## 1mdgea2021001

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### Executive summary and program objectives
- COVID-19 reversed recent progress in per capita income and poverty reduction in Madagascar; real GDP is estimated to have contracted by 4.2 percent in 2020.
- Two RCF disbursements approved on April 3 and July 30 (totaling 2.4 percent of GDP) helped close short-term financing gaps, support mitigation measures, and catalyze donor budget support.
- Authorities requested an Extended Credit Facility (ECF) arrangement to:
  - support the recovery from the pandemic;
  - anchor reform implementation; and
  - catalyze aid commitments.
- Staff proposal:
  - 40-month ECF arrangement with access of 90 percent of quota (SDR 219.96 million);
  - semi-annual reviews.
- Financing under the arrangement will help address balance of payment needs estimated at about US$893 million over 2021–24.
- Baseline assessments:
  - Madagascar’s risk of debt distress remains moderate for both external and overall public debt;
  - capacity to repay the Fund is adequate.

### Recent economic developments (key findings)
- Real GDP contracted by 4.2 percent in 2020—9 percentage points lower than the January 2020 Article IV projection.
- Sectoral and external impacts:
  - Tourism receipts collapsed from 5.1 percent of GDP in 2019 to 1.0 percent in 2020;
  - the country’s largest mine closed in mid-April 2020;
  - free trade zones’ exports showed some resilience later in 2020.
- Inflation and reserves:
  - Inflation remained subdued at 4.2 percent y-o-y in December 2020.
  - International reserves reached SDR 1337.8 million at end-2020 or 5.9 months of 2020 imports (4.7 months of 2019 imports).
- External and fiscal:
  - Current account deficit widened to an estimated 6.5 percent of GDP in 2020.
  - Tax revenue fell by 1.4 percentage points of GDP y-o-y in 2020 to 8.9 percent of GDP.
  - Reduction in customs revenue was -21.8 percent, and domestic taxes were -5.3 percent (y-o-y).
  - Domestic primary balance recorded a deficit of 2.6 percent of GDP in 2020, after a small surplus in 2019.
- Monetary and exchange rate:
  - Central bank foreign currency net sales reached US$156 million in 2020 (three times more than 2019).
  - Ariary depreciation was about 5 and 16 percent vis-à-vis the US$ and the euro, respectively.

### Program macro-framework and projections
- Real GDP path (program baseline):
  - 2020: contraction of an estimated 4.2 percent.
  - 2021: recovery partially to 3.2 percent (program baseline) or 4.5 percent rebound assumed in LFI.
  - Peak at 5.4 percent in 2023.
  - Leveling at 5 percent in 2023 and stabilizing around 5 percent in outer years.
  - Output expected to surpass its 2019 level in 2022 but remain well below pre-shock levels through the medium-term.
- Key macro anchors and trajectories:
  - Tax revenue: would gradually increase by about 1 percent of GDP per year over 2021-23.
  - Fiscal anchor: domestic primary balance excluding budget grants planned to be in deficit by about 2.5 percent of GDP in 2021 before turning positive in 2023.
  - Current account deficit: expected to stabilize at around 4 percent of GDP.
  - Gross official reserves: increase in nominal terms and converge to about 5 months of imports.
- Financing gap and IMF role:
  - Financing gap under program baseline (US$ million): 2021 = 415; 2022 = 171; 2023 = 172; 2024 = 136.
  - (In percent of GDP): 2021 = 2.8; 2022 = 1.1; 2023 = 1.0; 2024 = 0.7.
  - Expected budget support (US$ million): 2021 = 273; 2022 = 100; 2023 = 100; 2024 = 100.
    - World Bank: 185 (2021)
    - African Development Bank: 44 (2021)
    - European Union: 25 (2021)
    - Agence Francaise de Developpement: 19 (2021)
  - Residual financing gap (1-2) (US$ million): 2021 = 142; 2022 = 72; 2023 = 72; 2024 = 36.
  - IMF financing (90 percent of quota) allocated to fill residual gap: 2021 = 142; 2022 = 72; 2023 = 72; 2024 = 36.
  - (In percent of GDP): 2021 = 1.0; 2022 = 0.4; 2023 = 0.4; 2024 = 0.2.
  - Access for the ECF arrangement proposed at 90 percent of quota (SDR 219.96 million).

### Fiscal policy priorities and revenue measures
- Main fiscal priorities:
  - rebuild and strengthen fiscal space for capital investment and social spending through revenue mobilization and improving quality of spending;
  - contain fiscal risks from SOEs, fuel pricing, and natural disasters.
- Revenue mobilization and administration measures:
  - Revive tax control operations and improve collection of outstanding tax payments; SB to collect MGA 80 billion of tax arrears in first half of 2021 (Jun-21).
  - Generalization of VAT on public procurement expected to yield 0.4 percent of GDP in 2021.
  - Tax policy options under consideration for 2022 include VAT and excises and streamlining exemptions; VAT threshold raised to MGA 400 million expected to yield 40 billion Ariary in 2021.
  - Tax expenditures estimated at MGA 1470 billion (2.8 percent of GDP) in 2019.
- Limiting non-priority spending:
  - Strengthen planning and monitoring of the wage bill; wage bill targeted at 5.5 percent of GDP in 2021 LFI.
  - Design and implement reforms to contain civil servants’ pension fund deficit (plan expected in first half of 2021).
  - Mitigate fiscal risks related to SOEs—commitment to limit JIRAMA transfers to MGA 400 billion (about 0.7 percent of GDP).
- Social spending and monitoring:
  - ECF includes IT (floor) for domestically financed social spending (four ministries) and memorandum items for broader monitoring.
  - Under IT definition, social spending remained below 1 percent of GDP in recent years; adding salaries it remains below 3 percent of GDP.
  - Broader social spending in 2020 could be 4.7 percent of GDP including salaries and externally financed investments.
  - 2021 domestically financed budget for four social ministries increased by more than 10 percent to MGA 1,729 billion or 3 percent of GDP.
  - Structural benchmarks and conditionality: publication of quarterly budget execution reports with specific information on social spending execution is conditionality (continuous SB starting with Q1 2021).

### Public investment, PFM, and fiscal risks
- Public investment:
  - Rebound expected and pick up in 2023 reflecting public investment scaling-up and gradual private investment increase.
  - Prioritize projects considering implementation and absorptive capacity; finalize public investment manual (SB, Dec-21).
- PFM and transparency:
  - Revive PFM reform agenda; implement 2018-2026 Strategic Plan of Modernization; PEFA assessment planned for first half of 2021.
  - Key reforms: active cash management toward Single Treasury Account; strengthen internal audit and controls; draft treasury management law and draft law on status of public accountants to be submitted May 2021.
  - Commit to publish quarterly budget execution report on a payment basis before the end of the following quarter (continuous SB).
- Fuel pricing:
  - Liability to oil distributors peaked at 0.4 percent of GDP in April 2020; eliminated at end-January 2021.
  - Authorities committed to prepare a fuel pricing mechanism plan during first six months of 2021 and to keep liability below MGA 100 billion (continuous SB).
- Disaster/climate fiscal risk:
  - Climate-related disasters estimated to cost 1 percent of GDP per year on average; severe disasters can cause damage equivalent to 4 percent of GDP.
  - IMF support under ECF to incorporate climate change modeling in fiscal risk assessment; DSA contains a stress test related to natural disasters.
  - External disaster resilience support cited: World Bank CAT-DDO and AFD financing (examples provided).

### State-owned enterprises (SOEs) and contingent liabilities
- JIRAMA:
  - Worsened during the pandemic despite 1.4 percent of GDP in operational subsidies and transfers to repay arrears in 2020; ad hoc arrears clearance of 1 percent of GDP occurred in 2019.
  - Authorities committed to clearly identify transfers for 2021 in LFR and to keep total transfers limited to MGA 400 billion (about 0.7 percent of GDP).
  - Strategy to clear stock of arrears expected by June 2021; arrears clearance plan to be agreed with World Bank (continuous SB).
- Air Madagascar:
  - Debt reaching US$55 million; business plan being developed by external auditors to assess viability.
  - Authorities committed to avoid any further public financing until plan is finalized.

### Monetary policy, FX market and central bank safeguards
- Monetary policy stance:
  - BFM policy stance appropriate to maintain single digit inflation through money market and foreign exchange operations; active liquidity management and opportunistic FX interventions.
  - Transition to interest rate targeting framework targeted by 2023 with measures already implemented (interest rate corridor, overnight facilities).
- FX market and reserves:
  - FX market (MID) remains shallow and volatile; interventions in 2020 were almost three times higher than 2019.
  - Gross official reserves (SDR millions): 2018 = 1,221; 2019 = 1,196; 2020 = 1,390; 2021 = 1,338; 2022 = 1,552; 2023 = 1,449; 2024 = 1,540; 2025 = 1,680; 2026 = 1,793; 2027 = 1,940; 2028 = 2,057.
  - Months of imports coverage: 2018 = 4.3; 2019 = 4.2; 2020 = 4.4; 2021 = 5.9 (projection); then projected 4.5–5.0 range through 2026.
- Gold purchase program and safeguard concerns:
  - BFM engaged in a program to buy and store unrefined gold to refine and include in reserves—raising safeguard concerns.
  - Program not yet anchored in BFM’s reserves management strategy and could undermine BFM autonomy.
  - Authorities agreed to remove gold export ban by end-July 2021; BFM to reengage with government by September 2021 on the gold program and requested IMF TA.
  - February 2021 IMF Safeguards Assessment Mission highlighted need to strengthen internal audit and phase out BFM participation in the gold program.

### Financial sector and inclusion
- Banking sector:
  - Banks are well capitalized, liquid, and profitable overall, but heterogeneity has increased.
  - Non-performing loans to total gross loans: 2018 = 7.3; 2019 = 6.8; 2020 = 7.1; Dec-2020 point 7.6 percent noted.
  - Regulatory capital to risk-weighted assets: 13.7 (2018).
  - Capital to assets: 10.6 (2018), 10.1 (2019), 10.4 (2020 Dec).
  - Return on assets: 4.3 (2018), 4.1 (2019), 3.7 (2020).
  - Liquid assets to total assets: 36.9 (2018), 34.8 (2019), 37.2 (2020).
- Microfinance institutions (MFIs):
  - MFIs account for about six percent of total financial system assets; assets more than tripled since 2012.
  - Pandemic effects by end-Nov-2020: deposit withdrawals almost 9 percent decrease since March; NPLs rising to 11.5 percent; profitability negative (ROE = -2.6 percent on average).
- Financial inclusion and digitalization:
  - Mobile banking activities increasing but Madagascar lags most SSA low-income countries.
  - Mobile money transactions increased by 12 percent in 2020; mobile money used to support 243,686 vulnerable households.
  - CEM manages 1.2 million saving accounts totaling MGA 407 billion (0.8 percent of GDP).

### Debt sustainability, repayment capacity, and stress tests
- Debt outlook:
  - Public debt could reach about 49 percent of GDP in 2025 (higher than 46 percent envisaged in January 2020 Article IV).
  - New DSA: Madagascar remains at moderate risk of external debt distress and moderate risk of overall public debt distress.
- Key DSA projections and indicators:
  - Public debt (percent of GDP): 2018 = 39.8; 2019 = 37.8; 2020 = 39.8; 2021 = 43.6; 2022 = 40.8; 2023 = 46.9; 2024 = 47.8; 2025 = 48.6; 2026 = 49.1; 2027 = 49.3; 2028 = 49.6.
  - Current account balance (including grants, percent of GDP): 2018 = 0.7; 2019 = -2.2; 2020 = -1.5; 2021 = -6.5; 2022 = -1.5; 2023 = -5.0; 2024 = -4.4; 2025 = -4.3; 2026 = -4.0.
- Stress-test outcomes and vulnerabilities:
  - Under an export shock, PV of debt-to-exports and debt service thresholds are breached.
  - Under a growth shock, PV of debt-to-GDP approaches 55 percent of GDP by 2030 and is on a persistent upward trajectory; PV of debt-to-revenue would be over 380 in 2030; debt service-to-revenue ratio could be above 90 percent by 2025.
  - Liquidity pressures: debt-service-to-revenue ratio could near or exceed 70 percent in the near term under baseline and shocks.
- Repayment capacity to IMF:
  - Adequate. Annual repayments based on existing and prospective drawings peak in 2027 at 0.8 percent of GDP, 5.6 percent of government revenue and 2.7 percent of exports.
  - Outstanding IMF credit (Millions of SDRs, existing and prospective): 2021 = 632.4; 2022 = 662.8; 2023 = 674.5; 2024 = 655.4; 2025 = 590.1; 2026 = 486.2; 2027 = 371.5; 2028 = 265.7; 2029 = 159.6; 2030 = 75.8.
  - Total obligations (existing and prospective credit, Millions of SDRs): 2021 = 12.3; 2022 = 18.6; 2023 = 37.3; 2024 = 43.6; 2025 = 65.4; 2026 = 103.9; 2027 = 114.8; 2028 = 105.9; 2029 = 106.2; 2030 = 83.9; 2031 = 39.2; 2032 = 22.1; 2033 = 12.3; 2034 = 2.5; 2035 = 0.1.
- Policy implications:
  - Prioritize securing additional concessional external financing and develop domestic debt market to reduce debt service burdens.
  - Maintain conservative borrowing terms (continuous PC: ceiling on newly contracted external public debt of US$ 800 million in PV terms).

### Program modalities, monitoring, and conditionality
- Monitoring and reviews:
  - Semi-annual reviews; QPCs at end-Q2 and end-Q4; ITs at end-Q1 and end-Q3.
  - QPCs on: (i) domestic primary balance excluding budget grants; (ii) external public borrowing in present value terms (ceiling); (iii) net foreign assets of the BFM (floor); (iv) net domestic assets of the BFM (ceiling); and (v) external payment arrears (zero ceiling).
  - ITs on floors for social spending, domestic tax, and customs revenue. Structural benchmarks evaluate reform progress.
- Selected continuous and dated targets (figures preserved exactly):
  - Continuous PC: Ceiling on accumulation of new external payment arrears = 0 (Mar-21 through Mar-22).
  - Continuous PC: Ceiling on new external debt contracted or guaranteed by the central government or BFM, in PV terms (US$ millions) = 800 (Mar-21 through Mar-22).
  - Floor on gross domestic tax revenue (MGA, cumulative): 693 (Mar-21 IT), 1,556 (Jun-21 PC), 2,453 (Sep-21 IT), 3,384 (Dec-21 PC), 841 (Mar-22 IT).
  - Floor on gross customs tax revenue (MGA, cumulative): 510 (Mar-21), 1,147 (Jun-21), 1,785 (Sep-21), 2,550 (Dec-21), 621 (Mar-22).
  - Floor on social spending (MGA, cumulative): 77 (Mar-21), 154 (Jun-21), 282 (Sep-21), 513 (Dec-21), 111 (Mar-22).
  - Floor on domestic primary balance (MGA, cumulative): -550 (Mar-21 IT), -752 (Jun-21 PC), -1,324 (Sep-21 IT), -1,426 (Dec-21 PC), -120 (Mar-22 IT).
  - Memorandum: Official external budget support (grants, millions of SDRs): 0 (Mar-21), 9 (Jun-21), 9 (Sep-21), 54 (Dec-21), 54 (Mar-22).
  - Program exchange rate (MGA/SDR) used: 5,509 (Mar-21 through Mar-22).
- Key structural benchmarks and timelines:
  - Collect at least MGA 80 billion of tax arrears in the first half of 2021. (Jun-21)
  - Adopt implementation decree for law on illicit asset recovery and set up agency with dedicated budget in 2021 revised Budget. (Jun-21)
  - Increase beneficiaries of cash transfer programs from 483,428 (Dec-2020) to 540,000 (Sep-21) and to 590,000 by Dec-2021.
  - Finalize and publish public investment manual (Dec-21).
  - Publish independent third-party audit of COVID-19 spending (Dec-21).
  - Continuous SBs: notify IMF/World Bank of any JIRAMA supplier transfers within one week; keep government liability to oil distributors below MGA 100 billion.

### Risks, contingency planning and capacity development
- Risks to outlook (tilted downward):
  - Conjunctural: prolonged COVID-19 impacts, disrupted trade and global value chains, delayed tourism recovery, rising protectionism, natural disasters.
  - Domestic: larger than anticipated transfers to SOEs; stalls in anti-corruption and governance reforms; weak investment implementation capacity.
  - Political: presidential elections in 2023 may affect outlook.
  - Upside: faster global recovery or materialization of large-scale energy or extractive projects.
- Contingency measures:
  - In adverse scenario, revise macro-framework and fiscal program by reducing lower-priority investments while preserving social spending; seek higher external support.
- Capacity development (CD) priorities:
  - Strengthen tax policy and administration, PFM, monetary and financial sector oversight, and implement anti-corruption legal framework (revised CD strategy discussed with authorities).

### Staff appraisal and closing priorities
- Rationale for ECF:
  - Real GDP contracted by more than 4 percent in 2020; large decline in tax revenue and deterioration of external balances due to collapse in tourism receipts.
  - Pandemic threatens reversal of progress in raising per capita income and reducing poverty and slowed reforms from the 2016-2020 ECF arrangement.
  - Staff supports authorities’ request for the 40-month ECF arrangement with access equivalent to 90 percent of quota (SDR 219.96 million).
- Program priorities to restore resilience and inclusive growth:
  - Rebuild and strengthen fiscal space for investment and social spending;
  - Resume and advance structural reforms including governance and anti-corruption;
  - Strengthen stability and financial sector development and transition monetary framework toward interest rate targeting by 2023.
- Governance and transparency:
  - Emphasis on operationalizing anti-corruption institutions, budget transparency, PFM modernization, and disclosure of COVID-19 related spending and procurement.

*Source: IMF staff report excerpt — 1mdgea2021001.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- The COVID-19 pandemic reversed recent progress in per capita income and poverty reduction in Madagascar.
- Real GDP is estimated to have contracted by 4.2 percent in 2020.
- Two RCF disbursements approved on April 3 and July 30 (totaling 2.4 percent of GDP) helped close short-term financing gaps, supported mitigation measures, and catalyzed donor budget support.
- The authorities seek renewed Fund assistance to address protracted balance of payments needs aggravated by the pandemic and to support the Plan Emergence Madagascar (PEM) reform agenda.

### Program objectives and modalities
- Authorities requested an Extended Credit Facility (ECF) arrangement to:
  - support the recovery from the pandemic;
  - anchor reform implementation; and
  - catalyze aid commitments.
- Staff proposal:
  - 40-month ECF arrangement with access of 90 percent of quota (SDR 219.96 million);
  - semi-annual reviews.
- Financing under the arrangement will help address balance of payment needs estimated at about $893 million over 2021–24.
- Based on the program baseline:
  - Madagascar’s risk of debt distress remains moderate for both external and overall public debt;
  - capacity to repay the Fund is adequate.

