## 1mdgea2023002

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### Major findings and context
- Two years of pandemic and multiple climate shocks have aggravated Madagascar’s fragility.
- Madagascar’s economy rebounded faster than expected in 2021, but growth is projected at 4.2 percent in 2022–2023.
- The poverty rate is estimated to be above 80 percent (estimated 81.5 percent in 2021).
- Fiscal performance deteriorated with weak revenue performance and increasing cross-liabilities with oil distributors.
- Fiscal and external deficits have widened, but fiscal and external sustainability are assessed as preserved in the medium term (debt distress risk: “moderate”).
- Risks from the domestic political situation, low COVID-vaccination rates, and adverse global developments cloud the outlook.
- Upside scenario: full implementation of the Plan Emergence Madagascar (PEM) reform agenda could have significant effects on productivity and growth.

### Outlook and risks
- Real GDP projection:
  - 2023: 4.2 percent (staff projection).
  - Medium-term potential growth estimate revised from 5 to around 4.5 percent to account for recurring climate disasters.
- Inflation:
  - Average inflation projection: 9.5 percent in 2023 (staff projection).
  - Headline inflation rose from about 4 percent in 2020 to 10.8 percent year-on-year in November 2022.
  - End-2022 projection: around 11 percent; 2023: approximately 9 percent (text uses both 9.5 percent and ~9 percent depending on context).
- Key downside risk drivers:
  - Social fragility and weak state capacity.
  - Climate shocks and extreme weather events.
  - Political risks ahead of presidential elections.
  - Slowing global growth and high international prices.
- Upside scenario elements:
  - Full PEM implementation and new investment projects in energy and mining could significantly boost productivity and growth.
- Sector-specific risk:
  - Vanilla sector: attempts to restrict access and impose a minimum export price of US$250 per kilogram risk long-run viability and potential market substitution.

### Program performance, IMF decision, and financing
- IMF Executive Board action:
  - Completed the third review under the Extended Credit Facility (ECF).
  - Approved disbursement of SDR 24.44 million (about US$32.6 million) for budget support.
  - Total disbursements under the arrangement: SDR 146.6 million (about US$195.5 million).
- Quantitative performance (June 2022):
  - Three out of five quantitative performance criteria (QPCs) were met.
  - All three indicative targets (ITs) were missed.
  - Authorities requested waivers for non-observance of QPCs on:
    - The domestic primary deficit (missed by MGA 43 billion at end-June).
    - The central bank’s net foreign assets (NFA) (actual SDR 591 million vs target SDR 615 million).
- Program status and financing:
  - Program remains fully financed with firm commitments for the next 12 months.
  - Existing and prospective Fund credit expected to peak in 2023 at 4.8 percent of GDP and 46.8 percent of government revenue, declining thereafter.
  - Annual planned repayments peak in 2026 at 0.70 percent of GDP, 5.0 percent of government revenue, and 2.4 percent of exports.

### Key quantitative indicators (selected, 2019–24 from Table 1)
- GDP at constant prices (year values shown exactly as in source):
  - 2019: 4.4
  - 2020: -7.1
  - 2021: 5.7
  - 2022: 4.2 (Est.)
  - 2023: 4.2 (Proj.)
  - 2024: 4.8 (Proj.)
- Consumer prices (end of period):
  - 2019: 4.0
  - 2020: 4.6
  - 2021: 6.2
  - 2022: 11.2
  - 2023: 9.3
  - 2024: 8.6
- Broad money (M3) growth:
  - 2019: 7.3
  - 2020: 12.1
  - 2021: 12.2
  - 2022: 34.5
  - 2023: 16.5
  - 2024: 16.8
- Total revenue (excluding grants) (percent of GDP):
  - 2019: 10.8
  - 2020: 9.9
  - 2021: 10.5
  - 2022: 11.1
  - 2023: 11.9
  - 2024: 12.7
- Total expenditures (percent of GDP):
  - 2019: 15.4
  - 2020: 16.4
  - 2021: 14.0
  - 2022: 20.3
  - 2023: 17.6
  - 2024: 18.6
- Overall balance (commitment basis) (percent of GDP):
  - 2019: -1.4
  - 2020: -4.0
  - 2021: -2.8
  - 2022: -6.8
  - 2023: -3.0
  - 2024: -3.3
- Current account balance (exc. grants) (percent of GDP):
  - 2019: -5.4
  - 2020: -7.9
  - 2021: -5.7
  - 2022: -8.0
  - 2023: -8.4
  - 2024: -7.7
- Public Debt (percent of GDP):
  - 2019: 41.0
  - 2020: 51.2
  - 2021: 52.3
  - 2022: 57.1
  - 2023: 53.1
  - 2024: 51.9
- Gross official reserves (millions of SDRs):
  - 2019: 1196
  - 2020: 1338
  - 2021: 1630
  - 2022: 1601
  - 2023: 1523
  - 2024: 1627
- Months of imports of goods and services:
  - 2019: 4.2
  - 2020: 6.0
  - 2021: 5.8
  - 2022: 4.3
  - 2023: 3.7
  - 2024: 3.9
- GDP per capita (U.S. dollars):
  - 2019: 532
  - 2020: 477
  - 2021: 517
  - 2022: 526
  - 2023: 536
  - 2024: 560

