instruction includes safeguards against money laundering and requires regularization of accounts or restriction to withdrawals only within 6 months of expiration of the Instruction.
  - Staff urged close monitoring and publication of regular information on implementation.

### Fiscal, monetary, and governance reforms beyond the crisis
- Authorities committed to continuing reforms outlined in IMF Country Report No 20/100 once the crisis abates.
- Key reform priorities:
  - Determining an appropriate fiscal adjustment path to maintain public debt at prudent levels.
  - Strengthening customs and tax revenue mobilization to create space for priority investment and social spending.
  - Continuing reforms to mitigate fiscal risks related to public utility JIRAMA and other SOEs, and risks related to fuel pricing.
- Measures discussed with the World Bank to improve JIRAMA’s operational and financial situation, including planned repayment to suppliers of about 0.8 percent of GDP.
- Authorities taking advantage of fall in international oil prices to repay accumulated liability to oil distributors (currently reduced to less than 0.2 percent of GDP), which could be fully repaid by October 2020 given decision to maintain pump prices unchanged.
- On monetary policy, central bank should continue to actively manage bank liquidity and implement reform agenda to transition to an interest rate targeting framework.
- Emphasis on promoting better governance and improving the business climate through enforcement of new anti-corruption legal framework, strengthened Public Financial Management, and progress in regulatory framework and rule of law.

### External financing, IMF access, and debt assessment
- Persistent external medium-term projected financing gaps: cumulative financing gap of at least 3.6 percent of GDP over 2021-23 under current macroeconomic assumptions.
- Authorities interested in discussions for a successor arrangement to support economic reform strategy and catalyze private investment and donor support.
- Authorities requesting a disbursement under the RCF “exogenous shock” window equivalent to 50 percent of quota (SDR 122.2 million), to be redirected to the budget as budget support.
- Additional access of 50 percent of quota consistent with amended PRGT financing limits:
  - Outstanding PRGT credit would reach 225 percent of quota, of which 122.5 percent for outstanding credit under the RCF.
  - Total PRGT disbursements over a twelve month-period would reach 125.72 percent of quota.
- Madagascar’s risk of external debt distress increased from low to moderate; overall (external plus domestic) public debt distress remains moderate.
  - Public debt to GDP ratio expected to reach 44.8 percent in 2020 (a revision of 5 percent of GDP compared to the Article IV projection), of which 2.3 percent corresponds to central bank debt to the Fund related to the RCF disbursements.
  - Over the medium term, debt to GDP expected to reach 49.3 percent in 2025.
  - Under an export shock the debt service-to-revenue ratio breaches the threshold; overall debt distress remains moderate and shocks could introduce liquidity problems as overall debt service-to-revenue ratio could exceed 70 percent over the long term under a growth shock.
  - Assessment assumes debt service relief to the IMF under the Catastrophe Containment window of the CCRT through April 2022 and participation in the Debt Service Suspension Initiative supported by the G-20 and the Paris Club.
  - DSSI operation expected to postpone about SDR 9.9 million due in amortization in 2020, rescheduled in NPV-neutral terms over 2022-24.
- Capacity to repay the Fund remains adequate:
  - A disbursement of 50 percent of quota would result in Fund exposure to Madagascar of 5.3 percent of GDP.
  - Annual repayments projected to peak at 0.6 percent of GDP and 4.6 percent of government revenue in 2026.

### IMF safeguards, program modalities, and authorities’ commitments
- Authorities made commitments in line with IMF safeguards policy (LOI, ¶7).
  - A new Memorandum of Understanding (MoU) between the central bank and the government will be signed, respecting same modalities as the one signed for the previous RCF disbursement.
  - Central bank committed to undergo a safeguards assessment before approval of any new subsequent arrangement by the IMF.
  - Following previous RCF disbursement approved on April 3, 2020, an MoU was signed on April 30, 2020 aligning repayments from the Treasury to the central bank with planned repayments from the central bank to the IMF.