### Program policies and priorities
- Program design accounts for Madagascar’s fragilities, including high exposure to climate-related shocks, and will focus on:
  - mitigating the economic impact of the pandemic;
  - maintaining macroeconomic stability; and
  - reviving the reform momentum to raise and sustain growth and reduce poverty.
- Key policy pillars:
  - rebuild and strengthen fiscal space to allow for investment and social spending through revenue mobilization and improving quality of spending;
  - resume and advance structural reform, anti-corruption, and governance efforts;
  - strengthen the monetary policy framework and support financial stability while maintaining price stability with exchange rate flexibility.
- Capacity development is identified as crucial for program success.

### Recent economic developments (key findings)
- Real GDP contracted by 4.2 percent in 2020—9 percentage points lower than the January 2020 Article IV projection.
- Sectoral and external impacts:
  - tourism receipts collapsed from 5.1 percent of GDP in 2019 to 1.0 percent in 2020;
  - the country’s largest mine closed in mid-April 2020;
  - free trade zones’ exports showed some resilience later in 2020.
- Inflation remained subdued at 4.2 percent y-o-y in December 2020.
- Current account deficit widened to an estimated 6.5 percent of GDP in 2020.
- Fiscal developments:
  - tax revenue fell by 1.4 percentage points of GDP y-o-y in 2020 to 8.9 percent of GDP;
  - reduction in customs revenue was -21.8 percent, and domestic taxes were -5.3 percent (y-o-y);
  - domestic primary balance recorded a deficit of 2.6 percent of GDP in 2020, after a small surplus in 2019.
- Monetary and external sector:
  - central bank foreign currency net sales reached US$156 million in 2020 (three times more than 2019);
  - Ariary depreciation was about 5 and 16 percent vis-à-vis the US$ and the euro, respectively;
  - international reserves reached SDR 1337.8 million at end-2020 or 5.9 months of 2020 imports (4.7 months of 2019 imports).
- Two RCF disbursements totaling 2.4 percent of GDP helped catalyze about 2 percent of GDP in budget support in 2020; part of approved budget support in the form of loans required parliamentary approval obtained in December 2020 and is expected to be disbursed in early 2021.

### Policy implementation, reform agenda, and safeguards
- The ECF will prioritize well-targeted mitigation measures in the short term given uncertainties around new waves, variants, and vaccine implementation.
- The ECF will support a renewed reform momentum to:
  - maintain macroeconomic stability;
  - create fiscal space for investment in physical and human capital; and
  - resume structural reforms aligned with the PEM priorities (governance, human capital—education, health, housing—and accelerating growth via agriculture, tourism, and diversification).
- Staff supports the authorities’ request for an ECF arrangement, noting that the Letter of Intent and Memorandum of Economic and Financial Policies demonstrate program ownership and appropriate policies and safeguards.
- Given the highly uncertain global environment and substantial downside risks, contingency plans have been discussed with the authorities.

*Source: EXECUTIVE SUMMARY (1mdgea2021001).*

### 11.      Priorities will focus on three key areas. First, rebuilding and strengthening fiscal space

### 11.      Priorities will focus on three key areas. First, rebuilding and strengthening fiscal space

### A. Framework to Support Recovery and Preserve Macroeconomic Stability — Supporting Recovery and Mitigation Efforts
- Priorities: rebuild and strengthen fiscal space for capital investment and social spending; resume and advance structural reforms (mitigate fiscal and climate-related risks, improve business environment, strengthen governance and anti-corruption); strengthen stability and financial sector development (prudent and AML/CFT supervision, enhance monetary framework).
- Fiscal support needed to mitigate pandemic impacts: preparedness and detection (including boosting testing), safeguarding businesses, protecting workers, and targeted social protection programs (MEFP, ¶26).
- Authorities’ 2021 initial budget law (LFI) assumptions and staff concerns:
  - Growth rebound to 4.5 percent in 2021 assumed to raise net tax revenue-to-GDP to 10.9 percent (staff concerned about realism).
  - Planned domestically financed spending about 13 percent of GDP in 2021.
  - Wage bill of 5.5 percent of GDP and domestic public investment of 3.5 percent of GDP in 2021 LFI.
  - LFI assumes reduction of domestic primary deficit from 2.7 percent of GDP in 2020 to 1.3 percent in 2021.
- Revised budget law (LFR) to be prepared in May 2021:
  - 2021 LFR will include revised revenue assumptions and target a primary deficit of 2.5 percent of GDP (in line with program objectives).
  - Authorities committed to protecting social priority spending and identifying lower priority spending for reductions if needed.
- Program medium-term macro-framework (ECF-supported):
  - Real GDP path:
    - Contraction in 2020: an estimated 4.2 percent.
    - Recovery partially in 2021: 3.2 percent.
    - Peak at 5.4 percent in 2023.
    - Leveling at 5 percent in 2023 and stabilizing around 5 percent in outer years.
    - Output expected to surpass its 2019 level in 2022 but remain well below pre-shock levels through the medium-term.
  - Investment: expected to rebound and pick up in 2023 reflecting public investment scaling-up and gradual private investment increase.
  - Tax revenue: would gradually increase by about 1 percent of GDP per year over 2021-23.
  - Fiscal anchor: domestic primary balance excluding budget grants planned to be in deficit by about 2.5 percent of GDP in 2021 before turning positive in 2023.
  - Current account deficit: expected to stabilize at around 4 percent of GDP.
  - Gross official reserves: increase in nominal terms and converge to about 5 months of imports (within adequacy range, Annex III).
  - Risks to reserves path: faster-than-forecasted government spending with external financing shortfall; large terms-of-trade shocks; natural disasters.
- External financing and debt outlook:
  - External financing primarily concessional terms and grants to preserve debt sustainability.
  - Public debt could reach about 49 percent of GDP in 2025 (higher than 46 percent of GDP envisaged in January 2020 Article IV).
  - New DSA: Madagascar remains at moderate risk of external debt distress and moderate risk of overall public debt distress.
  - Performance criterion: ceiling on newly contracted external public debt of $US 800 million in present value terms to limit non-concessional borrowing and support debt sustainability.
- Risks to outlook (tilted downward, Annex IV):
  - Conjunctural risks: prolonged COVID-19 impacts, disrupted trade and global value chains, delayed tourism recovery, rising protectionism costs, social unrest, natural disasters.
  - Domestic risks: larger than anticipated transfers to SOEs reducing priority spending; stalls/reversals in anti-corruption and governance reforms; weak investment implementation capacity.
  - Political risk: presidential elections in 2023 may affect the outlook.
  - Upside risks: faster global recovery or materialization of large-scale energy or extractive projects.

### B. Advancing the Reform Agenda to Raise Sustainable and Inclusive Growth — Rebuilding and Strengthening Fiscal Space for Much Needed Social Spending and Investment
- Revenue mobilization and administration:
  - Need for ambitious but credible medium-term revenue mobilization plans supported by comprehensive revenue administration and collection strategy (MEFP, ¶20-23).
  - Priorities identified by FAD TA missions (Selected Issues, SM/20/20): revive tax control operations; improve collection of outstanding tax payments (SB for the first half of 2021); strengthen reliability of taxpayer identification; reduce irregularities in customs clearance; intensify control of companies benefitting from free-zone agreements.
  - Generalization of VAT on public procurement expected to yield 0.4 percent of GDP in 2021.
  - Tax reforms under consideration for the 2022 budget law include potential changes regarding VAT and excise taxes, and revision/streamlining of exemptions.
  - Two separate indicative targets (ITs) included for floors on domestic and custom revenue.
- Limiting non-priority spending to increase fiscal space:
  - Strengthen planning and monitoring of the wage bill (MEFP, ¶24).
  - Design and implement reforms to contain civil servants’ pension fund deficit (plan expected in first half of 2021, MEFP, ¶25).
  - Mitigate fiscal risks related to SOEs—including JIRAMA and Air Madagascar—and fuel pricing.
- Social spending:
  - Program seeks higher spending in social sectors; past substantial under-execution continued in 2020 despite the pandemic.
  - Social spending IT under previous ECF repeatedly missed due to weaknesses in planning, execution, transparent monitoring and reporting.
  - Budget of four social ministries increased by more than 10 percent in the 2021 LFR.
  - New ECF strengthens social spending monitoring and conditionality: an IT (floor for domestically financed social spending), memorandum items to improve monitoring, and structural benchmarks (Box 2 and MEFP, ¶26).
- Public investment scaling-up:
  - Requires better prioritization and execution (MEFP, ¶27): prioritize projects considering implementation and absorptive capacity, proper costing.
  - Government implementing FAD TA recommendations, including finalization of a public investment manual (SB).
  - Continued reliance primarily on external grants and concessional financing to keep debt sustainable.
- Social spending specifics (Box 2 highlights):
  - ECF IT definition for social spending: domestically financed spending, excluding salaries, by four ministries (education, health, water and sanitation, population and social protection).
  - Under IT definition, social spending remained below 1 percent of GDP in recent years; adding salaries it remains below 3 percent of GDP.
  - Broader definition: social spending in 2020 could be 4.7 percent of GDP including salaries and externally financed investments in the four social ministries and social spending in non-social ministries (examples: cash transfers MGA 204 billion, 0.4 percent of GDP; post-disaster emergency aid MGA 73 billion; electricity bill payments grace periods MGA 75 billion).
  - In 2021, externally financed social projects in social and non-social ministries projected to reach 1.1 and 0.9 percent of GDP respectively; broader social spending envelope could reach up to 5.1 percent of GDP (Figure 4).
  - Measures under new ECF: support for better planning, execution, and transparent monitoring and reporting of social spending; publication of quarterly budget execution reports with specific information on social spending execution is conditionality.
- Public financial management (PFM) and fiscal risks:
  - Revive PFM reform agenda; implement 2018-2026 Strategic Plan of Modernization; Inter-ministerial Steering Committee reorganized; PEFA assessment planned for first half of 2021.
  - Priorities: improve efficiency and transparency of public expenditure chain, active cash management toward Single Treasury Account, strengthened controls to fight corruption.
  - Two draft laws planned: treasury management and status of public accountants.
- Fuel pricing risk:
  - Immediate fiscal risk from fuel pricing contained but needs addressing (MEFP, ¶31).
  - Liability to oil distributors peaked at 0.4 percent of GDP in April 2020; eliminated at end-January 2021 due to lower oil prices and maintained pump prices.
  - Recent oil price rebound may reverse situation; authorities committed to prepare a plan towards a fuel pricing mechanism during first six months of 2021 and discuss with IMF staff.
  - In the meantime pump prices will remain administrated and liability will be kept below MGA 100 billion, or less than 0.2 percent of GDP (continuous SB).
- Climate-related fiscal risk and disaster risk management (Box 3):
  - Madagascar highly vulnerable to climate-related shocks and natural disasters.
  - Climate-related disasters estimated to cost 1 percent of GDP per year on average; severe disasters (e.g., cyclone Enawo 2017) can result in damage equivalent to 4 percent of GDP.
  - Drought in southern Madagascar doubled number in need of humanitarian assistance to more than 1.3 million in one year.
  - SNGRC 2016-2030 aims to build ex-ante resilience and effective ex-post recovery and mitigation via legal, regulatory, technical and financial capacity strengthening; PEM includes resilience priorities.
  - IMF support under new ECF to:
    - Incorporate climate change modeling in fiscal risk assessment and evaluate resources needed for mitigation plans; DSA contains a stress test related to natural disasters.
    - Encourage public policies for prevention and management of natural hazards and mobilization of domestic resources.
    - Continue to catalyze donor support; Madagascar has benefitted from external programs including the Disaster Risk Management Development Policy Operation with CAT-DDO (US$50 million World Bank joint operation and Agence Française support noted).

*Source: REPUBLIC OF MADAGASCAR, INTERNATIONAL MONETARY FUND*

### Box 3. Madagascar: Climate Change and Disaster Risk Management (concluded)

### Box 3. Madagascar: Climate Change and Disaster Risk Management (concluded)

### External support and disaster resilience projects
- Agence Française de Développement (AFD) provided Euro 25 million to strengthen the national framework for disaster risk management, build financial resilience to disasters, and incorporate disaster risk and climate change in territorial and urban planning.
- The World Bank supports disaster risk management, including a US$75 million Integrated Urban Development and Resilience Project for Antananarivo to strengthen flood protection infrastructure and urban resilience in the poorest parts of the capital.
- The AFD is implementing several urban programs throughout the country, with additional co-financing from the European Investment Bank and the European Union.
- Madagascar joined the Pan-African Insurance Scheme and received a US$2.1 million compensation in July 2020 for the ongoing drought crisis in the south of the country.

### Fiscal risks from state-owned enterprises (SOEs)
- Reducing fiscal risks related to JIRAMA and Air Madagascar remains essential (MEFP, ¶32-33).
- JIRAMA:
  - Worsened during the pandemic despite 1.4 percent of GDP in operational subsidies and transfers to repay arrears to suppliers in 2020.
  - Followed the ad hoc arrears clearance of 1 percent of GDP for arrears that occurred in 2019.
  - Authorities committed to clearly identify the amount of transfers for 2021 in the revised budget law (LFR) and to take corrective measures to ensure that total transfers remain limited to MGA 400 billion (about 0.7 percent of GDP).
  - World Bank–supported strategy includes clearing arrears to suppliers and renegotiating contracts on more favorable terms.
  - A strategy about how to clear the stock of arrears is being finalized by the company (expected by June 2021). After finalization, an arrears clearance plan will be agreed with the World Bank, including clearly identified financing. Details on payments of any government transfers to JIRAMA will be disclosed (continuous SB).
- Air Madagascar:
  - Financial situation deteriorated, with a debt reaching US$55 million.
  - A business plan is being developed by external auditors to assess short-term financial viability and outline a medium-term recovery plan (MEFP, ¶33).
  - Authorities committed to avoid any further public financing until the plan is finalized.

### Anti-corruption legal framework and enforcement
- Effective enforcement of the anti-corruption legal framework is crucial (MEFP, ¶37).
- Achievements and commitments:
  - Setting up an anticorruption legal framework in line with international standards during the previous ECF was a major achievement.
  - Authorities committed to allocate sufficient human, financial, and material resources to enforcement and operationalization of institutions in charge of the fight against corruption, in line with the national anti-corruption strategy updated in 2020.
  - Next steps include operationalization of the agency in charge of illicit assets’ recovery (implementation decree and allocation of a dedicated budget in the 2021 LFR is an SB for June 2021) and issuance of implementing decrees for the 2018 AML/CFT law.
  - Authorities reiterated commitment to preserve the mandate and power of the anti-corruption courts and have sought IMF technical advice on a draft amendment law currently under consideration.

### Monetary policy stance and liquidity management
- The BFM policy stance is appropriate and should continue to actively manage bank liquidity, while maintaining inflation stability.
- Objectives and tools:
  - Aim at maintaining single digit inflation through money market and foreign exchange operations.
  - Balance between exchange rate volatility and tensions on the interbank foreign exchange market (MID), while maintaining an adequate international reserve position—supported by a performance criterion with a floor on net foreign assets.
  - Policy stance: active bank liquidity management relying on quantitative instruments and opportunistic FX interventions aimed at building up reserve buffers (market conditions permitting).
  - BFM ready to continue liquidity support as needed in the short-term.

### Improving monetary transmission and FX market functioning
- Progress toward improving the interest rate channel of monetary policy transmission with a target of migrating to the interest rate targeting framework in 2023.
  - Recent measures: implementing an interest rate corridor system, establishing overnight deposit and lending facilities, and aligning interbank market rates with maturities of operations, risks and overall liquidity.
  - BFM’s objective: transition to interest rate targeting by 2023, with support from Fund TA (Annex V).
- Foreign exchange market (MID) remains shallow and volatile.
  - BFM interventions in response to COVID-induced supply and demand tensions and large fluctuations in the EUR-USD exchange rate.
  - Planned reforms:
    - Passing the FX Law, drafted with IMF TA and expected to be adopted in 2021, to clarify division of responsibilities between the Ministry of Finance and the BFM.
    - Improved monitoring and regulation of foreign currency accounts.
    - Higher mandatory reserve rates for foreign currency deposits in collaboration with MEF (part of a strategy to increase currency offers and competition on the MID).
    - Improved MID communications (Fund TA requested).
  - Post-FX Law: BFM intends to issue implementing decrees, develop a new plan to phase out the surrender requirement on export proceeds, and consider appropriate capital flow management measures as part of an integrated approach to liberalize the capital account and FX market reforms in line with the IMF’s Institutional View and market stability.

### Gold purchase program and safeguard concerns
- BFM engaged in a program to buy and store unrefined gold from local operators, intending eventual purification and inclusion in foreign reserves—raising safeguard concerns (MEFP, ¶42-43).
  - Government temporarily suspended exports of gold to formalize the sector and respond to evidence of large illicit exports.
  - The BFM and the Ministry of Mine and Strategic Resources launched a five-year program for the BFM to buy and store unrefined gold, with intent to refine and include it in reserves.
  - Program is not yet anchored in the BFM’s investment or reserves management strategy and is of a quasi-fiscal nature, potentially undermining BFM autonomy and credibility.
  - Authorities agreed to remove the export ban on gold by end-July 2021.
  - BFM will reengage with the government by September 2021 on its role in the gold purchase and refining program with a plan to find alternative arrangements.
  - In the interim, BFM requested Fund TA to advise on best alternatives to diversify reserves.

### Financial inclusion, supervision, and legal reforms
- Efforts to improve financial inclusion need to resume, with strengthened, risk-based prudential and AML/CFT supervision, in line with the 2018-22 National Strategy.
- Rationale and actions:
  - Signs of weakening in the financial sector warrant strengthened, risk-based supervision, notably for microfinance institutions (Annex VI).
  - Banking Law adopted in August 2020 (published on March 4, 2021) and the Financial Stability Law (due for examination by the Council of Government and the Council of Ministers before submission to Parliament in its session starting in May) are expected to strengthen the financial sector and improve financial inclusion.