### Fiscal policy recommendations and agreed measures
- Fiscal policy stance:
  - The gradual fiscal consolidation envisaged in the 2023 budget is appropriate; staff agree to a small relaxation of consolidation for 2023.
  - 2023 domestic primary balance could reach a surplus of 1.3 percent of GDP driven by settlement of oil distributors’ 2022 net liability.
- Revenue mobilization:
  - Identify adequate tax policy measures, such as rationalizing tax exemptions, to create fiscal space for social spending and public investment.
  - A properly designed revision of the mining code and mining taxation reform could yield significant revenue while boosting growth and exports; staff cautioned on excessive taxation (e.g., combined royalties + exit tax) that may deter investment or encourage smuggling.
- Expenditure and PIM:
  - Further efforts needed to strengthen public investment management and improve spending efficiency.
  - Strengthen budget credibility and fiscal transparency; cancel unused credits at fiscal year-end to enforce budget annuality.
- Specific measures:
  - Full implementation of agreement with oil distributors and gradual implementation of an automatic fuel pricing mechanism by 2024Q1.
  - Consolidation of the Cour des Comptes’ autonomy and strengthening legal framework for public procurement, including identification of ultimate beneficial owners (UBOs).
  - Authorities committed to clear the arrears accumulated in 2022 during 2023; use of MGA 1100 billion of the August 2021 SDR allocation planned to close financing gap.

### Monetary and financial policy recommendations
- Monetary policy:
  - Central bank should continue modernization of monetary operations, macroeconomic forecasting, and policy analysis to support transition to interest rate targeting.
  - Central bank should stand ready to further raise interest rates to contain inflationary pressures.
  - Limit foreign exchange interventions to smoothing volatility and building external buffers.
- Financial sector stability:
  - Adoption of a financial stability law recommended to strengthen the regulatory and supervisory role of the central bank.
  - Pursue compliance with Basel II and Basel III; consider increasing minimum capital requirements and adopting a capital conservation buffer.
  - Strengthen bank regulation, enforce prudential regulation, and closely monitor NPLs.
- Financial inclusion:
  - Update national inclusion strategy; support fintech solutions and implementation of a national payment Switch to allow interoperability; e-ariary CBDC pilot to be carefully considered.

### Governance, anti-corruption, and PFM reforms
- Governance priorities:
  - Effective enforcement of anti-corruption framework; provide adequate human and financial resources to anti-corruption agencies (PACs, ARAI, BIANCO, SAMIFIN).
  - Upgrade the AML/CFT framework to align with FATF recommendations; issue implementing decrees for Law No. 2018-043/2019.
  - Improve public access to information, adopt law on public access to information, protect whistleblowers, and enable public policy evaluation.
- Public Financial Management:
  - Remove the spending authorization requirement (already implemented for 2023 budget execution).
  - Prepare annual spending commitment plans for social ministries (structural benchmark met: prepared before end-January 2023 for four social ministries).
  - Improve coverage and adequacy of quarterly budget execution reports; finalization and publication of a public investment manual by March 2023 (SB).
  - Require publication of individual public procurement contracts and collect UBO information by June 2023 (new proposed SB).
- Sovereign fund and SOE oversight:
  - Clarify objectives, governance, financing, and transparency of Malagasy Sovereign Fund (FSM) before operationalization.
  - Strengthen oversight and restoration of SOE financial situation (notably JIRAMA and Air Madagascar) to reduce fiscal transfers and contingent liabilities.

### Social protection, JIRAMA, Air Madagascar, and vulnerable groups
- Social protection:
  - Strengthen social safety nets to protect the most vulnerable households; develop a new social protection strategy in 2023 with clear objectives, timelines, and financing.
  - Pilot integration of 60,000 households into the single social registry (two new proposed SBs).
  - Allocate $5 million (MGA 18 billion) for the Intervention Fund for Development (FID) for 36,900 households in 10 districts in 2023.
- JIRAMA:
  - 2023 budget law allows issuance of special T-bills to pay for fuel requisitions; authorities budgeted MGA 300 billion for JIRAMA’s operational subsidy in 2023 (vs. MGA 500 billion in 2022 LFR).
  - Prepaid electricity meters for all public administrations by end-2023 (structural benchmark).
  - Transfer needs for JIRAMA for 2023 estimated at MGA 453 billion; budget provides MGA 300 billion with decisions during year to provide additional funds as necessary.
- Air Madagascar:
  - Identified fiscal risk with preliminary financing requirement of at least US$ 60 million.
  - Government guarantee of US$ 20 million for aircraft leasing reported in the 2023 LFI; restructuring ongoing.