### Staff appraisal and support
- Pandemic severely impacts the economy and increased external financing needs since RCF disbursement on April 3, 2020.
  - Growth expected to reduce from 4.8 percent in 2019 to -1.0 percent in 2020.
  - Estimated external financing needs for 2020 are 2.4 percent of GDP higher than at time of first RCF request.
- Staff expressed reservations about high level of projected investment spending in the revised budget law and urged authorities to:
  - Take into account implementation capacity and available financing.
  - Prioritize projects with highest social impact and be ready to implement contingency measures.
- Staff supports Madagascar’s request for SDR 122.2 million (50 percent of quota) under the Rapid Credit Facility based on:
  - Additional urgent balance of payments needs arising from COVID-19.
  - Authorities' existing and prospective policies to address the shock.
  - Additional budget support of about 0.9 percent of GDP from other partners secured since the first RCF disbursement.
  - The proposed second disbursement will close immediate external needs in combination with additional budget support and a limited reserve drawdown.
- Staff welcomes authorities’ commitment to preserve fiscal sustainability after the crisis and their willingness to remain engaged with the Fund; staff is ready to initiate discussions on future engagement, including a successor arrangement.

### Annex I — Madagascar’s Social Emergency Plan in Response to COVID-19 (summary)
- State of emergency declared and containment measures (international travel restrictions, quarantines, ban on public gatherings, confinement of Analamanga, Antsinanana and Haute Matsiatra) extended several times, lately until the end of July.
- Social Emergency Plan measures include:
  - “Tsena Mora” (cheap shop) initiative to facilitate access to basic necessities at affordable prices.
  - Option to delay payment of electricity bills without penalties and to pay by installments later for households and companies.
  - Fiscal measures aimed at preserving companies’ financial viability and employment.
  - Financial measures supporting companies and temporarily laid off workers through postponement of mortgages or consumer credit payments.
- Social protection initiatives primarily in-kind donations (“Vatsy Tsinjo”) and unconditional cash transfers (“Tosika Fameno”); three regions initially targeted are the first quarantined regions, with intention to extend assistance to other regions.
- Execution responsibility:
  - Social Protection program execution lies with the Ministry in charge of Population, Social Protection and Gender Promotion, and the National Bureau in charge of Risk and Disaster Management (BNGRC).
- Financing of the Social Emergency Plan is being finalized and likely to include public funds and external financing from donors including the World Bank, the United Nations system, and the European Union; donors also providing technical support.

*Republic of Madagascar — International Monetary Fund (excerpt).*

### Box 1. Government In-Kind Donations “Vatsy Tsinjo”

### Box 1. Government In-Kind Donations “Vatsy Tsinjo”

### Overview
- “Vatsy Tsinjo” is a Presidential project aimed at supplying basic necessities to the most vulnerable and those whose activities have been directly impacted by the COVID-19-related confinement measures.

### Composition of the beneficiary pack
- Per beneficiary pack consists of:
  - 5 kg of rice
  - 2.5 kg of pulses
  - 1 kg of sugar
  - 1 bottle of cooking oil
  - 250 gr of fine salt
  - 500 gr of corn flour
  - 6 pieces of soap

### Leadership and implementation partners
- Led by:
  - Ministry of Industry, Commerce and Handicrafts (MICA)
  - Ministry of Environment and Sustainable Development (MEDD)
- Supported by:
  - Municipalities of each concerned region
  - “Association Fitia” (the charity association presided over by the first lady)
  - Members of the National Assembly
  - About a thousand volunteers

### Beneficiaries and coverage to date
- Initial target groups:
  - Homeless
  - The elderly
  - Workers in the informal sector severely affected by confinement measures, including taxi and other public transport drivers, street vendors, laundrywomen, rickshaw pullers, and newspapers sellers
- Extended recipient groups:
  - University students (unable to return home)
  - Artists
  - Journalists
  - Associations
  - Persons with disabilities
  - Public-school teachers
- Coverage to date:
  - Around 225,000 individuals in Analamanga (including about 700 homeless, 1,000 artists and 3,000 teachers)
  - 32,000 persons in Antsinanana
  - 35,000 persons in Haute Matsiatra