### Program modalities, monitoring, and financing
- Program monitoring:
  - Based on semi-annual reviews (MEFP, Tables 1 and 2), with Quantitative Performance Criteria (QPCs) at end-Q2 and end-Q4, and Indicative Targets (ITs) at end-Q1 and end-Q3.
  - QPCs on: (i) domestic primary balance excluding budget grants; (ii) external public borrowing in present value terms (ceiling); (iii) net foreign assets of the BFM (floor); (iv) net domestic assets of the BFM (ceiling); and (v) external payment arrears (zero ceiling).
  - ITs set on floors for social spending, domestic tax, and customs revenue. Structural benchmarks will evaluate reform progress.
- Financing needs and support:
  - Financing gap before budget support and IMF financing estimated at US$893 million over 2021-2024 (Text table 1), declining from 2.8 percent of GDP in 2021 to 0.7 percent in 2024.
  - Text Table 1 (US$ million; In percent of GDP) excerpts:
    - Financing gap under program baseline (1): 2021 = 415; 2022 = 171; 2023 = 172; 2024 = 136.
    - (In percent of GDP): 2021 = 2.8; 2022 = 1.1; 2023 = 1.0; 2024 = 0.7.
    - Expected budget support (2): 2021 = 273; 2022 = 100; 2023 = 100; 2024 = 100.
      - World Bank: 185 (2021)
      - African Development Bank: 44 (2021)
      - European Union: 25 (2021)
      - Agence Francaise de Developpement: 19 (2021)
    - Residual Financing gap (1-2): 2021 = 142; 2022 = 72; 2023 = 72; 2024 = 36.
    - IMF financing (90 percent of quota): 2021 = 142; 2022 = 72; 2023 = 72; 2024 = 36.
    - (In percent of GDP): 2021 = 1.0; 2022 = 0.4; 2023 = 0.4; 2024 = 0.2.
  - Access for the ECF arrangement proposed at 90 percent of quota (SDR 219.96 million), with total access to PRGT resources remaining below 300 percent of quota at any point of the program.
  - First two disbursements proposed to be redirected to the budget to ensure full financing of the 2021 budget under the program baseline amid limited margin for additional domestic bank financing.
  - IMF disbursements and donors’ budget support expected to fill one-third and two-thirds, respectively, of the financing gap over the program period.
  - Financing assurances in place for the first year; authorities engaged with key donors (World Bank, EU, AfDB, AFD) to secure expected support envelope for following years.

### Contingency measures and capacity development
- Given high uncertainty, contingency measures discussed (MEFP, ¶18):
  - In an adverse scenario (lower growth and government revenue), macro framework and fiscal program would be revised by reducing lower-priority investments while preserving social spending; higher external support may be difficult to avoid.
- Capacity development:
  - A revised CD strategy discussed with authorities (Annex VII), aligned with program objectives and priorities: strengthening tax policy and administration, PFM, monetary and financial sector oversight, and implementing the anti-corruption legal framework.

### Debt sustainability, repayment capacity, and safeguards
- Debt sustainability:
  - New DSA based on program baseline: Madagascar remains at moderate risk of external debt distress and moderate risk of overall debt distress.
  - No external debt thresholds breached under the baseline, but an export shock leads to a breach in the PV of debt-to-exports and debt service thresholds.
  - Distance to risk thresholds under the baseline suggests some space to absorb additional shocks.
  - Total public debt is below the benchmark under the baseline, but a growth shock drives the PV of debt-to-GDP toward the benchmark at the end of the period, without breaching it.
  - Liquidity pressures may materialize: debt-service-to-revenue ratio could near or exceed 70 percent in the near term under both baseline and shocks.
  - Securing additional external concessional financing and developing domestic debt market would help reduce debt service levels.
- Capacity to repay the Fund:
  - Adequate. Annual repayments based on existing and prospective drawings peak in 2027 at 0.8 percent of GDP, 5.6 percent of government revenue and 2.7 percent of exports.
  - Existing and prospective Fund credit will peak at 6.2 percent of GDP and 60.6 percent of government revenue at the outset of the program, then decline.
- Safeguards assessment:
  - Broad improvements found.
  - BFM maintains strong external audit arrangements; audit opinion on its 2019 financial statements is unmodified (clean).
  - Governance and oversight arrangements well-established following BFM Law amendments in 2016.
  - Central bank working toward full implementation of International Financial Reporting Standards in the 2020 financial statements.
  - Need to strengthen internal audit function and phase out BFM participation in the gold purchase and refining program outside the core mandate.
  - Memorandum of Understanding between BFM and government will be updated as first ECF disbursements are redirected to the Treasury.

### Staff appraisal and program priorities
- COVID-19 impact and rationale for ECF:
  - Real GDP contracted by more than 4 percent in 2020, with a large decline in tax revenue and deterioration of external balances largely due to a collapse in tourism receipts.
  - Pandemic threatens reversal of progress in raising per capita income and reducing poverty and slowed reforms from the 2016-2020 ECF arrangement.
  - Authorities requested a new ECF arrangement after two RCF disbursements in 2020 to address protracted balance of payments needs and support the Plan Emergence Madagascar (PEM).
- Program priorities aligned with government reform agenda; capacity development critical.
  - Priorities: rebuild and strengthen fiscal space for investment and social spending; resume and advance structural reforms; strengthen governance and the anti-corruption framework; strengthen stability and financial sector development.
- Macroeconomic framework:
  - Based on gradual recovery from the pandemic: growth expected to recover and accelerate, supported by public and private investment and a recovery of exports; tax revenue would gradually increase; gross official reserves converge to a level consistent with reserve adequacy.
- Fiscal policy focus:
  - Creating additional fiscal space requires raising government revenue and containing fiscal risks from natural disasters, fuel pricing, and transfers to SOEs (notably JIRAMA).
  - On JIRAMA: implement company’s financial recovery plan supported by the World Bank, finalize an arrears repayment strategy, and avoid ad hoc government transfers.
- Social spending and transparency:
  - Program pays particular attention to higher social spending and improved efficiency and execution through strengthened planning, execution, and monitoring.
  - Authorities intend to continue progress on budget transparency beyond COVID-19-related spending, strengthen execution monitoring and reporting to improve accountability and social outcomes.
- Governance:
  - Effective enforcement of the anti-corruption legal framework and governance reforms is crucial and would help attract higher private investment.
  - Authorities committed to enact application decrees and allocate sufficient resources for implementation.

*Source: IMF staff report excerpt — Box 3. Madagascar: Climate Change and Disaster Risk Management (concluded).*

### 47.      The continued progress in improving the monetary framework and strengthening

### 1mdgea2021001 - 47.      The continued progress in improving the monetary framework and strengthening

### Progress in institutional and policy reforms
- Continued progress in improving the monetary framework and strengthening the financial sector is welcome.
- Implementation underway of the "new banking law and financial stability law".
- Continuation of structural reforms undertaken at the BFM, including those toward an "interest rate targeting framework in 2023".

### Expected impacts and objectives
- Reforms are instrumental to "strengthen the monetary policy framework".
- Reforms are instrumental to "boost financial inclusion".

*REPUBLIC OF MADAGASCAR INTERNATIONAL MONETARY FUND 23*

### 48.      Based on the protracted balance of payment need and policy commitments, staff

### 1mdgea2021001 - 48.      Based on the protracted balance of payment need and policy commitments, staff

### Program support and IMF financing
- Staff supports the authorities’ request for a 40 month-arrangement under the ECF, with access equivalent to 90 percent of Madagascar’s quota (SDR 219.96 million).
- Table of proposed schedule of disbursements and timing of ECF arrangement reviews:
  - March 29, 2021: 20.0 percent of quota; Disbursement 48.88 (SDR millions)
  - November 15, 2021: 20.0 percent of quota; Disbursement 48.88
  - May 16, 2022: 10.0 percent of quota; Disbursement 24.44
  - November 15, 2022: 10.0 percent of quota; Disbursement 24.44
  - May 15, 2023: 10.0 percent of quota; Disbursement 24.44
  - November 15, 2023: 10.0 percent of quota; Disbursement 24.44
  - May 15, 2024: 10.0 percent of quota; Disbursement 24.44
  - Total: 90.0 percent of quota; SDR 219.96 million

### Real sector developments (Figure 2; Table 2)
- Long-run trend and COVID-19 impact:
  - Growth in Madagascar has been insufficient to offset population growth; the COVID-19 pandemic has reversed recent improvements.
- Demand-side drivers:
  - In recent years, net exports have been a key driver of growth.
- Supply-side drivers:
  - Growth is driven by the tertiary sector and a recent rebound in agriculture.
- Investment and tourism:
  - Investment is still below 2008 levels.
  - The pandemic brought an end to the tourism sector’s recovery (Tourism: Total visitors per year plotted).
- Real GDP projections (Table 2, Real GDP at market prices):
  - 2018: 3.2
  - 2019: 4.4
  - 2020: 5.2
  - 2021: -4.2
  - 2022: 5.4
  - 2023: 3.2
  - 2024: 5.0
  - 2025: 5.4
  - 2026: 5.2
  - 2027–2029: 5.0, 5.0, 5.0 (as listed)

### Inflation and external developments (Figure 3; Table 5)
- Inflation:
  - After peaking in December 2017, inflation has declined gradually.
  - Consumer prices (end of period projections, Table 1):
    - 2021: 6.9
    - 2022: 4.0
    - 2023: 6.2
    - 2024: 4.6
    - 2025: 5.9
    - 2026: 5.4
- Current account and reserves:
  - The current account deficit widened in 2020 due to the collapse in tourism receipts and is expected to decline slowly in the medium term.
  - Gross official reserves (millions of SDRs, Table 5 / Table 1 memoranda):
    - 2018: 1,221
    - 2019: 1,196
    - 2020: 1,390
    - 2021: 1,338
    - 2022: 1,552
    - 2023: 1,449
    - 2024: 1,540
    - 2025: 1,680
    - 2026: 1,793
    - 2027: 1,940
    - 2028: 2,057
  - Months of imports of goods and nonfactor services: 4.3 (2018), 4.2 (2019), 4.4 (2020), 5.9 (2021), and projected 4.5–5.0 range through 2026.
- Exports and commodities:
  - Vanilla prices and export revenue have dropped swiftly since end-2019; expected to slowly recover.
  - Price of Vanilla (US$ per kilo) and Vanilla Export Revenue (percent GDP) plotted; exports of goods, f.o.b. (Table 5):
    - 2018: 2,143
    - 2019: 1,891
    - 2020: 2,118
    - 2021: 1,387
    - 2022: 2,417
    - 2023: 1,673
    - 2024: 1,963
    - 2025: 2,243
    - 2026: 2,418

### Government revenue and spending (Figure 4; Tables 1, 3a, 3b)
- Revenue and tax performance:
  - After increasing between 2016 and 2019, tax revenue has been hit hard by the pandemic shock.
  - Total revenue (percent of GDP, Table 1):
    - 2018: 10.4
    - 2019: 10.5
    - 2020: 11.2
    - 2021: 9.2
    - 2022: 11.7
    - 2023: 10.3
    - 2024: 11.4
    - 2025: 12.2
    - 2026: 12.8
- Wage bill and social spending:
  - Due to the pandemic and the associated drop in tax revenue, the wage bill jumped to more than 60 percent of tax revenue in 2020.
  - Social Spending (percent of GDP, Table 1):
    - 2015–2020 plotted; 2020 shows low levels (0.0–1.5 range in figures).
- Fiscal outcomes and projections (Table 3b, percent of GDP):
  - Overall balance (commitment basis):
    - 2018: -1.3
    - 2019: -1.4
    - 2020: -2.7
    - 2021: -4.2
    - 2022: -4.2
    - 2023: -5.8
    - 2024: -4.8
    - 2025: -4.3
    - 2026: -3.7
  - Total expenditure and lending minus repayments (percent of GDP):
    - 2018: 14.1
    - 2019: 14.9
    - 2020: 16.4
    - 2021: 15.1
    - 2022: 17.3
    - 2023: 18.3
    - 2024: 18.1
    - 2025: 17.8
    - 2026: 17.4
  - Capital expenditure (percent of GDP):
    - 2018: 4.9
    - 2019: 5.6
    - 2020: 7.6
    - 2021: 5.6
    - 2022: 8.3
    - 2023: 7.6
    - 2024: 8.6
    - 2025: 8.6
    - 2026: 8.0
- Fiscal financing:
  - Total financing (percent of GDP, Table 3b):
    - 2018: 2.0
    - 2019: 1.3
    - 2020: 2.7
    - 2021: 2.9
    - 2022: 3.8
    - 2023: 6.6
    - 2024: 4.1
    - 2025: 3.9
    - 2026: 3.5

### Monetary developments (Figure 5; Table 6)
- Money and credit drivers:
  - Broad money growth was driven by the accumulation of net foreign assets and credit to the private sector.
  - Base money growth pre-pandemic was driven by net foreign assets.
- Key monetary aggregates (Table 1 / Table 6):
  - Reserve money (percent change in Table 1 projections):
    - 2021: 13.0
    - 2022: -4.4
    - 2023: 12.2
    - 2024: 10.8
    - 2025: 11.4
    - 2026: 17.1
  - Broad money (M3) (percent change, Table 1 projections):
    - 2021: 11.2
    - 2022: 7.3
    - 2023: 16.2
    - 2024: 12.1
    - 2025: 14.9
    - 2026: 21.8
- Excess bank reserves:
  - Excess bank reserves, usually volatile with strong seasonal effects related to the vanilla cycle, are declining and are concentrated in a few banks (distribution plotted).

### Financial sector developments (Figure 6; Tables 7, 8)
- Credit and NPLs:
  - Despite the pandemic, credit has remained at a reasonable level so far.
  - Non-performing loans significantly declined since their peak in late 2013, but are expected to increase.
  - Non-performing loans to total gross loans (percent, 4-quarter average, Figure 6):
    - 2018–2020 shown with 2020 Dec at 7.6 percent (Table 8: Non-performing loans to total gross loans: 7.3 in 2018, 6.8 in 2019, 7.1 in 2020).
- Bank soundness:
  - Overall, banks are well capitalized, liquid, and profitable, but heterogeneity among banks has been exacerbated by the pandemic.
  - Capital adequacy and liquidity indicators (Table 8):
    - Regulatory capital to risk-weighted assets: 13.7 (2018)
    - Capital to assets: 10.6 (2018), 10.1 (2019), 10.4 (2020 Dec)
    - Return on assets: 4.3 (2018), 4.1 (2019), 3.7 (2020)
    - Liquid assets to total assets: 36.9 (2018), 34.8 (2019), 37.2 (2020)
- Financial inclusion:
  - Mobile banking activities are rapidly increasing, but Madagascar lags most SSA low-income countries (Deposit and Money Market Accounts per 1000 adults, Mobile accounts plotted).

### Medium-term macroeconomic prospects (Figure 7; Table 1 & 2)
- Growth and public investment:
  - Growth is expected to be slightly above the Sub-Saharan average, sustained by scaled-up public investment.
  - Public capital expenditure projections (percent of GDP, Figure 7):
    - Domestically-financed and foreign-financed components shown increasing in 2022–2026.
- Financing of deficits and current account:
  - Despite the pandemic, public investment scaling-up is ongoing; deficits are mostly externally financed.
  - Investment-driven increases in the current-account deficit are expected to be financed by concessional borrowing.
  - Gross official reserves are expected to continue increasing despite the pandemic shock (refer to Gross official reserves series above).
- Projections (selected, Table 1 & Table 2):
  - Public debt (percent of GDP, Table 1):
    - 2018: 39.8
    - 2019: 37.8
    - 2020: 39.8
    - 2021: 43.6
    - 2022: 40.8
    - 2023: 46.9
    - 2024: 47.8
    - 2025: 48.6
    - 2026: 49.1
    - 2027: 49.3
    - 2028: 49.6

### Balance of payments and external financing (Table 5; Table 9; Table 11)
- Current account balances (Table 5, percent of GDP):
  - Current account balance (including grants):
    - 2018: 0.7
    - 2019: -2.2
    - 2020: -1.5
    - 2021: -6.5
    - 2022: -1.5
    - 2023: -5.0
    - 2024: -4.4
    - 2025: -4.3
    - 2026: -4.0
- External financing requirements and sources (Table 9, Millions of US Dollars):
  - Total financing requirements:
    - 2020: 1,281
    - 2021: 1,430
    - 2022: 1,447
    - 2023: 1,545
    - 2024: 1,503
  - Available financing (selected items):
    - Foreign direct and portfolio investment: 245 (2020), 327 (2021), 388 (2022), 484 (2023), 541 (2024)
    - Project support (total): 518 (2020), 689 (2021), 889 (2022), 890 (2023), 826 (2024)
    - IMF: RCF disbursements and ECF arrangement: 383 (2020), 142 (2021), 72 (2022), 72 (2023), 36 (2024)
  - Memorandum: Gross official reserves (Millions of US$) projected:
    - 2020: 1,863
    - 2021: 2,104
    - 2022: 2,254
    - 2023: 2,471
    - 2024: 2,647

### Indicators of capacity to repay the Fund (Table 12)
- Fund obligations based on existing and prospective credit (Millions of SDRs, Table 12):
  - Total obligations (existing and prospective credit, Millions of SDRs):
    - 2021: 12.3
    - 2022: 18.6
    - 2023: 37.3
    - 2024: 43.6
    - 2025: 65.4
    - 2026: 103.9
    - 2027: 114.8
    - 2028: 105.9
    - 2029: 106.2
    - 2030: 83.9
    - 2031: 39.2
    - 2032: 22.1
    - 2033: 12.3
    - 2034: 2.5
    - 2035: 0.1
- Outstanding IMF credit (Millions of SDRs, existing and prospective):
  - 2021: 632.4
  - 2022: 662.8
  - 2023: 674.5
  - 2024: 655.4
  - 2025: 590.1
  - 2026: 486.2
  - 2027: 371.5
  - 2028: 265.7
  - 2029: 159.6
  - 2030: 75.8
  - 2031: 36.7
  - 2032: 14.7
  - 2033: 2.4
  - 2034: 0.0
  - 2035: 0.0
- Ratios and memoranda (Table 12):
  - Outstanding IMF credit as percent of exports of goods and services:
    - 2021: 27.0
    - 2022: 23.1
    - 2023: 20.8
    - 2024: 18.7
    - 2025: 15.4
    - 2026: 11.9
  - Outstanding IMF credit as percent of government revenue:
    - 2021: 60.6
    - 2022: 53.4
    - 2023: 47.0
    - 2024: 40.9
    - 2025: 33.3
    - 2026: 25.1
  - Net use of IMF credit (millions of SDRs):
    - 2021: 85.5
    - 2022: 30.4
    - 2023: 11.7
    - 2024: -19.1
    - 2025: -65.3
    - 2026: -103.9

### Key statistics and memoranda (selected)
- GDP per capita (U.S. dollars, Table 1 memoranda):
  - 2018: 533
  - 2019: 540
  - 2020: 557
  - 2021: 502
  - 2022: 588
  - 2023: 521
  - 2024: 551
  - 2025: 582
  - 2026: 609
- Nominal GDP at market prices (billions of ariary, Table 1 memoranda):
  - 2018: 46,601
  - 2019: 52,533
  - 2020: 57,786
  - 2021: 52,413
  - 2022: 64,860
  - 2023: 57,024
  - 2024: 63,300
  - 2025: 70,701
  - 2026: 78,626

*International Monetary Fund. Source documents and figures as provided in the content unit.*

### Annex I. Madagascar’s Fragility and Challenges

### Annex I. Madagascar’s Fragility and Challenges

### Fragility overview and historical context
- The COVID-19 pandemic reversed recent improvements in growth outcomes since re-engagement with the international community after 2014.
- After return to constitutional order in 2014, Madagascar experienced a rebound in economic growth and relative stability during 2014-2019, including the first peaceful constitutional handover after the 2018 Presidential elections and Parliamentary elections in May 2019.
- Per capita income trend:
  - Per capita income has generally been on a declining trend since the 1960 independence.
  - Madagascar is one of only eight countries with lower real per capita income today than in 1960, and the only one among these not affected by armed conflict or war during this period.
  - Nominal GDP per capita just over US$500 in 2019.
  - Three-fourths of the population living on less than US$1.90 a day at purchasing power parity.