### Structural reform progress and benchmarks
- Structural reform implementation highlights:
  - September 30 dashboard on spending authorization requests initiated and shared monthly with staff; over last four months of 2022, 84 percent of SARs were approved with average weighted delay of 11.6 days.
  - Authorities agreed to eliminate the spending authorization process for 2023 budget execution.
  - Continuous structural benchmarks: coverage of quarterly budget execution reports improved; staff notified within one week of budget transfers to JIRAMA’s suppliers made in September.
  - Mining code revision committed to be finalized and submitted to Parliament by June 2023 (new proposed SB).
  - Five new structural benchmarks for June, October, and December 2023 include: public procurement legal framework to collect UBOs; finalize mining code revision; finalize social registry functionality; pilot integration of 60,000 households; install prepaid meters for all public administrations.

### Mining code recommendations (Box 2)
- Key recommendations:
  - Reinstate granting and renewal of exploration and production permits (suspended since 2011).
  - Include provisions for government monitoring of mining activities (e.g., cahier des charges attached to permits).
  - Strengthen environmental protection, health and safety rules, workers’ rights, and prohibit child labor.
  - Ensure stability of legal and fiscal framework and fiscal transparency; avoid bilateral conventions that reduce transparency.
  - Avoid earmarking mineral revenues to finance the Malagasy wealth fund to preserve budget unicity.
  - Weigh greater revenue mobilization (e.g., increasing royalty rate which currently is 2 percent) against investor attraction and smuggling risks.
- Exit tax specifics:
  - 5 percent on exports of transformed minerals, 15 percent on crude mineral and 10 percent on gold (as in draft proposals noted in source).

### Debt sustainability analysis (DSA) and public debt outlook
- Risk assessment:
  - Madagascar’s risk of overall and external debt distress remains “moderate.”
  - Composite Indicator (CI) score: 2.77, corresponding to medium debt-carrying capacity.
- Key DSA projections and indicators (selected exact figures from source):
  - PPG debt-to-GDP (selected years):
    - 2019: 41.0
    - 2020: 51.2
    - 2021: 52.3
    - 2022: 57.1
    - 2023: 53.1
  - External PPG debt (percent of GDP examples):
    - 2019: 27.0; 2021: 38.5; projections vary through 2032 in source tables.
  - NIIP (2022 estimate): -123 (percent of GDP).
  - Contingent liability shock simulated: 7.2 percent of GDP (components include 5.0 percent financial market shock and 2.2 percent SOE shock).
- Policy implications from DSA:
  - Prioritize concessional external financing.
  - Accelerate domestic debt market development.
  - Strengthen fiscal risk identification (fuel subsidies, SOEs, PPPs, pensions).
  - Carefully pace borrowing and improve project selection and execution.

### Climate, PEM, and productivity
- PEM targets:
  - Aim to increase GDP per capita to $4,000 in 2040 (from $522 in 2019).
  - Raise human capital index to 0.60 (from 0.39 in 2020).
  - Reduce poverty rate to 35 percent by 2040.
- Growth accounting and TFP requirements:
  - PEM assumes real investment-to-GDP: 35 percent in 2023, 38 percent in 2027, 40 percent in 2040.
  - Human capital growth assumed: annual growth in h of 1.65 percent per year.
  - TFP contribution needed to hit PEM 9-percent growth: 2.3 percentage points in first decade and 2.4 percentage points in second decade — representing a radical improvement relative to historical TFP performance (historical TFP contribution: average loss in growth of 1.28 percentage points each year).
  - If TFP follows historical average, annual average real GDP growth under PEM could reach 6 percent.
- Climate macroeconomic implications:
  - Staff revised medium-term growth projections from 5 to 4.5 percent to account for recurring climate disasters.
  - DIGNAD model simulations suggest investments in resilient infrastructure and human capital, financed by mitigation proceeds and grants, could boost growth while preserving fiscal sustainability — conditional on accelerated reforms and improved governance and PIM capacity.
- Climate adaptation and CMAP recommendations:
  - Strengthen emergency response capacity, increase agricultural productivity, improve infrastructure, and develop social safety nets.
  - Introduce climate-sensitive budgeting and climate budget tagging; adopt decrees to operationalize the National Contingency Fund (FNC).