### Targeting and distribution modalities
- Beneficiaries’ identification:
  - Done at the community level (“Fokontany”) for the elderly and laundrywomen
  - For other groups, via association database
- Distribution approach:
  - Door-to-door approach privileged in most cases due to stay-at-home directives for beneficiaries identified at the “Fokontany” level
  - For other beneficiaries, distribution carried out either by the Municipalities of each concerned region or the “Association Fitia”
- Note on “Fokontany”:
  - The Fokontany is a basic administrative subdivision which comprises either hamlets, villages, sectors or neighborhoods depending on the size of the agglomeration

### Costs and financing
- Exact operational costs have not yet been finalized
- Expected financing sources:
  - Public funds
  - Grants from individuals, associations, and external donors

*Source: Box 1. Government In-Kind Donations “Vatsy Tsinjo”*

### 2.5 percent of GDP in the prior baseline. Over the

### Republic of Madagascar — Debt Sustainability and COVID-19 Impact (July 17, 2020; July 30, 2020)

### Risk Assessment and Debt Sustainability Analysis (DSA) — key findings
- Madagascar is classified as having a medium debt carrying capacity and is assessed at moderate risk of external debt distress with some space to absorb shocks and moderate risk of overall debt distress. This is a change from the prior assessment of low risk of external debt distress and moderate risk of overall debt distress.
- The COVID-19 adjusted baseline does not breach any external public and publicly guaranteed (PPG) debt thresholds; however:
  - Under an export shock the debt service-to-revenue ratio breaches the 18 percent threshold in 2026, rising to 21 percent.
  - Debt service to the IMF (with planned RCF and ECF repayments) is projected to reach more than 4.5 percent of government revenue in 2026 and 2027 before decreasing to 2 percent in 2029.
- Shocks could introduce liquidity problems: the debt-service-to-revenue ratio could exceed 70 percent over the long term under the growth shock.
- Total public debt is below the benchmark under the baseline, but a commodity price shock drives the present value of debt to GDP above the benchmark at the end of the projection period.
- Madagascar has a Composite Indicator score of 2.81.
- The estimated amount of delayed bilateral official debt servicing under the Debt Service Suspension Initiative (DSSI) is estimated to be less than 0.1 percent of GDP.
- The assessment assumes debt relief to the IMF under the Catastrophe Containment window of the CCRT through April 2022 (subject to the availability of CCRT resources for the next 18 months).

### Stress tests and shock assumptions
- The default settings are applied for the export shock; its size and impact on growth broadly match the effect of the simultaneous global financial and domestic political crises in Madagascar in 2009, delivering the most severe stress scenario in this DSA.
- For the commodity price shock the assumption is an illustrative fall in prices equivalent to 10 percent of commodity exports, with no mitigating effect on imports; the shock occurs in 2020 and unwinds gradually by 2029.
- The magnitude of the growth shock was adjusted upwards to match the size of the growth shock considered during the March 2020 DSA to support comparability and adopt a conservative approach to the stress tests.

### Financing strategy and public debt composition
- For external financing:
  - The share of external to total debt does not exceed the authorities’ upper limit of 85 percent.
  - Use of concessional loans is maximized in the near term, while the portfolio of new external financing is expected to shift towards a more balanced distribution of concessional and non-concessional debt over the medium to long term.
- For domestic financing:
  - Short-term local currency treasury bills will remain the main source of financing over the long term.
  - Medium-term local currency bond issuance is expected to scale up over time, but from a low base (15 percent of locally issued debt).