### Exposure to natural disasters and exogenous shocks
- Natural disaster and shock profile:
  - Average of three cyclones per year.
  - Several episodes of droughts and floods.
  - Almost a fifth of the population living in zones at high risk of cyclones or floods.
  - Natural disasters and other exogenous shocks (locust infestations, health epidemics) estimated to cost the economy about 1 percent of GDP per year, on average.
- Growth volatility:
  - Recurrent political crises and natural disasters have contributed to short-lived growth episodes and growth volatility (Figure 1 referenced).

### Dimensions and consequences of fragility (the “fragility trap”)
- Core causes:
  - Political instability, poor quality of institutions and governance, inconsistent economic policies.
- Consequences and manifestations:
  - Widespread and persistent poverty.
  - High income inequality.
  - Human capital indicators among the worst worldwide.
  - Lack and poor quality of basic infrastructure.
  - Lack of financial inclusion.
  - Systemic corruption.
  - Lack of sources of employment and income.
  - Challenging business environment.
- Fragility components listed (from Figure 2):
  - Recurrent Political & Social Crises; Natural Disasters.
  - Outcomes: Low & volatile economic growth; High poverty & inequality; Human capital deficiency; Lack & poor quality of infrastructure; Limited employment opportunities; Lack of financial inclusion; Challenging business environment; Weak institutions; Weak governance; Corruption; Inconsistent policies; Stop-go structural reforms.

### Sustainable Development Goals (SDGs) and social indicators
- SDG performance:
  - According to 2019 Africa SDG Index, Madagascar ranks 44 out of 52 countries in Africa.
  - Global rank of 158 out of 162 countries in the 2019 SDG Report.
  - Madagascar faces major or significant challenges in 15 out of the 17 goals in the 2019 SDG report (including poverty, access to electricity, access to clean water and sanitation, education, and health and well-being).
- Human development and public spending:
  - Development outcomes remain poor.
  - Spending on health and education is low (Figure 3 referenced).

### Fund and donor engagement
- Role of IMF and donors:
  - The 2016-2020 Fund-supported ECF helped strengthen macroeconomic framework, make progress in structural reforms, improve capacity, and catalyze additional donor support.
  - During the COVID-19 period, Fund emergency support through two RCF disbursements and other donors’ disbursements were instrumental.
  - Continued support of IFIs likely needed as Madagascar moves from emergency to recovery.

### Selected indicators (summary of Figure 3)
- Growth:
  - Growth improving particularly in the last few years but per capita income overall declining and lower than in 1960 (index and comparisons referenced).
- Human capital and poverty:
  - Expected years of school, Human capital index, Fraction of kids under 5 not stunted, Access to electricity, Poverty headcount ratio at $1.90 a day (2011 PPP) — Madagascar fares poorly relative to SSA and fragile state comparators (Figure 3 panels referenced).
- Public spending:
  - Education Expenditure and GDP Per Capita show Madagascar with low education expenditure (percent of GDP) relative to comparators.
- Governance and business climate:
  - Recent advancements in governance must continue; improvements in the business climate are needed.
  - Ease of Doing Business 2020 indicators and Worldwide Governance Indicators, 2020 (Voice and Accountability; Government effectiveness; Control of Corruption; Rule of Law; Political Stability; Regulatory Quality) show Madagascar below SSA and fragile state averages in several areas.

### Plan Emergence Madagascar (PEM), 2019–2023
- Objectives and pillars:
  - PEM builds on 13 ‘velirano’ (commitments) of the president and is based on social, economic, and environmental pillars with governance as cross-cutting theme.
  - Specific priorities include:
    - Improving governance: fight against corruption, improved security conditions, greater decentralization.
    - Strengthening human capital: focus on education, health, and employment.
    - Accelerating economic growth: improve business climate, ensure reliable water and electricity, develop agriculture for domestic consumption, boost tourism and digital economy, upgrade transport infrastructure, diversify industries, establish specific investment zones and strengthen public-private partnerships.
- Ambitious macroeconomic objectives and major projects:
  - Growth expected to accelerate to 8 percent in 2023, mainly driven by private investment reaching 27.3 percent of GDP.
  - Projects envisaged: construction of a new city in Antananarivo, renovation of the waterfront in Toamasina, dredging of the Pangalanes canal, construction of hydroelectric dams.
  - Tax revenue expected to reach 14 percent of GDP in 2023 to preserve fiscal sustainability despite higher social and public investment spending.
- Selected Economic Indicators - PEM (table values as provided):
  - Real GDP growth (in percent): 2020: -4.2; 2021: 4.4; 2022: 6.2; 2023: 8.0.
  - Tax revenue (in percent of GDP): 2020: 8.9; 2021: 9.8; 2022: 11.9; 2023: 14.0.
  - Total investment (in percent of GDP): 2020: 17.9; 2021: 22.6; 2022: 24.5; 2023: 30.4.
    - of which: public: 2020: 5.6; 2021: 9.1; 2022: 9.8; 2023: 9.9.
    - of which: private: 2020: 12.3; 2021: 13.5; 2022: 14.7; 2023: 20.5.
- Implementation constraints and risks:
  - Absorptive capacity constraints and mobilizing public and private resources are key challenges.
  - Over 2020-2021, estimated needs of public investment to realize the PEM are nearly double projected financing under the baseline: 41 percent vs 33.5 percent of GDP, respectively.
  - Recent under-execution of public investment, especially externally financed investment:
    - Planned externally financed investment at 5.5 and 4.6 percent of GDP in budget laws for 2019 and 2020, executed at 4 and 2.7 percent of GDP, respectively.
    - Domestically financed investment at 1.6 and 2.9 percent of GDP in 2019 and 2020, respectively.
  - A pre-COVID IMF DIG model indicated that increasing public investment efficiency to the SSA average could increase real GDP per capita growth by up to 0.7 percent in 2023 and 0.5 percent each year thereafter compared to the baseline as at end-2019.
- Recommendations to improve public investment efficiency (Selected Issues, SM/20/20):
  - Appropriately prioritizing projects: focus available funding on fully financing priority projects to ensure completion.
  - Monitoring financing progress against total project cost and duration; budget documents should reference specific PEM engagements and SDG targets for each major project.
  - Proactively monitoring implementation of major projects to identify delays and expedite actions.
  - Ensuring adequate funding to complete ongoing projects to avoid delays and cost overruns.

### Private investment and business climate
- Private investment:
  - Private investment peaked in the late 2000s (Ambatovy mine), declined to 17 percent in 2013, and was estimated at 9.5 percent for 2020.
- Business climate weaknesses (World Bank Doing Business 2020 highlights):
  - Low access to energy.
  - Limited access to credit.
  - Challenges in dealing with paperwork for construction and property registration.

### External sector assessment (Annex III)
- Overall assessment:
  - The external position of Madagascar in 2020 is assessed to have been moderately stronger than the levels implied by fundamentals and desirable policies based on the current account model, consistent with the March 2020 assessment.
  - The external position is expected to converge towards its norm as capital infrastructure spending increases and import demand rises.
  - International reserves are adequate.
- Policy responses recommended:
  - A flexible exchange rate remains appropriate to act as a shock absorber.
  - Continue use of the FXI algorithm to passively build reserves and avoid exceptional volatility.
  - Efforts to formalize the mining sector should continue, but:
    - The temporary ban on gold exports should be lifted.
    - Existing surrender requirement on export proceeds should be gradually phased out as the exchange market deepens (average monthly volume traded was US$16.1 million at end-December).
  - The gold purchase program for reserves diversification should be paused or discontinued until reconsidered with Fund TA and formally integrated into the BFM’s reserve management.
  - Complete revisions of a new mining code under stakeholder consultation and submit the foreign exchange law to Parliament.
- Current account background and 2020 developments:
  - 2019 current account deficit: 2.2 percent of GDP (behind declining vanilla prices and lower private transfers).
  - 2020 current account deficit: 6.5 percent of GDP due to COVID-19 impacts.
  - Exports and sectoral shocks in 2020:
    - Goods exports dropped 27 percent year-on-year.
    - Exports of nickel and cobalt were zero since May 2020 due to the Ambatovy mine shutdown.
    - Gold exports temporarily prohibited since 2020Q4 to improve formalization and repatriation; the export ban on gold is expected to be lifted by end-July 2021.
    - Vanilla prices dropped 23 percent since end-2019.
    - Tourism exports fell 81 percent y-o-y.
  - Exports expected to gradually recover; imports expected to rise with increased capital spending.
- Assessment and model estimates for 2020 (Table 1 values preserved):
  - CA-Actual: -6.5 (In Percent of GDP)
  - Cyclical contributions (from model): -0.9
  - Natural disasters and conflicts: -0.1
  - Cyclical tourism effect: -2.0
  - Cyclical oil effect: 0.3
  - Cyclical effect on other commodities (nickel, cobalt, and vanilla): -1.0
  - Adjusted CA: -2.7
  - CA Norm (from model)1/: -4.0
  - Adjusted CA Norm: -4.0
  - CA Gap: 1.2 (CA model); 0.4 (REER model)
    - o/w Policy gap: 1.1
  - Elasticity: -0.16
  - REER Gap (in percent): -7.5 (CA model); -2.5 (REER model)
  - Interpretation: The CA model suggests a current account gap of 1.2 percent of GDP in 2020 after including pandemic adjustors (tourism, oil imports, commodity exports). The cyclically adjusted CA is -2.7 percent of GDP in 2020 and the CA norm is -4.0 percent of GDP, indicating the external position is moderately stronger than implied by fundamentals and desirable policies. As imports increase with higher capital expenditures, the CA deficit should converge toward its norm.

_Annex I. Madagascar’s Fragility and Challenges (IMF)._

### 4. Background. The average REER depreciated in 2020 by 3.8 percent, extending a multi-year

### 1mdgea2021001 - 4. Background. The average REER depreciated in 2020 by 3.8 percent, extending a multi-year

### Exchange rate, REER, and assessment
- Background
  - The average REER depreciated in 2020 by 3.8 percent, extending a multi-year trend of REER depreciations (with the exception of 2017).
  - The 2020 REER depreciation has occurred due to a sizeable depreciation in the NEER and higher inflation in Madagascar compared to its trading partners.
  - The Ariary depreciated 5 percent against the USD and 16 percent against the Euro year-on-year at end-2020.
- Assessment
  - Based on the CA model, the estimated REER gap is -7.5 percent in 2020.
  - The REER model suggests a REER gap of -2.5 percent in 2020.
  - Both estimates point to undervaluation of the exchange rate.

### Foreign assets and liabilities: NIIP position and trajectory
- Background
  - The estimated net international investment position (NIIP) remains negative.
  - From 2006 to 2020, the NIIP decreased from -15 to -114 percent of GDP, linked to large private sector liabilities in the mining sector.
  - The NIIP has been broadly stable in recent years, although it deteriorated slightly in 2020 due to pandemic related developments (i.e., an increase in external public debt while GDP has contracted).
  - Note: There is a structural break in the series at 2018 due to a recent revision of private sector debt based on an INSTAT survey. Data from 2018 onwards reflects these new estimates.
- Assessment
  - The NIIP does not represent a critical vulnerability to external sustainability but is subject to risks.
  - Most (over 80 percent) of external public debt is held by official creditors, namely multilateral institutions (e.g., the World Bank and African Development Bank), and is concessional.
  - Risks associated with external private debt appear contained:
    - Around 80 percent of the debt is associated with the mining sector.
    - The sector’s income is in foreign currency.
    - The majority of its debt is medium-to-long term.
    - A sizeable portion of its debt is with its affiliated headquarters or global group.
  - Persisting risks:
    - Temporary mining closures and project suspensions (e.g., Ambatovy).
    - Regulatory uncertainty related to a new mining code.
    - A faster-than-anticipated scaling up of infrastructure spending.

### Capital and financial accounts: flows and policy measures
- Background
  - Capital grants were 2.2 percent of GDP in 2020; these are anticipated to taper off as broader access to financing on concessional terms weakens over time.
  - FDI reached 1.8 percent of GDP in 2020 (down from 2.6 percent in 2019).
  - FDI is projected to rebound in 2021, reaching 2.2 percent of GDP.
  - Following adoption of the FX Law, the BFM plans to develop a plan to gradually phase out the existing surrender requirement on export proceeds, considered a capital flow management measure (CFM) under the IMF’s Institutional View on the Liberalization and Management of Capital Flows (the IV) in a way that will not destabilize or put further pressure on the exchange market.
- Assessment
  - There is no foreign portfolio investment.
  - There could be a risk to foreign direct investment flows should there be major reversals or delays in structural reforms or a more protracted global crisis.

### FX intervention and reserves level
- Background
  - Madagascar has a floating exchange rate regime and intervenes to smooth volatility and build reserves.
  - 2020 reserves reached SDR 1338 million (13.5 percent of GDP) or 5.9 months of import coverage and up from its 2019 level of SDR 1196 million.
  - Foreign currency interventions in 2020 were almost three times higher than last year’s total net sales.
  - The Ariary has depreciated by 5 percent relative to the USD and 16 percent relative to the Euro at end-2020.
  - Interventions were made to smooth volatility on the interbank currency market (the MID) and to help address Covid-19 related exchange rate volatility in 2020.
  - The authorities are in the process of reviewing and revising the parameters of the intervention algorithm.
  - Under the algorithm, the maximum allowance of either a weakening or strengthening in the spot rate relative to a rate in line with fundamentals is 5 percent, with intermediate margins that allow for a relatively larger depreciation of the exchange rate before triggering an intervention. When the exchange rate is within its designated fluctuation bands, the BFM accumulates reserves.
  - The BFM is seeking to diversify its reserve holdings and, in late 2020, began a program to purchase gold from local operators, which the BFM plans to refine in order to bring it to monetary gold standards.
  - The BFM is conducting a feasibility study on setting up a refinery, with plans to eventually transfer refining responsibility to a private company.
  - A February 2021 IMF Safeguards Assessment Mission indicated concerns about the gold purchase program, including:
    - The program is not yet anchored in the BFM’s reserve management strategy.
    - Ownership of a refinery is a quasi-fiscal operation outside traditional core-central banking activities which could harm the BFM’s financial position.
    - Cost uncertainties of refinement may result in an implicit subsidy to the mining sector.
    - There are substantial governance and reputational risks.
  - The BFM should pause this purchase program by September 2021 and seek Fund TA to achieve its reserve diversification needs.
- Assessment
  - International reserves are assessed as adequate.
  - Reserves coverage is up from 4.2 months of import coverage in 2019 to 5.9 months of coverage in 2020 (and 4.7 months of coverage in terms of 2019 imports, highlighting that much of the increase is due to a decline in projected 2020 imports due to Covid-19).
  - The projected level of reserves coverage exceeds the traditional three-month rule, as well as the upper bound of 5.7 from an ARA model for credit-constrained economies.
  - Reserves coverage is expected to fall back towards the adequacy bound in 2021 as imports rise more rapidly than reserve levels.
  - Madagascar remains highly vulnerable to additional external shocks, including term-of-trade shocks and natural disasters that could put Madagascar’s reserve path at risk.
  - Coverage risks could also arise should government spending accelerate faster than anticipated in the context of a shortfall in external financing.
  - While Covid-19 has necessitated large net USD sales in 2020, FX intervention has occurred in both directions in the past two years (e.g., there were net purchases of USD in March 2020).

### Risk Assessment Matrix (high-level risks and policy responses)
- Conjunctural shocks and scenarios
  - Unexpected shifts in the Covid-19 pandemic; prolonged pandemic (downside)
    - Likelihood: Medium
    - Impact: High. More containment measures required; economic growth further slows; fiscal pressure increases; pandemic-prompted protectionist actions may disrupt trade and global value chains.
    - Policy response: Cushion income losses, increase spending on health and social protection, follow global public health guidance, use containment measures to build health system capacity if required.
  - Unexpected shifts in the Covid-19 pandemic; faster containment (upside)
    - Likelihood: Medium
    - Impact: High. Fast recovery boosts confidence, raises commodity prices (e.g., vanilla and metals) and economic activity.
    - Policy response: Leverage unexpected gains to bolster fiscal space and catalyze the structural reform agenda.
  - Widespread social discontent and political instability
    - Likelihood: High
    - Impact: Low. Economic activity disrupted; policymaking and confidence weakened.
    - Policy response: Increase social priority spending, undertake promised reforms, renew commitment to operating SOEs transparently, step-up anti-corruption and AML/CFT efforts, commit to effective risk communication.
- Structural risks
  - Larger than anticipated transfers to SOEs (e.g., JIRAMA and Air Madagascar)
    - Likelihood: High
    - Impact: Medium. Transfers reduce other priority expenditures; potential economic disruption.
    - Policy response: Identify options to protect key public services, protect social priority spending, strengthen governance structures and oversight of key SOEs.
  - Stall or reversals in corruption and governance reforms, especially for SOEs
    - Likelihood: High
    - Impact: High. May compromise concessional support, hinder private investment (incl. PPPs), and harm negotiations with fuel suppliers.
    - Policy response: Undertake promised reforms; renew commitment to transparent SOE operations; step-up anti-corruption and AML/CFT efforts.
  - Weak investment implementation capacity
    - Likelihood: High
    - Impact: Medium. Slower economic growth.
    - Policy response: Monitor domestic capacity and prioritize investments with highest returns.
  - Accelerating de-globalization
    - Likelihood: Medium
    - Impact: Medium. Reduced exports and greater fragmentation reduce potential growth.
    - Policy response: Maintain exchange rate flexibility, reallocate fiscal spending to key public services, energize donor support by emphasizing the merits of the medium-term development plan.
  - Higher frequency and severity of natural disasters related to climate change
    - Likelihood: Medium
    - Impact: High. Loss of real and human capital and lower growth.
    - Policy response: Reallocate fiscal spending to finance recovery work and appeal to donors for post-disaster financing.