### Financial inclusion and smallholder farmers (Box 4)
- Context and vulnerabilities:
  - Madagascar ranked 12th out of 180 countries in Climate Risk Index (CRI-2021) for 2000–19.
  - Almost 80 percent of population rely on agricultural activities; access to arable land and agricultural productivity are low.
  - Out of estimated 8–10 million land parcels, less than 1 million bear a land certificate.
- Recommended reforms to increase financial inclusion:
  - Advance land tenure reform and property rights to allow land as collateral.
  - Adopt digital identification.
  - Improve mobile connectivity and expand mobile banking; implement a national payment Switch.
  - Encourage bank-MFI partnerships with mobile money operators and CICO agents.
  - Require government payments via bank accounts or mobile money to reduce informality.
  - Promote financial literacy and improve consumer protection.
- Programs and pilot results:
  - WFP program assisting 62,000 smallholder farmers in Great South (Androy, Anosy, Atsimo-Andrefana).
  - WFP agricultural microinsurance within FAGNAVOTSE: 5,478 beneficiaries (almost 70 percent women); beneficiaries joined VSLAs — VSLAs reported to potentially help reduce extreme poverty rates by 14 percent.

### Banking sector and microfinance
- Banking indicators:
  - Average NPL ratio: 7.7 percent in December 2022 versus 7.3 percent in December 2019.
  - Top five banks (90 percent of sector assets) had NPL ratio below 7 percent in September.
  - One small bank (2.7 percent of credit market) with high NPLs is being recapitalized by its foreign parent.
  - Banks remain adequately capitalized, liquid, and profitable; average capital-to-risk-weighted-assets ratio: 12 percent at end-September against regulatory minimum of 8 percent.
- Monetary operations and liquidity:
  - Central Bank liquidity injections cumulatively reached MGA 1,154 billion over the year while raising rates.
  - Private sector credit growth: 19.3 percent year-on-year in October 2022, largely driven by short-term credit.
  - Deposit and marginal lending facility rates increased by 634 and 394 basis points since May 2021, to 8.1 and 10.1 percent, respectively.
- Microfinance sector:
  - Deposits and loans grew by 5.9 and 15.6 percent year-on-year in August 2022.
  - Sector net income up by 16 percent; 9 out of 17 microfinance institutions profitable.

### Program monitoring, structural benchmarks, and safeguards
- Structural benchmarks and timeline:
  - Prior actions for review completion: approval of 2023 budget consistent with program objectives and removal of spending authorization requirement.
  - Five new SBs for 2023 on UBO collection, mining code revision, social registry functionality, 60,000 household pilot, and prepaid meters installation.
  - Review schedule: Fourth, fifth, and sixth reviews expected on/after May 15, 2023; November 15, 2023; and May 15, 2024 (based on end-December 2022, end-June 2023, and end-December 2023 test dates).
- Safeguards:
  - Since 2021 safeguards assessment, BFM implemented majority of recommendations and completed transition to IFRS; outstanding recommendations include external quality assessment of internal audit and phasing out involvement in unrefined gold purchases until safeguards are in place.

### Staff appraisal: priorities and concluding recommendations
- Staff appraisal highlights:
  - Persistent external and domestic headwinds, high poverty, and acute vulnerability to climate shocks.
  - Recovery from pandemic faster than expected, but growth slowed in 2022 due to global slowdown, higher inflation, and cyclones.
  - Medium-term outlook broadly favorable with sizeable potential in tourism and mining if governance and reforms advance.
- Immediate priorities:
  - Monitor and contain inflation with readiness to tighten monetary policy as needed.
  - Mobilize domestic revenue by removing costly and distortionary tax exemptions and strengthening tax administration.
  - Improve PFM, budget credibility, and execution; cancel unused credits at year-end.
  - Strengthen governance, anti-corruption enforcement, and AML/CFT framework; provide resources for anti-corruption agencies.
  - Address JIRAMA and Air Madagascar fiscal risks with realistic recovery plans and oversight.
  - Implement CMAP recommendations, strengthen food security, and build resilience to climate shocks.
- Program recommendation:
  - Staff support completion of the third review under the ECF, the waiver requests for non-observance of QPCs, and a 24-month cycle for the next Article IV consultation.

*Source: IMF staff report — Republic of Madagascar: Staff Report for the 2022 Article IV Consultation, Third Review Under the Extended Credit Facility Arrangement, and Requests for a Waiver of Nonobservance of Performance Criteria and Modification of Performance Criteria (March 2023) — content unit 1mdgea2023002.*

### Box 92780 • Washington, D.C. 20090 Telephone: (202)

### IMF Executive Board Completes the Third Review Under the Extended Credit Facility, Approves $32.6 Million Disbursement, and Concludes the 2022 Article IV Consultation with the Republic of Madagascar

### Major Findings and Context
- Two years of pandemic and multiple climate shocks have aggravated Madagascar’s fragility.
- Madagascar’s economy rebounded faster than expected in 2021, but growth is projected at 4.2 percent in 2022–2023.
- The poverty rate is estimated to be above 80 percent.
- Fiscal performance has deteriorated with weak revenue performance and increasing cross-liabilities with oil distributors.
- Fiscal and external deficits have widened, but fiscal and external sustainability are preserved in the medium term.
- Risks from the domestic political situation, low COVID-vaccination rates, and adverse global developments cloud the outlook.
- Upside scenario: full implementation of the Plan Emergence Madagascar reform agenda would have significant effects on productivity and growth.