### Recent macroeconomic developments and outlook (July 30, 2020 statement)
- Since the RCF-1 disbursement on April 3, 2020, COVID-19 continued to spread; new cases and fatalities rose significantly following relaxation of initial restrictions in May–June 2020, prompting reimposition of a stricter lockdown in early July 2020.
- Macroeconomic performance in Q2 2020 shows a strong impact across sectors, notably tourism.
- Domestic financing has been challenging amid:
  - A sharp decline in fiscal revenue.
  - Mixed results in treasury bill issuances and higher spending.
- Reserves have increased following external aid disbursements, but net foreign exchange sales at end-June 2020 already exceeded those for the entire year of 2019.
- The local currency depreciated by 6-7 percent vis-à-vis the dollar and the euro.
- Madagascar’s risk of external debt distress increased from low to moderate.
- Main partners’ economic prospects have deteriorated, materializing a downside risk to growth.
- Macroeconomic outlook for 2020 has weakened compared to April 2020 projections:
  - Growth has been revised down more steeply, with a contraction more likely to occur in 2020.
  - Inflation will slow down.
  - Current account balance should improve mainly due to lower petroleum prices.
  - A sharper decline in fiscal revenue and higher COVID-19-related expenditures will result in a doubling of the fiscal deficit.
  - The balance of payments needs for 2020 have almost doubled.
- The additional financing gap for 2020 is estimated at 2.4 percent of GDP and should be closed by a combination of:
  - RCF-2 resources,
  - A reserves drawdown,
  - Additional budget support already committed by development partners,
  - Freed resources from the debt service suspension under the CCRT and the G-20 Debt Service Suspension Initiative.

### Policy response to the pandemic — measures and commitments
- The authorities adopted a Multisectoral National Response Plan to improve coordination and consistency of the COVID-19 response.
- Medical response measures:
  - Provision of protective equipment to medical staff.
  - Establishment of well-equipped COVID-19 treatment centers and testing laboratories.
- Social, fiscal and financial measures adopted include cash transfers, in-kind donations, tax relief, subsidies and credit easing to support vulnerable households and the private sector. The total cost of these measures is estimated at 2.8 percent of GDP.
- The Commission de Supervision Bancaire et Financière (CSBF) relaxed requirements for the opening of accounts remotely to enable government transfers, while taking safeguards to limit risks to financial stability.
- The National Assembly approved on June 24, 2020 a revised budget law reflecting the updated assessment of the pandemic’s impact; the fiscal stance is further loosened to accommodate additional social and business support priorities.
- Contingency plans: authorities stand ready to rationalize spending and delay some public investment projects if fiscal and financing resources fall short.
- Transparency measures:
  - A decree, prepared with Fund assistance, established a COVID-19 Pandemic Response Fund and defined its operational management, control and accountability framework.
  - The Fund had an initial public dotation representing 0.5 percent of GDP and will collect all contributions to fight the pandemic.
  - Authorities intend to publish online procurement contracts, list of beneficiaries, ex-post audits by an independent third-party auditor, and the report of the emergency fund’s inspection by the “Cour des Comptes”.
- Medium-term fiscal stance:
  - Authorities will pursue prudent policies to preserve fiscal and debt sustainability and shift to consolidation by unwinding temporary pandemic-related measures once the health crisis abates.
  - Ongoing reforms to improve revenue mobilization, enhance public financial management, and strengthen the financial situation of some public enterprises will be sustained.
  - Progress in the energy sector, including restructuring of JIRAMA with World Bank assistance and diminution of liabilities towards fuel distributors, will continue.
- The authorities reiterated interest in a successor arrangement under the Extended Credit Facility to support the Plan Emergence Madagascar (PEM); the central bank is committed to undergo a safeguards assessment before approval of such an arrangement.

### Requests to the Fund and concluding assessment
- Authorities request an additional disbursement of 50 percent of quota (SDR 122.2 million) under the RCF to support their efforts and policy response to the pandemic.
- The country’s capacity to repay is described as adequate.
- Conclusion: The global COVID-19 pandemic and domestic containment measures have taken a heavier than anticipated toll on the Malagasy economy. Fund emergency assistance and additional support from development partners helped the response, but the severity of the crisis increased financing needs and uncertainty, warranting additional Fund assistance to address the impact and prepare economic recovery.

*Republic of Madagascar — International Monetary Fund, July 17 and July 30, 2020.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1mdgea2020004.pdf_