### Transition to interest rate targeting (Annex V)
- Rationale and objectives
  - In 2019, the BFM launched reforms to transition from a framework relying on reserve money aggregates to directly targeting interest rates to achieve price stability.
  - Expected benefits: strengthen monetary policy transmission, enhance financial deepening, and foster the finance-growth nexus.
- Progress and measures
  - Introduction of an overnight deposit and standing facilities in May 2019.
  - Volume of interbank transactions increased by 33 percent y-o-y over the first 11 months of 2020.
  - The average money market interest rate declined by 220 bp over the same period.
  - Duration of interbank lending operations started lengthening until the Covid-19 outbreak in April 2020, with some transactions for six months to one-year maturities at an average interest rate of 8 percent.
  - A repo law drafted with Fund TA was adopted by the parliament in December 2019; publication of the repo law was delayed and must occur by June 2021 (MEFP, ¶45 and 39).
  - The BFM should begin to evaluate the interest rate consistent with the money base target and conduct monetary operations based on this "shadow policy rate".
- Reform sequencing and timetable (selected milestones)
  - First half of 2021
    - Implement the symmetrical corridor to drive short-term interest rates on the money market.
    - Development of tools for management of short-term interest rates.
    - Determination of a target rate (key rate) objectively and according to macroeconomic variables: FPAS model or similar (with Fund TA support).
    - Effective implementation of repurchase operations; publication of the repo law by June 2021.
  - Second half of 2021
    - Migration towards a transitional framework of monetary aggregates flexible targeting.
    - Short-term operational target on the money market.
    - Medium-term operational target (quarterly): average of the monetary base or its counterparties with an acceptable fluctuation band.
  - First half of 2022
    - Launch of BFM investment certificates with fixed maturities; development of regulatory text.
  - Second half of 2022
    - Inflation forecasting by BFM; negotiation between MEF/BFM/INSTAT regarding inflation forecasts; first official medium-term inflation forecast (2 years) produced by BFM in Q2 2022.
    - Development of a continuous Ariary interbank market (IT and accounting infrastructure, legal documents and tests with Fund TA support).
  - 2023
    - Migration to the Interest Rate Targeting Framework: drop volume targeting, re-publish the key rate in the middle of the corridor, establish new monetary policy transmission mechanism, evaluate efficiency via yield curve evolution.

### Financial sector (Annex VI) — system health and vulnerabilities
- Overview
  - The banking sector started 2020 well-capitalized, liquid, and profitable; the pandemic has exposed vulnerabilities and risks, reducing profitability, but stress tests confirm the sector remains broadly resilient and sufficiently capitalized.
  - Financial sector remains shallow (financial assets accounting for one third of GDP), dominated by the banking sector (about 80 percent of total assets), with microfinance institutions important in rural areas.
  - The banking sector is mostly foreign owned and concentrated around four banks which hold more than 80 percent of total deposits and outstanding loans and credits.
  - Banks have been profitable, adequately capitalized, well above the 8 percent capital adequacy ratio, and with ample liquidity buffers—as confirmed by annual stress tests.
- Emerging vulnerabilities
  - Asset quality
    - NPL ratio increased from 6.8 percent at end-2019 to 7.6 percent in December 2020 and is expected to increase further.
    - A write-off of all un-provisioned NPLs would consume 20-25 percent of the system-wide capital.
  - Capital adequacy
    - Banking sector average capital adequacy ratio: 11.7 percent.
    - Equity was increased by about 17 percent since end-2019 through limits set on the distribution of dividends.
    - NPLs net of provision recently increased to 19 percent.
  - Earnings
    - The banking system ranked among the top-two SSA performers in terms of profitability in 2019.
    - Return on equity declined in 2020 due to increases in provisioning requirements.
    - Around 60 percent of banks had to reduce the number of staff and 80 percent reduced their investments, impacting profitability.
  - Liquidity
    - Historically maintained excess liquidity buffers; at the midst of the crisis, liquidity dried up following freezing of the interbank market, prompting central bank intervention.
    - Interventions allowed rebound of liquid asset to total asset and liquidity asset to short-term liability ratios to 35 percent and 49 percent, respectively, from the troughs reached in June 2020.
  - Sensitivity to market risk
    - Exposure to interest and exchange rate risks is among the lowest in the SSA region.
    - Low ratios of foreign currency loans to total loans and foreign currency liabilities to total liabilities.
    - Net open position in foreign exchange to capital ratio is less than 20 percent.

*Source: IMF staff report excerpt (Republic of Madagascar).*

### 3. The overall deterioration in liquidity and solvency indicators has been limited so far,

### 3. The overall deterioration in liquidity and solvency indicators has been limited so far,

### Banking sector solvency and asset quality
- Average solvency ratio remained above the 8 percent required minimum as of end-2020.
- Two banks were at or below the 8 percent minimum at end-2020; a third large bank was temporarily below it earlier in 2020.
- NPLs net of provisions to capital rose to 19 percent as of end-2020.
  - Two banks had NPLs net of provisions to capital ratios close to 37 percent.
  - One bank had a ratio of 185 percent (attributable to low capital).
- Profitability in 2020:
  - Return on assets declined to 1 percent for smaller banks.
  - Return on assets remained at 4 percent for big banks.
- Supervisory stance:
  - BFM is closely monitoring asset quality across banks and stands ready to continue enforcing strict micro-prudential rules, notably a minimal solvency ratio of 8 percent.

### Policy measures and bank responses during the pandemic
- Central Bank (BFM) measures implemented include:
  - Relaxation of reserve requirement rules.
  - Encouragement to defer SME and household loan repayments.
  - Permission to deduct loans to SMEs that have been restructured from regulatory reserve requirements.
  - Extending credit lines by establishing an exceptional medium-term refinancing instrument while preserving bank liquidity.
  - Extending the existing Partial Portfolio Credit Guarantee Schemes (PPGS) for firms negatively affected by the crisis.
- Most banks’ operational responses:
  - Reducing overheads.
  - Requiring additional guarantees for new loans.
  - Introducing intense monitoring of loans that have been postponed.
  - Intensifying recovery of overdue debts.
  - Suspending or postponing non-essential investments.
  - Enforcing stricter lending standards.
  - Increasing interests on deposits to curb cash withdrawals.
  - Suspending or lowering dividend distribution.
- CSBF (banking sector regulator and supervisor) actions:
  - Requiring banks to communicate their strategy and revised financial forecasts to assess measures and anticipate difficulties.

### Microfinance institutions (MFIs)
- Sector share and growth:
  - MFIs account for about six percent of total financial system assets.
  - MFIs more than tripled their assets since 2012.
- Pandemic impact as of end-Nov-2020:
  - Deposit withdrawals surge: almost 9 percent decrease at end-Nov-2020 compared to March.
  - NPLs rising: 11.5 percent at end-Nov-2020.
  - Lending has decreased markedly.
  - Profitability is negative:
    - Return on equity was negative 2.6 percent on average.
    - Only five MFIs out of twelve are still profitable.
- Policy support:
  - Central bank established an exceptional medium-term refinancing instrument designed exclusively to support MFIs and MSMEs through the commercial banks.
- Prudential status:
  - MFIs are still able to comply with prudential requirements despite rising NPLs and negative profitability.

### Financial inclusion and financial intermediation
- Credit and financial deepening:
  - Credit to private sector is less than 15 percent of GDP.
  - This is about half the average for SSA countries.
- National strategy and targets:
  - Authorities launched an updated national strategy late in 2018 to increase the adult population having access to formal financial services from 29 percent in 2016 to 45 percent in 2022.
  - Priorities: (i) financial education and consumer protection; (ii) access and use of financial services; and (iii) strengthening the political, legal, regulatory and institutional framework.
- Progress achieved:
  - Adoption of a new banking law.
  - A new law on insurance expected to boost access to insurance services and improve supervision.
  - Operationalization of the first credit bureau.
- Digital financial services:
  - Mobile banking transactions increased by 12 percent in 2020.
  - Mobile money network played an instrumental role in providing financial assistance to thousands of vulnerable households.
- Structural constraints to inclusion:
  - Low access to credit explained by supply and demand factors: lack of credit culture, asymmetric information, high credit costs, weak consumer protection and creditors rights.
  - Unfavorable business environment and political instability.
  - Banking sector structure (shallow markets, few big players) and lack of competition leading to expensive financial services and contributing to financial exclusion.

### Comparative indicators and financial soundness (selected)
- Financial sector share metrics and indicators presented (figures and heatmaps as of end-2020 and Sept-2020) include:
  - Asset quality indicators, capital/asset ratios, NPLs net of provisions/capital, NPLs/gross loans, ROA, ROE, liquid assets to total assets, liquid assets to short-term liabilities, deposits/total loans, net open position in foreign exchange to capital, foreign currency–denominated loans/liabilities to total loans/liabilities.
  - Cross-country FSI comparisons (Sept-2020) presented for: Regulatory Capital to Risk-Weighted Assets (percent); Non-performing Loans to Total Gross Loans (percent); Return on Assets (percent); Return on Equity (percent); Liquid Assets to Short Term Liabilities (percent); Net Open Position in Foreign Exchange to Capital (percent).
- Aggregate sector developments (Dec-2020) reported:
  - NPLs / Gross Loans (%), Credit to economy (yoy), Deposit growth (yoy), Change since 2019 (rhs), Selected Financial Soundness Indicators (In Percent), Aggregate Sector Financial Soundness Indicators, Banks (In Percent), Aggregate Sector Financial Soundness Indicators, Microfinance, Nov-2020 (In Percent).

### Policy implications and technical assistance priorities
- Ongoing supervisory enforcement of minimum solvency requirements and close monitoring to contain financial stability risks.
- Continued use of targeted central bank support instruments (medium-term refinancing for banks and MFIs; PPGS extension).
- Strengthen financial inclusion through:
  - Financial education and consumer protection.
  - Broader access and use of financial services.
  - Strengthening political, legal, regulatory and institutional frameworks.
- Structural reforms and capacity development (Annex VII summary):
  - Continue modernization of revenue administrations and tax policy design to converge toward a level of taxation consistent with potential.
  - Strengthen PFM: tougher internal controls; better control of fiscal risks (pensions, PPPs, and SOEs); improved management of public investment and the wage bill; enhanced forecasting and budgeting; improve transparency in COVID-19 related spending.
  - Continue multiyear reform plan for monetary policy: gradually transition to policies based on market interest rates.
  - Advise central bank on reserves diversification and strengthen financial sector stability via better supervision and adoption/operationalization of a resolution framework.
  - Improve governance by enforcing legal framework and stepping up fight against corruption.
- Authorities’ requests and commitments (from Letter of Intent, March 15, 2021):
  - Request financing under the Extended Credit Facility in the amount of SDR 219.96 million, corresponding to 90 percent of quota, over a forty-month period.
  - Use first disbursement under ECF to help fill the projected fiscal financing gap through on-lending by the central bank to the Treasury; update existing Memorandum of Understanding between central bank and government for similar operations.
  - Commitment to adhere to DSSI requirements and to use freed resources for COVID-19 health spending and mitigating measures.
  - Central bank commits to complying with recommendations of the 2021 update safeguards assessment, including discontinuing its non-monetary gold purchase program, and to provide IMF staff access to audit reports and auditors.

*Source: 1mdgea2021001 - 3. The overall deterioration in liquidity and solvency indicators has been limited so far.*

### 3.      The new ECF arrangement  will support our continued efforts to respond to the

### 3.      The new ECF arrangement  will support our continued efforts to respond to the

### ECF objectives and immediate role
- Support pandemic mitigation efforts and lay the foundation for a sustained recovery through a credible macroeconomic framework.
- Advance reform momentum to raise and sustain inclusive growth in line with PEM priorities.
- Catalyze donor financing to address urgent balance of payments needs, attract foreign private investment, and mobilize external project and budget support.
- Focus areas under the ECF:
  - Maintain macroeconomic stability.
  - Create fiscal space for investment in physical and human capital.
  - Resume a strong structural reform agenda.

### Recent developments and response to COVID-19
- Economic impact and sectoral effects:
  - Estimated output contracted by about 4 percent in 2020 versus anticipated growth of more than 5 percent pre-pandemic.
  - Tourism severely affected; almost all international commercial passenger flights suspended since March 2020.
  - Secondary sector hit by shutdown of main nickel and cobalt mining company since April 2020; textile, other manufacturing, transportation, and other services also impacted.
- Fiscal and external balances:
  - Tax revenue collapsed by about 1.5 percentage points to 8.9 percent of GDP in 2020.
  - Domestic primary balance moved from a slight surplus in 2019 to a deficit of 2.6 percent of GDP in 2020.
  - Current account deficit widened from -2.2 percent of GDP in 2019 to -6.5 percent in 2020.
- Banking and reserves:
  - Banking sector remained healthy overall with central bank support for bank liquidity and foreign currency net sales to limit Ariary depreciation.
  - International reserves reached SDR 1337.8 million at end-2020, equivalent to 5.9 months of 2020 imports (and 4.7 months of 2019 imports).
- Government mitigation measures (coordinated through a multi-sectoral response plan):
  - State of health emergency declared March 21, 2020 (ended October 18), plus border closures, quarantines, testing, restrictions on public events, and temporary lockdowns.
  - Temporary loosening of macroeconomic and financial policies.
  - Specific measures: targeted health investments; social emergency plan with unconditional transfers; tax relief, temporary salary subsidies, and deadline extensions for private sector; central bank liquidity provision to commercial banks.
- International financing and IMF support:
  - Two RCF disbursements approved April and July 2020 totaling 2.4 percent of GDP.
  - Emergency support estimated at about 3 percent of GDP helped close short-term budget and balance of payments gaps and catalyzed additional donor resources.

### Macroeconomic program, outlook, and policy framework
- PEM objectives (as articulated in the updated PEM):
  - Higher and sustained economic growth via tax mobilization, spending prioritization, and increased public and private investment.
  - Greater inclusion through strengthened social policies and spending focused on education, health, and housing.
  - Sustainable use of natural resources and improved resilience to climate change.
  - Better governance, including anti-corruption, security, and regional challenges.
  - Key PEM strategies: scale-up infrastructure, double electricity production, increase access to water, expand agricultural land, preserve ecosystem.
- ECF sequencing and key objectives:
  - Immediate: support pandemic mitigation while maintaining macroeconomic stability.
  - Medium-term: strengthen structural reforms to promote inclusive growth, reduce poverty, and address long-term fragilities.
  - Three key objectives supported by ECF:
    1. Rebuild and strengthen fiscal space for investment and social spending by mobilizing domestic revenue and improving spending quality.
    2. Resume and advance structural reform agenda, including governance strengthening and anti-corruption framework reinforcement.
    3. Strengthen stability and financial sector development by improving supervision and enhancing the monetary framework.
- 2021 budget (Loi de Finances Initiale, LFI) and fiscal composition:
  - LFI approved December 2020 and promulgated December 24, 2020.
  - Target net tax revenue-to-GDP ratio of 10.9 percent in 2021.
  - Non-interest current spending about 9.5 percent of GDP; wage bill 5.5 percent of GDP; domestic public investment 3.5 percent of GDP.
  - Externally financed public investments expected close to 6 percent of GDP.
- Growth and medium-term expectations:
  - GDP rebound forecast to 4.5 percent in 2021 (LFI).
  - Medium-term acceleration driven by private capital expenditure and expansion of agriculture, tourism, manufacturing, and mining.
  - Current account deficit expected to stabilize around 4 percent of GDP in the medium term.
  - Public debt-to-GDP ratio expected to remain below 55 percent as PEM investments and reforms progress.
- Fiscal stance and anchor:
  - COVID-19 support measures to continue until end of pandemic; dedicated account at Public Treasury secured MGA 214 billion at end-2020 for pandemic mitigation.
  - Fiscal stance supportive in 2021; domestic primary balance is the program anchor and targeted to turn positive in 2023.
- External financing and debt strategy:
  - External financing primarily concessional terms and grants to preserve debt sustainability; Madagascar assessed to have a moderate risk of external debt distress.
  - Ceiling on new external debt in present value terms at US$800 million as a continuous Performance Criterion.
  - Avoidance of non-concessional short-term external borrowing (original maturity less than one year); limited long-term non- and semi-concessional borrowing may be considered for critical high-yield investment projects if concessional financing exhausted.
- External private debt monitoring:
  - 2020 INSTAT survey updated external private debt estimates; prior IMF estimate of SDR 2 billion at end-2018 vs new data suggesting SDR 4 billion.
  - Around 80 percent of external private debt is associated with the mining sector; majority medium-to-long term; sizeable portion with affiliated headquarters or global group.
- Central bank and monetary stance:
  - Liquidity injections of about 1.2 percent of GDP at end-2020; structural excess liquidity expected to gradually normalize but central bank (BFM) ready to continue support as needed.
  - Monetary policy aims at maintaining single digit inflation through money market and foreign exchange operations, balancing exchange rate volatility and interbank FX market tensions while maintaining adequate international reserves.
- 2021 program baseline vs LFI and contingency planning:
  - Program baseline aligned with LFI on spending except divergences: about 0.5 percent of GDP on domestic investment and about 1.2 percent of GDP on externally financed investment.
  - Government expects net tax revenue of 10.9 percent of GDP in 2021, 0.9 percent of GDP more than program baseline; if realized, would lead to domestic primary deficit of about 1.2 percent of GDP.
  - If net tax revenue does not materialize and primary balance deficit widens beyond the 2.5 percent of GDP projected under program baseline, government commits to revise projections in a Revised Budget Law prepared in May 2021 and implement budget savings while protecting social priority spending.
- Medium-term ambitions and risks:
  - PEM aims to accelerate growth to 8 percent in 2023 driven by sharp increase in private investment through reforms and improved business environment.
  - Adverse scenario: delayed global recovery or prolonged pandemic could lead to weaker external and domestic demand, lower externally financed public investment, and additional fiscal financing gaps; response would prioritize protecting social spending, reduce lower-priority spending, and seek additional budget support with IMF program on track.

### Structural reforms — Rebuilding and strengthening fiscal space (Mobilizing Tax Revenue)
- Medium-term revenue mobilization plan and strategy:
  - Objective to recover tax-to-GDP ratio to pre-crisis levels and gradually increase it in the medium-term in line with peers and tax potential estimated at about 5 percentage points of GDP.
  - Reforms will target the Tax General Department and Customs Directorate; performance in increasing domestic tax and customs revenue will be monitored by indicative targets.
- Tax administration reforms and priorities:
  - Continue and strengthen reforms at the Tax General Department: organization, simplification, and digitalization of procedures; performance contracts; taxpayer dialogue and tax controls.
  - Specific priorities and expected outputs:
    - Further develop performance contracts, strengthen individual performance evaluation, and apply disciplinary measures when necessary.
    - Establish Integrated Tax Administration System (SAFI) supported by World Bank's PAPSP to improve internal management and operational efficiency.
    - Continue and strengthen efforts to identify taxpayers; update taxpayer database using regional tax administration information.
    - Continue Anjara Hetrako campaign (identified more than 17,000 new taxpayers in Antananarivo and Toliara at end-2020) and extend to other regions.
    - Generalize electronic payment of taxes to medium-size enterprises, expected yield close to MGA 40 billion (about 0.1 percent of GDP) in 2021.
    - Progress digitalization: electronic declarations and payments, mobile banking payments, platforms for VAT declarations and payments, and remote transmission of financial statements.
    - Revive and optimize tax control by reallocating human and budgetary resources and assigning new agents for tax control; cross-check VAT declarations, import declarations, and public contracts; joint control operations with customs.
    - Intensify control of large companies (Direction des Grandes Entreprises - DGE), expand coverage to at least 15 percent of these companies targeting those not controlled in 2019 and 2020.
    - Continue and intensify clearance of tax arrears (restes à recouvrer): stock estimated end-2020 at MGA 344.72 billion (about 0.7 percent of GDP); objective to collect MGA 152 billion (0.3 percent of GDP) of tax arrears in 2021, of which at least MGA 80 billion in the first half of the year (Structural Benchmark).
    - Implement public procurement tax (Taxe sur les marchés publics, TMP): after delays, TMP started to be applied and is expected to yield more than MGA 200 billion (0.4 percent of GDP) in 2021 based on late 2020 commitments and projected spending.