### Outlook and Risks
- Real GDP projection: 4.2 percent in 2023.
- Average inflation projection: 9.5 percent in 2023 (staff projection).
- Directors noted growth has decelerated and risks are to the downside.
- Key risk drivers:
  - Social fragility and weak state capacity.
  - Climate shocks and extreme weather events.
  - Political risks ahead of presidential elections.
  - Slowing global growth and high international prices.

### Program Performance and IMF Decision
- Completion of the third review under the Extended Credit Facility enabled disbursement of SDR 24.44 million (about US$32.6 million), usable for budget support.
- Total disbursements under the arrangement: SDR 146.6 million (about US$195.5 million).
- Program performance (June 2022):
  - Three out of five quantitative performance criteria (QPCs) were met.
  - All three indicative targets (ITs) were missed.
  - Authorities requested a waiver for non-observance of performance criteria on:
    - The domestic primary deficit.
    - The central bank’s net foreign assets.
- Authorities advanced key structural reforms, including:
  - Removing the spending authorization requirement.
  - Preparing annual spending commitment plans for social ministries in line with the approved budget.
  - Strengthening the budgetary autonomy of the supreme audit institution.
  - Reaching an agreement to clear cross-liabilities with oil distributors.

### Policy Recommendations and Agreed Measures
- Fiscal policy
  - The gradual fiscal consolidation envisaged in the 2023 budget is appropriate.
  - Identify adequate tax policy measures, such as rationalizing tax exemptions, to create fiscal space for social spending and public investment.
  - A properly designed revision of the mining code and mining taxation reform could yield significant revenue while boosting growth and exports.
  - Further efforts needed to strengthen public investment management and improve spending efficiency.
  - Strengthen budget credibility and fiscal transparency; recent public financial management reforms are expected to improve budget execution in 2023.
  - Measures to enhance the legal framework for public procurement contracts would be welcome; require identification of ultimate beneficial owners.
  - Consolidation of the Cour des Comptes’ autonomy to improve external oversight of public finances.
- Monetary and financial policy
  - Central bank should continue modernization of monetary operations, macroeconomic forecasting, and policy analysis to support transition to interest rate targeting.
  - Central bank should stand ready to further raise interest rates to contain inflationary pressures.
  - Limit foreign exchange interventions to smoothing volatility and building external buffers.
  - Adoption of a financial stability law would strengthen the regulatory and supervisory role of the central bank and enhance financial stability.
- Governance and anti-corruption
  - Effective enforcement of the anti-corruption framework is crucial; provide adequate human and financial resources to anti-corruption agencies.
  - Upgrade the AML/CFT framework.
  - Restore financial situation of state-owned enterprises and improve their governance to reduce fiscal transfers.
- Social protection and climate resilience
  - Strengthen social safety nets to protect the most vulnerable households.
  - Build resilience to climate shocks drawing on CMAP recommendations: strengthen emergency response capacity, increase agricultural productivity, improve infrastructure, and develop social safety nets.
- Other measures
  - Full implementation of the agreement reached with oil distributors in December 2022 and gradual implementation of an automatic fuel pricing mechanism to mitigate fiscal risks.

### Executive Directors’ Assessment Highlights
- Directors welcomed progress on reforms but noted mixed performance under the Fund-supported program.
- Supported a more gradual fiscal consolidation path to navigate complex global and domestic environment.
- Emphasized mobilizing domestic revenue, preferably by removing costly and distortionary tax exemptions.
- Encouraged continued modernization of public financial management and improvement of budget execution and transparency.
- Stressed urgency of improving governance and accountability to improve trust in institutions.
- Welcomed efforts to build resilience to climate shocks and improve food security via emergency response, agricultural productivity, infrastructure, and social safety nets.
- Noted progress toward interest rate targeting and encouraged readiness to raise interest rates to contain inflationary pressures.