_1mdgea2021001_

### 22.      Regarding the customs administration, we plan the following actions based on our

### 22. Regarding the customs administration, we plan the following actions based on our

### Customs administration reform (2020-2023)
- Centralize collection activities and follow payment recovery to improve collection induced by a better access to all statistical information and better monitoring.
- Strengthen control of import values declared to customs and take effective remedial action in case of fraud.
  - Cooperate with GasyNet and monitor all value declarations.
  - Set up a Value Center to provide a relevant and reliable reference basis of goods values.
  - Systematically strengthen controls and optimize penalties.
- Improve pre- and post-clearance controls based on dynamic risk analysis to target controls (following-up of the recommendations of the IMF technical assistance mission).
  - Use a common database with the DGI to better identify potential offenders.
- Intensify control of companies benefitting from special economic regimes (free-trade zone, temporary admission regimes, or other exemption agreements).
- Strengthen accountability by improving organization of audit and performance and establishing key performance indicators by individuals, departments or offices.

### Tax policy reforms under consideration
- Potential changes regarding the VAT and the excise taxes.
  - VAT threshold raised to MGA 400 million, expected to yield 40 billion Ariary in additional revenue in 2021.
  - Increased duties on specific products (soft drinks, tea, and sweets); studying possibility of introducing excise taxes on other products.
- Revising and streamlining exemptions.
  - Latest study from the Tax Policy Unit: tax exemptions cost estimated at MGA 1470 billion (2.8 percent of GDP) in 2019.
  - Major exemptions linked to Law on Large Mining Investments (LGIM), regime for free zones (ZEF), and establishment agreements.
  - Costliest exemptions: import and local sale of rice (more than half of total tax expenditures) and those related to the LGIM.
  - Plan to assess costs and benefits of exemptions and remove ineffective ones.
- Revising mining taxation objectives:
  - (i) Continue to honor existing mining contracts and stabilize large mining investments.
  - (ii) Extend anti-abuse measures from the Code General des Impôts into the special regime for large mining investments.
  - (iii) Ensure all revenues are collected through the large taxpayer unit (DGE) of the DGI and remitted to single treasury account.
  - Will consult the IMF prior to any revision of the mining code (building on TA received in March 2020 from the Fiscal Affairs Department).

### Improving the quality of spending and public employment management
- Wage bill management and civil service administration:
  - Launched upgrade of IT workforce management tool (AUGURE 2) on December 10, 2020 to improve accounting of civil service.
  - Tool to manage all civil servants, including military, National Public Establishments employees and local municipality agents, by 2023.
  - Objective to merge IT payroll and civil service management tools by 2023.
  - Progress on eliminating ghost workers: as of December 2020, 1,219 public servants with irregular status out of 23,417 identified in January 2020.
- Pension reform:
  - Gradual reform to control government transfers and ensure long-term sustainability.
  - Assessing parametric reforms (contribution rates, years of eligible service, highest average remuneration, age of retirement, applicable yearly accrual rate) and governance improvements for pension fund.
  - Detailed action plan to be presented to the Council of Government in the first half of 2021.

### Social spending priorities and social safety nets
- 2021 LFI increases domestic budget for four social ministries by more than 10 percent to reach MGA 1,729 billion or 3 percent of GDP (to be further increased in the LFR).
  - Public health workers: from 10,861 in 2020 to 13,786 in 2021.
  - Teachers: from 69,354 in 2020 to 77,234 in 2021.
- Cash transfer programs:
  - Beneficiaries increased from 250,000 in June 2020 to 483,428 in December 2020.
  - Plan to reach at least 540,000 beneficiaries by September 2021 (Structural Benchmark) and 590,000 by December 2021.
  - Agreement signed January 24, 2020: dedicated annual domestic budget allocation for the FID of a minimum amount of US$ 5 million over 2021-23.
- Budget classification and monitoring:
  - Adjust budget classification for better monitoring and reporting of social spending; operational for 2022 budget law preparation.
  - Continue to monitor and disclose domestically financed spending, excluding salaries of social ministries (IT under the program), and other social spending indicators as memorandum items.
- Education sector transparency:
  - Registration fees in public schools cancelled at start of school year October 2020; transfers to schools (caisses écoles) planned in the budget to be implemented.
  - Transfers published school by school on Ministry of Education website: https://www.education.mg/caisse-ecole/index.php/c_etat.

### Public investment management and prioritization
- Clarify ambitious public investment objectives in the PEM, prioritize projects considering implementation and absorptive capacity constraints.
- Monitor implementation progress, ensure proper costing and adequate funding per FAD TA recommendations.
- Prioritize external grants and concessional financing.
- Finalize and publish a public investment manual in line with FAD TA recommendations (Structural Benchmark, December 2021).
- Establish mechanism for regular political-level review (2-3 times a year) of PIM portfolio execution, initially covering important projects (10-20).
- Unify reporting system on public investment execution to produce a dashboard available to decision-makers and the public.

### Limiting non-priority spending
- Commitment to limit non-priority spending to increase fiscal space for priority spending on infrastructure, education, healthcare, and targeted social and natural disaster assistance.

### Reducing fiscal risks
- Fiscal risks annex to the budget enriched with IMF TA; 2021 finance law annex analyzes risks related to:
  - (i) natural disasters;
  - (ii) public-private partnerships;
  - (iii) imbalances in the civil service pension system; and
  - (iv) public debt sustainability, including public guarantees.
- Disaster risk management:
  - Country exposed to drought and flood caused by cyclones with largest impact.
  - Late January 2020: northern Madagascar torrential rains with at least 30 lives lost and more than 15,000 homes destroyed; south facing worst drought in a decade.
  - Since 2019, benefiting from a Disaster Risk Management Development Policy Operation with Catastrophe Deferred Drawdown Option (World Bank US$50 million and Agence Francaise de Developpement initially Euro 10 million increased by another 15 million in context of COVID-19), of which US$15 million and Euro3 million, respectively, were disbursed in February 2020.

### Fuel pricing mechanism and liability limits
- Plan to implement a fuel pricing mechanism to avoid future budget costs; mechanism to be finalized in July 2021 and discussed with IMF staff.
- Commit to keep the liability to oil distributors below MGA 100 billion (continuous Structural Benchmark) until implementation.
- Continue administration of prices in the first half of 2021 per decree adopted January 20, 2021.
- Working on mitigating measures for the most vulnerable, including scaling up social safety nets with World Bank support.

### JIRAMA recovery plan and fiscal support
- 2020 deficit of about MGA 400 billion (about US$ 100 million), MGA 155 billion higher than initially projected in multi-year business plan.
- Continued measures: programs to deal with power cuts, restore public lighting in district capitals, infrastructure improvements (renewal of generators, extending drinking water production stations, renewing water pipes).
- Recovery and development plan formalized in “Development plan 2025”; tariff reform postponed due to COVID-19 but necessary to increase revenue alongside cost-saving measures.
- Government transfers to JIRAMA:
  - 2020 total transfers including arrears repayments: MGA 845 billion (1.6 percent of GDP).
  - 2021 planned transfers in initial budget law: MGA 121 bn (0.2 percent of GDP); will be increased in the LFR to a maximum of MGA 400 bn (0.7 percent of GDP).
  - Commitment to ensure total transfers remain below MGA 400 bn and notify World Bank and IMF staff of details of any budget transfer to JIRAMA's suppliers and share documentation within one week of payment (continuous Structural Benchmark).
- Repayment of suppliers tied to renegotiation of contracts on more favorable terms; additional repayments will be considered only after finalization (planned for June 2021) of a strategy agreed with the World Bank with clearly identified financing.

### Air Madagascar fiscal risk posture
- Preliminary estimates indicate a financing need of at least US$55 million and need for debt write-offs and restructuring for Air Madagascar and Tsaradia.
- Business plan being developed by external auditors to assess short-term viability and outline medium-term recovery; tentatively to be presented to the Council of Ministers on March 24, 2021.
- Commitment to avoid putting any public fund to the company until the plan is finalized and before consulting with the Fund and the World Bank.

### Transparency of COVID-19 spending and procurement
- Publish COVID-19 spending on Ministry of Economy and Finance website: http://www.mefb.gov.mg/reportingcovid.
  - As of March 8, 2021, published amount of COVID-19 committed spending was MGA1,906 billion (about US$500 million or 3.3 percent of GDP), of which more than 90 percent has been either paid or given the order to be paid.
  - Website provides spending by Ministries, category, and subcategories.
- Procurement transparency:
  - Information on procurement contracts (amount, awardees) published on same website.
  - For awarded companies, published tax identification number, trade register number, and name of authorized representative.
  - As of March 8, links to contracts for 109 of the 127 contracts have been posted; 32 ex-post delivery reports (“Procès verbaux de reception”) posted.
  - Remaining ex-post delivery reports to be published by June 2021 for fully executed contracts.
  - Seek TA from IMF’s Legal Department to establish requirements/processes to identify beneficial owners of companies or legal persons awarded procurement contracts.
- Commitments under RCF2 LOI:
  - Publish independent third-party audit of COVID-19 spending by December 2021 (Structural Benchmark).
  - Publish names of beneficial owners of companies or legal persons awarded COVID-19-related procurement contracts.

### Public Financial Management (PFM) reform and transparency
- Progress under 2018-2026 Strategic Plan of Modernization with FAD TA in national public institutions management, budgeting, debt management strategy, procurement transparency and efficiency, cash management, Treasury Single Account implementation, reporting and statistics, internal audit and inspection strengthening.
- Plan to undertake PEFA self-assessment in first half of 2021.
- Reorganization of Inter-ministerial Steering Committee for Public Finance Reforms adopted December 23, 2020 to improve coordination and leadership.
- Portal dedicated to PFM reforms on Ministry of Economy and Finance website to be launched in second quarter of 2021.
- Draft law on treasury management expected to be submitted to Parliament for May 2021 session to improve active cash management and support implementation of the Single Treasury Account.
- Identify and list all accounts of Public Establishments opened in Primary Banks for repatriation to the Public Treasury.
- Draft law on status of public accountants (specifying legal responsibility for irregularities) to be submitted to Parliament in May 2021.
- Budget execution transparency:
  - “Salohy” platform publishes detailed budget execution data and actual payments: http://app.tresorpublic.mg/opendata.mef.mg/.
  - Commit to publish quarterly budget execution report on a payment basis (including COVID-19 and social spending) before the end of the following quarter (Continuous Structural Benchmark, starting with Q1 2021 to be published before end of Q2 2021).
- Strengthen ex post controls and anti-corruption contribution of PFM system:
  - Strengthening audit bodies and internal inspections, especially Cour des comptes.
  - Publish progress update on implementation of Cour des Comptes’ recommendations on AUGURE, including payroll payment chain (Structural Benchmark, September 21).
- Public procurement measures:
  - Limit use of over the counter (OTC) contracts; decree clarifying scope of emergencies prepared.
  - Updated decree on Code of Ethics specifying sanctions for procurement code violations.
  - Developing e-Government Procurement project in collaboration with UNDP.

*REPUBLIC OF MADAGASCAR / INTERNATIONAL MONETARY FUND*

### 36.      Governance  is central in the Plan Emergence  Madagascar. Our PEM features governance

### 36.      Governance  is central in the Plan Emergence  Madagascar. Our PEM features governance

### Governance as central pillar
- Governance is the central pillar and a cross-cutting theme connecting all areas of sustainable development: strengthening public security and political stability, peace and security, rule of law, human rights, the fight against of corruption, and the efficiency of administration and institutions.

### Anti-corruption legal framework and institutions (paragraph 37)
- Commitment to enforce the new anti-corruption legal framework with dedicated human, financial, and material resources and a dedicated budget allocation in the LFR 2021.
- Progress on anti-corruption courts:
  - Mahajanga court operational since October 2020.
  - Recruitment for Fianarantsoa court underway; scheduled opening Q4 2021.
- Strategy and policy instruments:
  - Updated national anti-corruption strategy and national policy for good governance finalized in 2020; to be presented to the Council of Ministers by May 2021.
  - Sectoral policies for priority sectors to be developed with CSI support.
  - Decree to establish the agency for the recovery of illicit assets to be adopted by end-March 2021; dedicated budget allocated in the 2021 LFR (Structural Benchmark, June 2021).
- AML/CFT implementation:
  - 2018 AML/CFT law brought framework closer to FATF standards; plan to issue implementing decrees after Council of Ministers presentation in May 2021.
- Legislative process:
  - Draft law revising anti-corruption courts adopted by National Assembly in July 2020; awaiting Senate consideration. Government plans to review the law before Senate examination; draft shared with IMF for technical advice.
- SAMIFIN actions:
  - SAMIFIN developing a 5-year strategy with World Bank collaboration.
  - Quarterly statistics on corruption cases published regularly since April 2018; statistics up to December 2020 published.

### Business climate and private investment (paragraph 38)
- Progress made in:
  - Digitalization of tax payments for companies.
  - Issuance of work permits.
  - Registration of new businesses.
  - Establishment of a credit bureau.
- In context of a new investments law: intend to cap tariffs, align foreign and domestic investors’ rights, and improve land property law.
- Main impediments to business development: access to electricity, water, and high transportation and logistics costs.

### Strengthening stability and financial sector development (C, paras 39–43)
- Monetary policy operational framework reform continued despite 2020 COVID-19 slowdown. BFM implemented interest rate corridor, overnight deposit and lending facilities, stopped publication of taux directeur, aims to transition to interest rate targeting by 2023 via a sequence of measures:
  - First semester 2021:
    - Implement symmetrical corridor to drive short-term interest rates on the money market.
    - Change mandatory reserves system with more reliable rules and new calendar.
    - Start effective implementation of repurchase operations; repo law to be published by June 2021.
  - Second half of 2021:
    - Migrate to transitional framework with more flexible targeting of monetary aggregates based on market short-term interest rates and medium-term average of monetary base with a fluctuation band.
  - 2022:
    - Launch BFM investment certificates with fixed maturities.
    - Develop a continuous Ariary interbank market.
    - Publish first official medium-term inflation forecast produced by BFM.
  - Target migration to interest rate targeting framework during 2023, acknowledging possible implementation delays.

- BFM modernization (paragraph 40):
  - Commit to full adoption of IFRS for 2020 accounts expected by April 2021; action plan supported by IMF technical assistance.
  - Strengthen internal audit mechanisms per safeguards’ mission recommendations.
  - Reinforce controls in currency operations, implement a risk management framework, and strengthen lending operations including operationalizing emergency lending framework.

- Foreign exchange market operations and reserve management (paragraph 41):
  - Revisiting algorithm parameters after late-2020 applications suggested interventions that would have placed additional pressure on the MID.
  - Reforms in 2021 to improve MID functioning:
    - Pass FX Law clarifying Ministry of Finance and Central Bank responsibilities.
    - Improve monitoring and regulation of foreign currency accounts.
    - Higher mandatory reserve rates for foreign currency deposits in collaboration with MEF/FINEX.
    - Improved MID communications.
  - After FX Law adoption: issue implementing decrees and develop plan to phase out surrender requirement gradually if conditions permit.
  - Conduct further technical market analysis to improve competition, anticipate volatility, and increase market depth by extending access to non-bank financial participants.

- Reserve diversification and gold program (paragraph 42):
  - Plan to diversify reserves by adding gold. Late 2020 joint program with Ministry of Mine and Strategic Resources to purchase gold from local operators (maximum of one ton by end-2021) to be refined to monetary grade.
  - Feasibility study on setting up a refinery; if pursued, commit to transfer responsibility to a private company.
  - Conditions for operator participation: increase traceability, repatriate earnings, comply with surrender requirement.
  - Acknowledge safeguards concerns from IMF Safeguards Assessment about purchase of unrefined gold, refining and certification as outside core central bank mandate; such activities are mentioned in BFM statutes (Articles 17 and 19) but create potential governance, reputation, liquidity, quasi-fiscal, and financial risks.
  - Requested IMF technical assistance to diversify reserve portfolio while safeguarding BFM autonomy.
  - BFM to reengage government to revisit its role in gold program and find alternative arrangements by September 2021 to avoid BFM participation in quasi-fiscal operations.

- Gold sector formalization and illicit exports (paragraph 43):
  - Following smuggling incidents in 2020, government suspended gold exports in late 2020 and is conducting a census of gold operators to improve tracking of production and trade flows.
  - Commit to removing the export ban once sector review completed: full compliance with regulations and an extensive census of licensed operators expected to be completed by end of July 2021.

### Financial inclusion and digitalization (paragraph 44)
- Mobile money:
  - Expanded rapidly over the last decade but remains low compared to peers.
  - Government-supported initiatives by banks and microfinance institutions to enlarge access to credit, notably in rural areas, via electronic payment platforms with mobile operators.
  - Mobile money network used in 2020 to provide financial assistance for six months to 243,686 vulnerable households in Antananarivo, Toamasina and Fianarantsoa.
- Caisse d’Epargne de Madagascar (CEM) and PAOMA:
  - CEM manages 1.2 million saving accounts totaling MGA407 billion (0.8 percent of GDP). Obtained license March 2019 to operate as a microfinance institution; recently started credit activity in an embryonic state.
  - PAOMA manages about 500,000 saving accounts and plans to develop financial activities via its network of more than 250 agencies nationwide.
- e-Ariary digital payment project:
  - Aim: secure, accessible, easy to use, legal method of transaction across national territory; subject to monetary authority regulation and control.
  - Will support financial inclusion, improve control of money in circulation, and strengthen efficiency, safety and robustness of the national payment system.
- Financial literacy:
  - BFM developed a dedicated module on its website (https://www.banky-foibe.mg/education-financiere) and plans regional awareness campaigns.

### Supervision, prudential regulation, and AML/CFT (paragraph 45)
- Banking sector:
  - Remains well capitalized despite pandemic impact; vulnerabilities emerging and substantial heterogeneity among banks on liquidity ratios and ROE.
  - Supportive pandemic measures maintained: relaxation of reserve requirement rules; deferring SME and household loan repayments for 6 months; permission to deduct restructured SME loans from regulatory reserve requirements; extending credit lines while preserving liquidity; extending Partial Portfolio Credit Guarantee Schemes (PPGS).
- Financial Stability Law:
  - Adoption requires examination by Council of Government and Council of Ministers before submission to Parliament.
  - Will establish a national structure to analyze, identify and prevent systemic risks and manage financial crises; crucial given expected rise in NPLs.
- Banking law (in effect since March 5):
  - Facilitates gradual transition to interest rate targeting and improves monetary policy transmission.
  - Instructions on bank equity, solvency, liquidity, risk division, and provisioning are ready to be enforced once law published.
- Microfinance institutions (MFIs):
  - Heavily impacted by the pandemic: slowdown, deposit decline, portfolio deterioration.
  - BFM set up an exceptional medium-term refinancing instrument to support MFIs and MSMEs through commercial banks.
  - Strengthened prudential and AML/CFT supervision in line with 2018-22 National Strategy.
  - CSBF implemented a risk-based approach and is working on effective implementation.

### Technical assistance, safeguards, and data priorities (paras 46–48)
- Value and continuation of IMF technical assistance emphasized.
- Commitment to meet Fund’s safeguards policy requirements.
- Data provision: broadly adequate but commitment to allocate sufficient resources to statistics production and support INSTAT.
- Priorities to strengthen data:
  - Formalize, make public and capitalize on 2018 RGPH results; results and micro-data officialized on February 15, 2021. Replace projections based on 1993 RGPH-2 for denominators in GDP, GNP and GNI per capita.
  - Update poverty and household living conditions via 2021 Permanent Household Survey.
  - Conduct surveys on diaspora transfers to inform BFM and INSTAT financial statistics.
  - Improve national accounts and CPI: PPI survey, extend CPI geographical coverage, publish decomposition of national accounts (quarterly, regional, sector satellites).
  - Contribute to general census of agriculture.
  - Monetary and financial statistics: consolidated MFI and CEM balance sheets into monetary survey (2018). Once CSBF supervision of insurance sector effective, BFM will include insurance corporations’ balance sheets in monetary statistics. Finalize external statistics survey results before end of first semester 2021. Resume survey in first semester of 2022. BFM will monitor private debt and strengthen FDI statistics with INSTAT.

### Program monitoring, reviews, and targets (paras 49 and Tables)
- Program evaluation:
  - Based on quantitative performance criteria and structural benchmarks (Tables 1 and 2) and semi-annual reviews.
  - Definitions and reporting requirements set in Technical Memorandum of Understanding (TMU).
  - Review schedule:
    - First review: on or after September 15, 2021 (test date end-June 2021).
    - Second review: on or after March 15, 2022 (test date end-December 2021).
    - Third review: on or after September 15, 2022 (test date end-June 2022).

- Selected quantitative performance criteria and indicative targets (Table 1; figures preserved exactly):
  - Continuous Performance Criteria:
    - Ceiling on accumulation of new external payment arrears1: 0 (Mar-21), 0 (Jun-21), 0 (Sep-21), 0 (Dec-21), 0 (Mar-22).
    - Ceiling on new external debt contracted or guaranteed by the central government or BFM, in present value terms (US$ millions)2: 800 (Mar-21), 800 (Jun-21), 800 (Sep-21), 800 (Dec-21), 800 (Mar-22).
  - Performance Criterion / Indicative Targets (IT/PC) and Memorandum Items (figures by date):
    - Floor on domestic primary balance3,*: -550 (Mar-21 IT), -752 (Jun-21 PC), -1,324 (Sep-21 IT), -1,426 (Dec-21 PC), -120 (Mar-22 IT).
    - Ceiling on net domestic assets (NDA) of BFM: 2,165 (Mar-21), 2,301 (Jun-21), 2,578 (Sep-21), 2,838 (Dec-21), 3,285 (Mar-22).
    - Floor on net foreign assets (NFA) of BFM (millions of SDRs): 677 (Mar-21), 655 (Jun-21), 623 (Sep-21), 645 (Dec-21), 650 (Mar-22).
    - Floor on gross domestic tax revenue*: 693 (Mar-21), 1,556 (Jun-21), 2,453 (Sep-21), 3,384 (Dec-21), 841 (Mar-22).
    - Floor on gross customs tax revenue*: 510 (Mar-21), 1,147 (Jun-21), 1,785 (Sep-21), 2,550 (Dec-21), 621 (Mar-22).
    - Floor on social spending4,*: 77 (Mar-21), 154 (Jun-21), 282 (Sep-21), 513 (Dec-21), 111 (Mar-22).
    - Memorandum items:
      - Social spending, including salaries5,*: 377 (Mar-21), 754 (Jun-21), 1,182 (Sep-21), 1,713 (Dec-21), 420 (Mar-22).
      - Social spending, including salaries and externally financed investments: 480 (Mar-21), 953 (Jun-21), 1,514 (Sep-21), 2,361 (Dec-21), 536 (Mar-22).
      - Wage bill of public workers-Education *: 237 (Mar-21), 474 (Jun-21), 711 (Sep-21), 948 (Dec-21), 232 (Mar-22).
      - Wage bill of public workers-Health *: 60 (Mar-21), 120 (Jun-21), 180 (Sep-21), 240 (Dec-21), 65 (Mar-22).
      - Official external budget support (grants, millions of SDRs): 0 (Mar-21), 9 (Jun-21), 9 (Sep-21), 54 (Dec-21), 54 (Mar-22).
      - Official external budget support (loans, millions of SDRs): 95 (Mar-21), 95 (Jun-21), 95 (Sep-21), 133 (Dec-21), 133 (Mar-22).
      - Program exchange rate (MGA/SDR): 5,509 (Mar-21), 5,509 (Jun-21), 5,509 (Sep-21), 5,509 (Dec-21), 5,509 (Mar-22).

*Italicized final line below attributes the source.*

*Source: Madagascar authorities; and IMF staff projections (excerpt from the IMF document).*

### 1. Enforce the collection of outstanding tax arrears by collecting at least MGA 80

### 1. Enforce the collection of outstanding tax arrears by collecting at least MGA 80 billion of tax arrears in the first half of 2021.

### Key structural benchmarks and timelines
- Collect at least MGA 80 billion of tax arrears in the first half of 2021. (Jun-21) — Mobilizing fiscal revenue — High
- Adopt implementation decree for the law on illicit asset recovery, including the setting-up of the illicit asset recovery agency, with a dedicated budget allocation in the 2021 revised Budget. (Jun-21) — Enhancing economic governance — Medium
- Increase the number of beneficiaries of cash transfer programs from 483,428 in December 2020 to 540,000 in September 2021. (Sep-21) — Improving the composition and quality of fiscal spending — High
- Publish progress update of the implementation of AUGURE's recommendations made by the Cour des Comptes, including on the payroll payment chain. (Nov-21) — Improving the composition and quality of fiscal spending — High
- Finalize and publish a public investment manual in line with FAD TA recommendations, notably with a view to clarify institutional aspects. (Dec-21) — Promoting growth by advancing reforms and addressing fragilities — High
- Publication of an independent third-party audit of COVID-19 related contracts. (Dec-21) — Enhancing economic governance — Medium
- Publish the terms and conditions of all PPP contracts within one month of the date of signature on ARMP’s web site. (continuous) — Enhancing economic governance — Medium
- Notify IMF and World Bank staff of details of any budget transfer to JIRAMA's suppliers and share associated documentation within one week of payment. (continuous) — Enhancing economic governance & Improving the composition and quality of fiscal spending — High
- Keep government liability to oil distributors below MGA 100 billion without any direct budget compensation. (continuous) — Preserving and strengthening fiscal space — High
- Publish (before the end of following quarter) a quarterly budget execution report on a payment basis, including on Covid-19 related spending and social spending. (continuous, starting with Q1 2021) — Enhancing budget transparency — High

### Fiscal definitions and measurement conventions
- Government for the TMU comprises the scope of operations of the treasury shown in the opérations globales du Trésor (OGT). It excludes state-owned enterprises and sub-national authorities.
- External and domestic defined on a residency basis.
- Quantitative performance criteria and indicative targets are evaluated in terms of cumulative flows from the beginning of each calendar year.
- Total government revenue comprises tax and nontax budget revenue (Chapter 5 of GFSM 2001) and grants; revenue is recorded on a cash basis.
- Taxes on the import of petroleum products, paid through issuance of promissory notes, are recorded under revenue at issuance; an equivalent amount is recorded (negatively) under “other net transactions of the Treasury” until actual payment.

### Program exchange rates (for TMU calculations)
- Malagasy Ariary (MGA)/SDR 5508.800000
- U.S. Dollar/SDR 1.440269
- Euro/SDR 1.175341
- Australian dollar/SDR 1.878406
- Canadian dollar/SDR 1.840229
- Chinese Yuan/SDR 9.399560
- Japanese Yen/SDR 148.565264
- Swiss Franc 1.274206
- U.K. Pound Sterling/SDR 1.058243

- Foreign currency accounts denominated in currencies other than the SDR will first be valued in SDRs and then converted to MGA using program exchange rates. Amounts in other currencies and monetary gold will be valued in SDRs at the exchange rates and gold prices that prevailed on December 30, 2020, and then converted to MGA.

### Data provision and transparency commitments
- Monthly data on variables subject to quantitative performance criteria and indicative targets: NFA and NDA of CBM within a lag of no more than four weeks; other data within eight weeks. Authorities will promptly transmit any data revisions.
- Financial Intelligence Unit (SAMIFIN) to publish quarterly data (no later than end of the month following the quarter) on reports sent to BIANCO concerning suspicions of laundering of proceeds of corruption, on a publicly available website.
- BIANCO to publish quarterly data (no later than end of the month following the quarter) on: number of persons indicted; number of persons convicted by a first instance court decision; number of persons convicted pursuant to a final court decision; number of verifications of assets disclosures of public officials; on a publicly available website.
- For structural benchmark on notifying IMF and World Bank staff of details of any budget transfer to JIRAMA’s suppliers and sharing documentation within one week of payment, the information to be shared is:
  - (1) details of each transfer, as published for 2020 at http://www.mef.gov.mg/reportingcovid, including the “reference d’engagement”, the beneficiary enterprise, the purpose of the transfer (“objet”), the “date d’engagement”, and the amount of the transfer; and
  - (2) the agreement or “convention” signed with the supplier in relation with the transfer.

### Quantitative performance criteria and indicative targets (summary points)
- Performance criteria cover: net foreign assets (NFA) and net domestic assets (NDA) of the central bank, external payments arrears, new external debt owed or guaranteed by the central government and/or the central bank, and the domestic primary balance (commitment basis).
- Performance criteria are set for end-June 2021 and end-December 2021; indicative targets for end-March 2021, end-September 2021, and end-March 2022.
- Continuous performance criteria include non-introduction of exchange restrictions and multiple currency practices, and related measures inconsistent with Article VIII.

### Fiscal aggregates: domestic primary balance (commitment basis) — measurement and reference values
- Domestic primary balance measured as: domestic tax and non-tax revenue less domestically financed capital expenditures and current spending excluding interest payments.
- Tax revenues are measured net of VAT refunds for primary balance calculations.
- Using data at end-September 2020, reference values:
  - Primary Balance Excluding Foreign Financed Investment and Grants (commitment basis) -269
  - Gross Tax revenue 3,613
  - of which gross domestic tax revenue 1,953
  - of which gross custom tax revenue 1,660
  - VAT refunds 115
  - Tax revenue (net of VAT refunds) 3,498
  - Domestic non-tax revenue 91
  - Less: Domestically-financed capital expenditures 453
  - Current expenditures 3,405
  - Wages and salaries 2,008
  - Goods and services 182
  - Transfers and subsidies 1,134
  - Treasury operations (net of VAT refunds) 81

### External debt and arrears definitions and ceilings
- Ceiling on accumulation of new external payment arrears: arrears are overdue debt-service obligations (payments of principal and interest) related to loans contracted or guaranteed by the government or CBM; overdue if not paid 30 days after due date or after end of a grace period agreed with creditor. Excludes arrears where creditor has accepted in writing to negotiate alternative payment schedules or payments failing to materialize for reasons beyond control of Malagasy authorities.
- Ceiling on new external debt: present value (PV) of debt at contracting calculated by discounting future debt-service using discount rate 5 percent.
- For variable-rate loans tied to benchmark rates, PV calculated using interest rate at time of signature for all disbursements under the agreement.
- Program reference rate for six-month USD LIBOR is 0.42 percent and will remain fixed for the duration of the program.
- Spreads specified:
  - spread of six-month Euro LIBOR or 3-month Euribor over six-month USD LIBOR is -50 basis points.
  - spread of six-month JPY LIBOR over six-month USD LIBOR is -50 basis points.
  - spread of six-month GBP LIBOR over six-month USD LIBOR is 0 basis points.
  - For interest rates on currencies other than Euro, JPY, and GDP, the spread over six-month USD LIBOR is -50 basis points.
- The PV ceiling applies to new external debt contracted or guaranteed by the government or CBM for which value has not yet been received; includes private debt with official guarantees. Ceiling observed continuously from beginning of the year until end-March 2022 when it will be renewed/adjusted. Ceiling subject to an adjustor.

- Exclusions from the ceiling:
  - (i) use of IMF resources;
  - (ii) debts incurred to restructure, refinance, or prepay existing debts, to the extent such debt is on more favorable terms than existing debt and up to the amount actually restructured/refinanced/prepaid (also applies to liabilities of Air Madagascar assumed by government in context of strategic partnership agreement);
  - (iii) debts classified as international reserve liabilities of CBM.

### Monetary aggregates: NFA and NDA of CBM — reference stocks
- NFA of CBM evaluated using end-period stock calculated using program exchange rates. NFA defined as gross foreign assets minus total foreign liabilities, including debt owed to the IMF. All foreign assets and liabilities converted to SDRs at program exchange rates.
- Reference: at end-December 2020, NFA was SDR 653 million, calculated as:
  - Foreign Assets: MGA billions, end-2020 exchange rates (A) 7,369.6
  - SDR millions, end-2020 exchange rates (B) 1,337.8
  - SDR millions, program exchange rates (C) 1,337.8
  - Foreign Liabilities: MGA billions, end-2020 exchange rates (D) 3,772.3
  - SDR millions, end-2020 exchange rates (E) 684.8
  - Net Foreign Assets SDR millions, program exchange rates (F) = (C) – (E) 653.0
- NDA target ceiling evaluated using end-period stock at program exchange rates. NDA defined as difference between reserve money and NFA of CBM valued in MGA. Reference: at end-December 2020, NDA at program exchange rates was MGA 1,083 billion, calculated as:
  - Net Foreign Assets SDR millions, program exchange rates (A) 653.0
  - MGA billions, program exchange rates (B) 3,597.3
  - Base Money MGA billions, end-2020 exchange rates (C) 5,393.1
  - Net Domestic Assets MGA billions, program exchange rates (D) = (C) – (B) 1,795.8

### Indicative targets on social spending and tax revenue
- Floor on Priority Social Spending: cumulative from beginning of calendar year; defined as sum of budget allocations in the Loi de Finance to the Ministries of Health, Education, Population and Water, excluding salaries and externally financed investment.
- Floors on Gross domestic Tax Revenue and gross custom tax revenue: measured on a gross basis before refund of VAT credits; revenue measured on a cash basis as reported in government financial operations table. For year ending December 2020, reference values:
  - Gross domestic tax revenue MGA 2,658 billion (comprised of net domestic tax revenue MGA 2,526 billion and VAT refunds MGA 132 billion)
  - Gross custom tax revenue MGA 2,187 billion (comprised of net custom tax revenue MGA 2,128 billion and VAT refunds MGA 59 billion)

### Structural benchmark clarifications related to tax arrears, fuel liabilities, and JIRAMA transfers
- Structural benchmark on enforcing collection of outstanding tax arrears: collection refers to the “recouvrements des restes à recouvrer” monitored by the Direction Générale des Impôts.
- Structural benchmark on fuel pricing: until adoption of a fuel pricing mechanism, authorities will set prices to prevent total estimated net liabilities to fuel distributors from rising above MGA 100 billion (measured as a cumulative stock). Estimated total net liability calculated by Malagasy Office for Hydrocarbons (OMH) using prevailing or new fuel price structure. Authorities will provide IMF staff calculations for monthly flow and stock estimates for these net liabilities by the 14th day of each month.
- For JIRAMA transfers, required information to IMF/World Bank staff includes transfer details and the related agreement or “convention”.

### Memorandum items and use of adjusters
- Official external program (budget) support defined as grants and loans (including in-kind aid when products are sold by government and receipts are earmarked for budgeted spending) and other exceptional financing by foreign official entities and private sector incorporated into the budget. Does not include grants and loans earmarked to investment projects. Calculated as cumulative flow from January 1, 2021.
- Additional monitoring of social spending as memorandum items: (i) social spending, including salaries of the four social ministries; (ii) social spending, including salaries and externally financed investments; (iii) wage bill of public workers in education (masse salariale des employés publics dans le Secteur Education, provided by the DGT); (iv) wage bill of public workers in health (masse salariale des employés publics dans le Secteur Santé, provided by the DGT).
- Use of adjusters:
  - The floor on NFA will be adjusted downward (upward) by the cumulative deviation downward (upward) of actual from projected budget support (official external program support). Adjustment capped at the equivalent of SDR 100 million, evaluated at program exchange rates.
  - The ceiling on NDA will be adjusted upward (downward) by the cumulative deviation downward (upward) of actual from projected budget support (official external program support). Adjustment capped at the equivalent of SDR 100 million, evaluated at program exchange rates.

*Source: 1mdgea2021001 - 1. Enforce the collection of outstanding tax arrears by collecting at least MGA 80 billion of tax arrears in the first half of 2021.*

### 28.      The performance criteria on the primary balance will be adjusted in line with  deviations from

### 1mdgea2021001 - 28.      The performance criteria on the primary balance will be adjusted in line with  deviations from

### Adjustments to primary balance performance criteria
- The floor on the primary balance excluding foreign-financed investment and grants (commitment basis) will be adjusted downward by the cumulative upward deviation of actual from projected official external program support (grants or loans on concessional terms).
- Deviations for the adjustment are calculated cumulatively from the beginning of each calendar year.
- Deviations are calculated at quarterly period-average actual exchange rates as described in paragraph 4.

### External debt adjustor
- An adjustor of up to 5 percent of the external debt ceiling set in PV terms applies in case deviations are prompted by a change in the financing terms.
- Changes in interest rates, maturity, grace period, payment schedule, commissions, fees of a debt or debts are candidates for the adjustor.
- The adjustor cannot be applied when deviations are prompted by an increase in the nominal amount of total debt contracted or guaranteed and are subject to debt sustainability.

### Data reporting and monitoring (selected items)
- Exchange rate and CBM foreign exchange transaction breakdowns: Daily, next working day.
- Foreign exchange cash flow, including foreign debt operations: Monthly.
- Stock of gross international reserves (GIR) and net foreign assets (NFA), both at program and market exchange rates: Monthly.
- Balance sheet of CBM: Monthly, within two weeks of the end of each month.
- Balance sheet (aggregate of deposit money banks): Monthly, within six weeks of the end of each month.
- Monetary survey: Monthly, within six weeks of the end of each month.
- Financial soundness indicators of deposit money banks: Quarterly, within eight weeks of the end of the quarter.
- Preliminary revenue collections (customs and internal revenue): Monthly, within three weeks of the end of each month.
- Treasury operations (OGT): Monthly, within eight weeks of the end of each month.
- Stock of domestic arrears, including arrears on expenditure and VAT refunds: Monthly, within eight weeks of the end of each month.
- Priority social spending as defined by the indicative target: Monthly, within eight weeks of the end of each month.
- Public and publicly-guaranteed debt stock at end of month (by creditor, instrument, and guarantees): Monthly, within four weeks of the end of each month.
- Balance of payments: Quarterly, by the end of the subsequent quarter.
- Consumer price index data (INSTAT): Monthly, within four weeks of the end of each month.