### Key Quantitative Indicators (selected from Table 1, 2019–24)
- GDP at constant prices:
  - 2019: 4.4
  - 2020: -7.1
  - 2021: 5.7
  - 2022: 4.2 (Est.)
  - 2023: 4.2 (Proj.)
  - 2024: 4.8 (Proj.)
- Consumer prices (end of period):
  - 2019: 4.0
  - 2020: 4.6
  - 2021: 6.2
  - 2022: 11.2
  - 2023: 9.3
  - 2024: 8.6
- Broad money (M3) growth:
  - 2019: 7.3
  - 2020: 12.1
  - 2021: 12.2
  - 2022: 34.5
  - 2023: 16.5
  - 2024: 16.8
- Total revenue (excluding grants) (percent of GDP):
  - 2019: 10.8
  - 2020: 9.9
  - 2021: 10.5
  - 2022: 11.1
  - 2023: 11.9
  - 2024: 12.7
- Total expenditures (percent of GDP):
  - 2019: 15.4
  - 2020: 16.4
  - 2021: 14.0
  - 2022: 20.3
  - 2023: 17.6
  - 2024: 18.6
- Overall balance (commitment basis) (percent of GDP):
  - 2019: -1.4
  - 2020: -4.0
  - 2021: -2.8
  - 2022: -6.8
  - 2023: -3.0
  - 2024: -3.3
- Current account balance (exc. grants) (percent of GDP):
  - 2019: -5.4
  - 2020: -7.9
  - 2021: -5.7
  - 2022: -8.0
  - 2023: -8.4
  - 2024: -7.7
- Public Debt (percent of GDP):
  - 2019: 41.0
  - 2020: 51.2
  - 2021: 52.3
  - 2022: 57.1
  - 2023: 53.1
  - 2024: 51.9
- Gross official reserves (millions of SDRs):
  - 2019: 1196
  - 2020: 1338
  - 2021: 1630
  - 2022: 1601
  - 2023: 1523
  - 2024: 1627
- Months of imports of goods and services:
  - 2019: 4.2
  - 2020: 6.0
  - 2021: 5.8
  - 2022: 4.3
  - 2023: 3.7
  - 2024: 3.9
- GDP per capita (U.S. dollars):
  - 2019: 532
  - 2020: 477
  - 2021: 517
  - 2022: 526
  - 2023: 536
  - 2024: 560

*Source: IMF staff report — Republic of Madagascar: Staff Report for the 2022 Article IV Consultation, Third Review Under the Extended Credit Facility Arrangement, and Requests for a Waiver of Nonobservance of Performance Criteria and Modification of Performance Criteria (March 2023).*

### 1.      The COVID-19 pandemic and multiple climate shocks have aggravated Madagascar’s

### The COVID-19 pandemic and multiple climate shocks have aggravated Madagascar’s fragility

### Fragility, poverty, and structural constraints
- The 2020 recession was about three times deeper than in the rest of Sub-Saharan Africa (SSA).
- Real per capita income fell back to historical lows in 2020 after two decades of quasi-stagnation.
- The estimated poverty rate increased to 81.5 percent in 2021, almost twice as high as the average of SSA countries.
- More than one million people rely on food assistance from the World Food Program due to worsening food insecurity from inadequate infrastructure and several years of droughts.
- Internal migration to northern districts has increased as people search for better livelihood opportunities.
- Growth remains constrained by: weak physical and human capital, high informality and self-subsistence, weak governance and corruption, and exposure to climate disasters.

### Political risks and governance
- Risks of political tensions are growing ahead of the 2023 presidential elections.
- Despite the 2018 elections and 2019 inauguration marking the first democratic handover in Madagascar’s history, persistent food insecurity, higher prices, high levels of perceived corruption, and growing poverty could exacerbate popular discontent.
- Banditry, cattle rustling, and lawlessness weaken rural security and state control.
- Reforms are hampered by limited capacity and weak governance; decision-making and policy implementation are often tainted by private interests, exclusion of key groups, high centralization, and weak accountability.

### Plan Emergence Madagascar (PEM) and investment prospects
- The national forum of investments for the emergence of Madagascar held in October 2022 aimed to draw prospects for development in the context of the PEM.
- PEM target: an eightfold increase in per capita GDP and reduction of the poverty rate to 35 percent by 2040.
- Achieving PEM objectives would require a quantified and timebound implementation strategy, accelerated structural reforms, reinforced public trust, and an ambitious investment scale-up financed by a significant increase in domestic revenue mobilization and external financing.

### Recent economic developments and growth
- After a contraction of 7.1 percent in 2020, the economy grew 5.7 percent in 2021, supported mainly by the mining industry and construction.
- Growth momentum was disrupted in the first half of 2022 by five cyclones.
- Low COVID-19 vaccination rate: 6.9 percent, affecting tourism recovery.
- Growth estimated around 4.2 percent in 2022, supported by mining, textile, and tourism rebounds.

### Inflation: magnitude and drivers
- Headline inflation rose from about 4 percent in 2020 to 10.8 percent year-on-year in November 2022.
- A 43-percent fuel price increase in July 2022 is a key driver; public wages increased by 5 to 25 percent in May (17 percent on average) and the private sector minimum wage was raised by 25 percent, with the government subsidizing 60 percent of the increase in employers’ social contributions in 2022.
- Central Bank actions: raised interest rates five consecutive times since November 2021, including a 120 basis point increase in October 2022; deposit and marginal lending facility rates increased by 634 and 394 basis points since May 2021, to 8.1 and 10.1 percent, respectively.
- Box 1 findings:
  - Energy and transportation explain the recent spike: energy up 13.6 percent y-o-y in August 2022 versus 2.4 percent y-o-y in June 2022; transportation up 19.3 percent y-o-y in August 2022 versus 3.3 percent y-o-y in June 2022.
  - Energy and transportation represent 13 percent of the CPI basket (7.75 and 5.3 percent respectively) but explain more than 57 percent of the observed change in inflation in July and August 2022; this share fell to 50 percent in September and 40 percent in November 2022.
  - Between November 2021 and November 2022, y-o-y inflation increased by 4.7 percentage points, of which energy and transportation contributed 1 and 0.9 percentage points, respectively.
  - Imported and semi-imported products (15 percent of CPI basket) contributed almost 50 percent of the surge in inflation in July-August 2022 and 35 percent in November 2022.