### Debt coverage, contingent liabilities, and relief measures
- DSA coverage: public and publicly guaranteed (PPG) external and domestic debt, including all external liabilities held by the central bank and all borrowing from the IMF; non-guaranteed domestic debts owed by SOEs where the government has at least 50 percent of the shares; direct guarantees by the central government.
- Contingent liability shock simulated: 8.4 percent of GDP (default setting for PPPs and financial markets but includes a larger contingent liability setting).
- JIRAMA’s debts included in baseline: 2.1 percent of GDP.
- Other SOEs’ debts included in baseline: 2.3 percent of GDP.
- Air Madagascar specific exposures: accumulated debt to external suppliers of US$29 million due to COVID-19; ongoing litigation with amounts in dispute of EUR 20 million.
- Conservative adjustment for Air Madagascar liabilities: US$53 million or 0.4 percent of GDP.
- Additional potential contingencies (postal savings scheme and Caisse d’Epargne de Madagascar, CEM) assumed less than 1 percent of GDP; an additional 1 percent of GDP is added to the shock, bringing the total to 3.4 percent of GDP in the described adjustment.
- PPP-related capital stock below threshold (estimates fall below 3 percent of GDP); Ravinala Airport capital stock estimated at 1.8 percent of GDP.
- Default value for financial markets shock: 5 percent.

- Participation in debt relief initiatives:
  - Debt Service Suspension Initiative (DSSI): amounting to almost SDR 9 million or less than 0.1 percent of GDP.
  - IMF Catastrophe Containment and Relief Trust (CCRT) relief through April 2022: SDR 22 million or 0.2 percent of GDP.

### Recent debt developments and macroeconomic projections
- 2020 PPG debt ratio projected to reach 44 percent, rising by 6 percent of GDP relative to 2019.
- Increase in 2020 driven by large increase in primary deficit and decline in nominal GDP growth due to the COVID-19 pandemic.
- Domestic and external public debt increased by 0.4 and 5.4 percent of GDP, respectively.
- External sources account for almost three-quarters of PPG debt; almost 60 percent of external debt owed to multilateral sources (World Bank, African Development Bank, IMF).
- Debt service pressures:
  - Liquidity pressures may materialize as the debt-service-to-revenue ratio could near or exceed 70 percent in the near term under both the baseline and shocks.

- Macroeconomic assumptions and projections:
  - 2020 GDP contraction: about 4 percent.
  - 2021 partial recovery: +3.2 percent.
  - Growth expected to peak at 5.4 percent in 2023.
  - Growth in 2030 expected to hit 5.0 percent.
  - Public debt could reach 49 percent of GDP in 2025 (higher than the 46 percent of GDP forecasted in the 2019 Article IV but broadly in line with the August 2020 DSA).
  - Primary deficit projected to reach 2.6 percent of GDP by 2025 (lower primary deficits by 2025 reflecting revenue mobilization and PFM reforms).
- Policy-reform measures supporting fiscal outlook include:
  - Updates to the taxpayers’ database.
  - Strengthening compliance in customs administration.
  - Broader use of electronic tax payments and digitalization of related procedures.
  - Clearance of tax arrears (0.3 percent of GDP in additional revenues).
  - Implementing a public procurement tax (0.4 percent of GDP in additional revenues).

### Risk assessment and judgment
- Risk of external debt distress: Moderate.
- Overall risk of debt distress: Moderate.
- Granularity in the risk rating: Some space to absorb shocks.
- Application of judgment: No.
- Baseline does not breach external PPG debt thresholds, but under an export shock the present value of debt-to-exports and debt service ratios breach thresholds towards the latter half of the horizon, assuming continued mobilization of concessional financing (including grants) in the short term.
- Total public debt below benchmark under baseline; a growth shock drives PV of debt-to-GDP towards the benchmark at the end of the period without breaching it.
- Assessment reflects participation in DSSI and CCRT.

*Source: Excerpted content from the supplied IMF document 1mdgea2021001.*

### 6.      Financing assumptions broadly reflect the authorities’ 2021-23 Medium Term Debt

### 6.      Financing assumptions broadly reflect the authorities’ 2021-23 Medium Term Debt

### Financing assumptions and baseline composition
- Main 2023 targets of the debt strategy:
  - Share of external public debt as a share of total public debt should not exceed a maximum of 86 percent (it is estimated at around 73 percent in 2020).
  - Average maturity of locally-issued debt should increase above 10 months (estimates put it around 11 months for 2020).
  - Share of new external debt within a year should be less than 25 percent of the stock of external debt (it is estimated to be around 14 percent in 2020).
  - Share of new domestic debt within a year should be less than 75 percent of the stock of domestic debt (it is estimated at almost 49 percent in 2020).
- Deviations from the medium-term debt strategy:
  - Financing assumptions of this DSA deviate on domestic financing due to a more conservative approach to external financing assumptions and to account for significant amounts of SOE debt.
- Local debt instrument assumptions:
  - Local financing share of medium-term bonds revised upwards to 25 percent from 2020-2025, with continued growth thereafter.
  - Longer-term bonds (e.g., between 4-7 years) are assumed to reach a share of 3 percent in 2026-30, rising to 9 percent by 2036-40.
- Other financing assumptions:
  - Central bank financing is completely phased out by 2030.
  - Commercial borrowing is expected to slowly scale back up from 2030 onwards as Madagascar’s fundamentals strengthen.
- External budget support and domestic financing role:
  - Baseline includes only external budget support based on firm assurances from donors, resulting in a large role for domestic financing.
  - Conservative path assumed for externally financed investment projects.
  - Result: domestic financing closes financing gaps, implying higher associated borrowing costs than external financing.

### Implications for costs and liquidity
- Effects relative to prior DSA (August 2020):
  - Debt service to revenues ratio increased to 78 percent in 2025 relative to 56 percent in the prior DSA.
- Policy priorities to mitigate liquidity pressure:
  - Continue to develop the domestic debt market.
  - Prioritize securing external financing on concessional terms (including grants), in line with the authorities’ debt strategy.

### Realism checks and risk assessment
- Realism tools and projection consistency:
  - Across a range of realism checks (Figure 4), underlying assumptions (including projected 3-year adjustment for the primary balance and public investment plans) do not raise flags.
  - Projected growth in 2021 is below the range of potential growth paths under various fiscal multipliers; COVID-19 impacts are not well-captured by that analysis.
- Key risks to the outlook:
  - Conjunctural risks: prolonged COVID-19 impacts, disrupted trade and global value chains, delayed recovery in tourism, rising costs from heightened protectionism, social unrest, exposure to natural disasters.
  - Structural and governance risks: larger than anticipated transfers to SOEs that reduce priority spending; stalls or reversals in anti-corruption and governance reform agenda; weak investment implementation capacity.
  - Political risk: Presidential elections in 2023 may affect the outlook.
  - Upside risks: faster global recovery and materialization of large-scale projects in the energy or extractive sectors.
- Note on domestic debt issuance constraint:
  - Under the conservative baseline, the share of new domestic debt disbursements as a percent of the stock of domestic debt exceeds the 75 percent level between 2023-27; in all other years over the horizon, it falls below the 75 percent level.

### Drivers of debt dynamics
- Medium-term drivers:
  - Scaling up of foreign-financed public investment drives an increase in debt relative to the 5-year historical average.
  - External and total public debt to GDP ratios expected to rise faster by an additional 8 and 11 percentage points, respectively, over the medium term relative to 2014-2019.
  - Drivers include pandemic-related borrowing, gradual increase in borrowing costs, and higher capital investments accompanied by increasing deficits.
  - Growth and trends in prices and the exchange rate help offset such factors; residuals (including unrepatriated mining receipts and reserve accumulation) are smaller than in the past.
- Public investment and growth:
  - Government capital spending is revised slightly upward, but average 5-year real growth is expected to fall relative to prior forecasts due to pandemic scarring and a fall in private investment ratios.
  - Private investment dropped precipitously in 2020; forecasted to rise thereafter but remain below prior estimates over the medium term.
  - Projected contribution of public investment to real GDP growth over the next 5 years is expected to be slightly higher than suggested by the previous DSA.
  - CPIA score improved from 3.1 in 2015 to 3.3 in 2019, indicating improving institutional strength.

### Country classification and stress test scenarios
- Debt-carrying capacity classification:
  - Madagascar continues to be rated as having medium debt-carrying capacity.
  - Composite Indicator (CI) score: 2.73 (10-year average values based on 2015-24); August 2020 CI score was 2.82.
  - Composite Indicator Score Threshold for medium capacity is 2.69.
- Components (Text Table 5 highlights calculations; CI components preserved in source):
  - CPIA 10-year average: 3.228; contribution 1.25 (46%).
  - Real growth rate (in percent) 10-year average: 3.562; contribution 0.10 (4%).
  - Import coverage of reserves (in percent) 10-year average: 35.811; contribution 1.45 (53%).
  - Import coverage of reserves^2 (in percent) 10-year average: 12.824; contribution -0.51 (-19%).
  - Remittances (in percent) 10-year average: 2.261; contribution 0.05 (2%).
  - World economic growth (in percent) 10-year average: 2.928; contribution 0.40 (15%).
- Stress test design and customizations:
  - Standardized stress tests applied with one exception: growth shock simulates a two standard deviation shock instead of one.
  - Natural disaster shock applied (default template): a 10 percentage-point rise in the debt-to-GDP ratio alongside a fall in real GDP growth (1.5 percent) and exports (3.5 percent) in 2021.
  - Commodity shock customized: illustrative fall in prices equivalent to 10 percent of commodity exports, no mitigating effect on imports, declines in real GDP growth of 0.5 percent and in fiscal revenue of 0.25 percent of GDP; shock occurs in 2021 and unwinds gradually by 2030.
  - Residual financing for external debt stress tests assumed from external sources with rates 25 percent above current concessional rates and with lower average maturities (75 per cent of current average maturity periods).
  - For overall public debt stress tests, assume 65 percent of additional financing would come from external sources and remaining domestic financing would be more expensive (with domestic rate nearly 20 percent above baseline).

### External debt sustainability results
- Baseline projections for external PPG debt:
  - External PPG debt projected to rise from 32 percent of GDP in 2020 to 43 percent of GDP in 2030 and 48 percent of GDP in 2040.
  - Present value (PV) external PPG debt projected to rise from 19 percent of GDP in 2020 to 29 percent of GDP in 2030 and 35 percent in 2040.
  - Projected debt service to exports ratio rises from 4 percent of exports in 2020 to 7 percent of exports in 2030.
  - All indicators remain well below applicable thresholds for Madagascar under the baseline.
- Exports shock outcomes:
  - Under the exports shock, applicable thresholds for Madagascar’s medium debt-carrying capacity are breached for:
    - PV of debt-to-exports,
    - Debt service-to-exports,
    - Debt service-to-revenue (rises to 21 percent in 2027 and remains elevated thereafter; threshold 18 percent).
  - PV of external debt to GDP rises to 35 percent of GDP in 2022, below the indicated threshold of 40.
  - External PPG debt indicators remain resilient to all other shocks except the combined shock.
- Granularity assessment:
  - Under tests to qualify the moderate risk of external debt distress, all indicators fall below limited space thresholds, indicating some space to absorb shocks.
  - PV of debt-to-GDP and debt service-to-revenue ratios rise towards the limited space thresholds by 2030.
- External private sector debt update:
  - 2020 INSTAT survey updated external private sector debt estimates: prior IMF forecasts estimated SDR 2 billion in external private debt at end-2018; new data suggests SDR 4 billion.
  - Implied external private debt as percent of GDP increased to 41 percent from 21 percent in the prior DSA for 2020.
  - Risk assessment: around 80 percent of the debt associated with the mining sector; majority medium-to-long term; sizeable portion with affiliated headquarters or global group; many loans not requiring full reimbursement until liquidation.
  - Private external debt projected to rapidly decline as major mining project loans are repaid, with stock of external private debt falling by almost 40 percent by 2030.
  - Conservatively assume additional borrowing to sustain mining exports towards end of DSA horizon, contributing to private debt equivalent to about 6 percent of GDP in 2040.

### Total public debt sustainability results
- Baseline projections for total public debt (external + domestic):
  - Total public debt projected to rise from 44 percent of GDP in 2020 to 54 percent of GDP in 2030, before reaching 59 percent of GDP in 2040.
  - In PV terms, total public debt/GDP expected to rise from 31 percent in 2020 to 40 percent in 2030 and 46 percent in 2040, below the benchmark of 55 percent for medium-capacity countries.
  - Comparison with August 2020 DSA: total public debt ratio projected to be 4 percentage points higher by 2039 relative to prior DSA.
- Primary deficit projections:
  - Projected primary deficits: 2021 primary deficit expected to reach 4.9 percent; 2025 primary deficit expected to reach 2.6 percent.
  - In August 2020 DSA: 2021 and 2025 primary deficits were expected to reach 4.0 percent and 3.4 percent, respectively.
  - Ongoing revenue mobilization and PFM reforms expected to continue; share of tax revenue in GDP projected to rise in medium to long term.
- Liquidity risk concern:
  - PPG debt service to revenue and grants ratio forecasted to reach 78 percent by 2025, reflecting repayment of prior IMF loans and conservative financing assumptions with high reliance on domestic financing during the program horizon.
  - Potential for debt service and liquidity difficulties within the medium term.
  - Recommended priorities:
    - Authorities should prioritize securing ongoing external concessional financing.
    - Continue to accelerate domestic debt market development to bring down borrowing costs.
    - If strong donor support continues, liquidity risks can be mitigated.

*Source: IMF DSA chapter titled "6.      Financing assumptions broadly reflect the authorities’ 2021-23 Medium Term Debt" (supplied content).*

### 20.      Total public debt is vulnerable to a growth shock but does not breach its benchmark within

### 1mdgea2021001 - 20.      Total public debt is vulnerable to a growth shock but does not breach its benchmark within

### Debt vulnerability and stress-test outcomes
- The most severe simulated shock is a growth shock.
- Under the growth shock:
  - "the PV of debt to GDP approaches 55 percent of GDP by 2030 and is on a persistent upward trajectory."
  - The PV of debt-to-revenue would be "over 380 in 2030."
  - The debt service-to-revenue ratio "could raise the debt service-to-revenue ratio above 90 percent by 2025."
- A commodity price shock produces qualitatively similar results to the growth shock.
- Despite the upward trajectory under the growth shock, the PV of debt-to-GDP "does not breach the benchmark for medium capacity countries like Madagascar" within the stress test horizon.

### Risk rating and vulnerabilities
- Madagascar is classified as being at "moderate risk of external debt distress."
- Under the baseline scenario, "no thresholds are breached."
- Under an export shock, there are breaches in:
  - "the PV of debt-to-exports" threshold, and
  - "debt service ratio" thresholds.
- A granularity assessment indicates Madagascar "has some space to absorb shocks."
- The overall assessment: Madagascar is "at moderate risk of overall debt distress."
  - The PPG debt stress test for growth shows PV of debt-to-GDP "approaches the applicable benchmark in the final years of the stress test horizon and is on a persistent upward trajectory."
  - Liquidity pressures could arise if more concessional external financing is not secured or if domestic debt market development is delayed.
  - "the debt-service to revenue ratio could near or exceed 70 percent within the medium term."
  - "Together with potentially high debt service burdens, the breach of the external PPG debt thresholds classifies Madagascar’s overall risk of debt distress as moderate."
- This assessment is "in line with the authorities’ most recent September 2020 debt sustainability analysis."

### Policy implications, financing conditions, and recommended actions
- The assessment is supportive of Madagascar’s current plans to scale up borrowing "conditional on the mobilization of continued concessional external financing."
- Key risks if borrowing increases faster than planned:
  - "A steeper-than-expected increase in borrowing in line with a rapid execution of the government’s ambitious medium-term borrowing plan would carry significant risks, especially in the absence of securing additional external concessional financing."
  - "Poorly selected public investments and less favorable financing terms could affect debt vulnerability."
  - "The state of SOE liabilities could also influence future assessments."
  - "Less grant financing and a switch to a less concessional mix of borrowing would raise the debt burden, especially when measured in PV terms, as well as debt service risks."
  - "External private debts could increase in less ringfenced sectors (e.g., banking) that would increase the vulnerabilities associated with such debts."
- Recommended policy actions and priorities:
  - Continue to secure concessional external financing to contain debt and liquidity risks.
  - Develop the domestic debt market "in order to lower borrowing costs."
  - Strengthen public financial management and public investment management to improve absorptive capacity.
  - Improve external statistics and debt coverage (including private debt) and strengthen institutional capacity and quality.
  - Monitor and manage fiscal risks from SOEs, natural disasters, and terms-of-trade shocks as part of borrowing pacing decisions.

### Contextual macro-fiscal notes from the authorities’ statement
- The authorities requested a "40-month Extended Credit Facility (ECF) arrangement" to support recovery and mobilize external financing.
- Near-term policy stance:
  - Maintain an "accommodative fiscal stance in the near-term to mitigate the pandemic and support the recovery."
  - Domestic primary balance expected to "turn positive in 2023" through strengthened revenue mobilization and improved public financial management.
  - Rely mostly on "grants and concessional borrowing for financing" to preserve debt sustainability.
- Structural and institutional reforms planned:
  - Strengthen revenue administration and tax policies to recover and gradually increase the tax-to-GDP ratio.
  - Improve spending transparency and efficiency, wage bill management, and prioritization of investment projects.
  - Implement anti-corruption, governance, AML/CFT, and public-sector reforms; operationalize institutions for the fight against corruption.
  - Central bank reforms to transition "from a framework relying on reserve money aggregates to interest rate targeting" and adopt IFRS for 2020 accounts.
- SOE risk management:
  - Pursue recovery plan for JIRAMA and limit transfers to what is allocated in the budget law.
  - "Refrain from putting any public funds" in Air Madagascar until its business plan is finalized.
- Disaster risk management and fuel pricing:
  - Continue to improve disaster risk management strategy.
  - Finalize a plan towards a fuel pricing mechanism to reduce potential liabilities to oil distributors.

### Key statistics and projections cited
- PV of debt to GDP "approaches 55 percent of GDP by 2030" under the growth shock.
- PV of debt-to-revenue "over 380 in 2030" under the growth shock.
- Debt service-to-revenue ratio "above 90 percent by 2025" under the growth shock.
- Debt-service to revenue ratio could "near or exceed 70 percent within the medium term" under delayed concessional financing or delayed domestic debt market development.
- Risk classifications: "moderate risk of external debt distress" and "moderate risk of overall debt distress."
- Authorities’ requested program length: "40-month Extended Credit Facility (ECF) arrangement."
- Domestic primary balance expected to turn positive in "2023."

*Source: IMF staff report excerpts and Madagascar authorities’ statement contained in the provided chapter.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1mdgea2021001.pdf_