### Monetary and credit conditions
- Central Bank provided ample liquidity while raising rates; liquidity injections cumulatively reached MGA 1,154 billion over the year.
- Private sector credit growth grew by 19.3 percent year-on-year in October 2022, largely driven by short-term credit.
- Banks remain adequately capitalized, liquid, and profitable; average capital-to-risk-weighted-assets ratio was 12 percent at end-September against the regulatory minimum of 8 percent.

### External sector and exchange rate
- Current account deficit estimated to have widened to 5.6 percent of GDP in 2022 from 5.0 percent in 2021.
- Goods exports rose by almost 50 percent relative to 2021, driven by mining volume growth and high international prices for cobalt and nickel.
- Tourism revenues rebounded but remained some 40 percent below 2019 levels.
- Increased imported services values related to mining, construction, and transportation.
- Ariary depreciation: around 12.8 percent over 2022; BFM net interventions amounted to US$ 4.3 million in 2022.
- Madagascar’s external position at end-2022 assessed as broadly in line with fundamentals and desirable policies; FX reserves remain within standard adequacy levels.

### Fiscal developments and public finances
- Domestic primary deficit estimated at 2.7 percent of GDP in 2022 versus a target of 1.4 percent in the revised budget (LFR).
- Domestic tax collection underperformed by about 0.8 percent of GDP, mostly due to accumulating VAT credits toward oil distributors and the non-resumption of gold exports.
- Oil distributors stopped paying oil customs taxes in November 2021 until an agreement end-December 2022; assessed (but not paid) oil customs taxes were recorded with offsetting items and did not reduce the deficit.
- Agreement with oil distributors implies payment of oil taxes due for November 2021-December 2022 in 2023; net effect on the budget expected to be positive (around 0.4 percent of GDP).
- Execution of domestically financed public investment slow early in 2022 (17.6 percent execution at end-September) but expected to accelerate to around 66 percent of the LFR target by year-end.
- Spending of unused investment credits from 2021 under treasury operations was high (1.5 percent of GDP).
- Authorities contained spending (wage bill and goods and services) and accumulated arrears.

### Banking sector asset quality and microfinance
- Average NPL ratio at 7.7 percent in December 2022 versus 7.3 percent in December 2019.
- Significant heterogeneity: top five banks (90 percent of sector assets) had NPL ratio below 7 percent in September.
- One small bank (2.7 percent of credit market) with high NPLs is being recapitalized by its foreign parent under supervisor scrutiny.
- Microfinance sector: deposits and loans grew by 5.9 and 15.6 percent year-on-year in August 2022; sector net income up by 16 percent, with 9 out of 17 microfinance institutions profitable.

### Outlook, growth projections, and risks
- Projected real GDP growth for 2023 revised down to 4.2 percent due to inflationary pressures, political uncertainty, and slowing global growth.
- Mining output (graphite expansion) and agricultural production expected to be higher in 2023, boosting exports.
- Annual average inflation projected to reach 9.5 percent in 2023 despite lower international oil prices because of recent exchange rate depreciation and second-round wage and pump price effects.
- 2023 domestic primary balance could reach a surplus of 1.3 percent of GDP driven by settlement of oil distributors’ 2022 net liability to the government.
- Current account deficit expected to stabilize at around 5.7 percent of GDP in 2023.
- Medium-term potential growth estimate revised from 5 to around 4.5 percent to account for recurring climate disasters; this does not account for the sizeable potential of mining or PEM effects on TFP.
- Inflation expected to remain above 8 percent until 2025 if strong growth intensifies demand pressures.
- Debt distress assessment: Madagascar’s risk of overall and external debt distress remains “moderate.”
- Downside risks: domestic political situation, weak state capacity, low COVID-vaccination rates, adverse commodity price shocks, global growth slowdown, financial stress in SOEs, banking fragilities, and high vulnerability to climate shocks.
- Upside scenario: full PEM reform implementation and new investment projects in energy and mining could significantly boost productivity and growth.
- Sector-specific risk: vanilla sector fragilized by attempts to restrict access to improve compliance with a minimum export price of US$250 per kilogram, risking long-run viability and potential market substitution.

### Program performance and targets
- Mixed program implementation for quantitative performance criteria (QPC) and indicative targets (IT); some misses due in part to factors outside authorities’ control.
- Two out of five QPC were missed at end-June 2022.
  - Ceiling on net domestic assets and two external debt-related continuous QPCs were respected.
  - Floor on central bank’s net foreign assets (NFA) missed by a small margin; end-September IT was met.
  - QPC on the domestic primary balance breached narrowly at end-June (MGA 43 billion), mostly due to non-payment of oil customs taxes by oil distributors.
  - Staff expect the domestic primary balance QPC to be missed by a larger margin at end-December 2022, but the breach is expected to be temporary following the agreement with oil distributors.
- IT on customs tax collection missed; a third of projected revenue not collected from distributors.
- IT on domestic tax collection missed following slower-than-expected growth.
- IT on social spending missed by more than half, though social spending including wages reached 89 percent of the target.

*Source: IMF staff report excerpt for Madagascar (content unit 1mdgea2023002).*

### 17.      There was significant progress on the program’s structural reform agenda. On

### 1mdgea2023002 - 17.      There was significant progress on the program’s structural reform agenda. On

### Progress on structural reform implementation
- On September 30, the authorities provided the first monthly dashboard reporting the number and amount of spending authorization requests (SAR) addressed to the Prime Minister and the President, as well as the average approval time. This dashboard has since been shared monthly with staff.
- Over the last four months of 2022, 84 percent of SARs were approved with an average delay (weighed by amount) of 11.6 days.
- Authorities agreed to eliminate the spending authorization process for the 2023 budget execution.
- With support of the Fund-provided long-term expert, annual spending commitment plans in line with the approved budget were prepared for the four social ministries before end-January 2023.
- Budget autonomy of the Cour des Comptes was strengthened with the creation of a dedicated budgetary mission in the 2023 budget law.
- Continuous structural benchmarks (SBs):
  - Coverage of the quarterly budget execution reports was improved (though further improvements remain necessary).
  - Staff were notified within one week of the budget transfers to JIRAMA’s suppliers made in September.
- The ceiling on the government’s gross liabilities to oil distributors (MGA 300 billion) was breached in September because the agreement with oil distributors on settling cross-liabilities was delayed until December 2022.
- The Technical Memorandum of Understanding for the program specifies that government revenue are to be recorded on a cash basis for the assessment of the program targets and criteria.

### Creating and strengthening fiscal space; 2023 budget framework and targets
- Excluding exceptional revenue from the payment of overdue oil taxes, the 2023 budget envisages a relaxation of 0.4 percent of GDP in the domestic primary deficit relative to the second review.
- The relaxation is justified by the need for additional transfers to settle all past liabilities with oil distributors not previously envisaged for this year.
- Assuming no delay in oil tax payment, this still implies a consolidation effort of 0.4   percent of GDP in an electoral year, consistent with program objectives.
- Given expected settlement of cross-liabilities with oil distributors, the program targets a domestic primary surplus of 1.3 percent of GDP in 2023, with revenue and social spending ITs based on staff’s projections.
- The medium-term consolidation path, underpinned by better domestic revenue mobilization, should ensure a positive domestic primary balance in 2024 and beyond.
- A projected domestic primary surplus of around 1 percent of GDP would contribute to stabilizing debt as a share of GDP and anchor debt sustainability.

### 2023 budget revenue and tax measures
- The 2023 budget (LF) projects an ambitious increase in tax revenue, supported by a mix of tax policy and administration measures.
- Administrative revenue measures planned in the 2022 budget law were delayed (e.g., implementing a tracing system of products subject to excise taxes) and thus renewed in the 2023 budget law.
- Tax policy changes:
  - Reverted the reduction of the VAT rate on fuel from 15 to 20 percent that was implemented last summer along with a 43-percent increase in retail fuel prices.
  - Replaced the corporate income tax for exporters of agricultural products by a 3-percent turnover tax on exports proceeds. Staff warned this tax could discourage domestic transformation and might undermine the PEM’s objective to develop the domestic food industry.
  - Introduced a withholding tax on intermediaries in the vanilla sector and imposed a minimum price to be paid to local producers of green vanilla.
  - Imposed a new exit tax on exports of non-renewable minerals.
  - Changed the gold excise tax to 6 percent. Staff cautioned that combined taxation of mining exports including royalties and the new exit tax might exceed taxation levels commonly applied in other mining exporters and could jeopardize sector development; higher taxes on gold might encourage illegal exports without generating additional revenue.
- Staff urged authorities to reconsider those measures and remove distortionary and costly tax exemptions instead.
- Staff’s overall revenue projections reflect lower assumed yields than the budget. Gross tax revenue is still projected to increase by 0.9 percent of GDP between 2022 and 2023 in line with the increase envisaged at the time of the second review.

### Mining code revision and mining taxation (Box 2 recommendations)
- Authorities committed to finalizing a revision of the mining code in close consultation with the World Bank, the IMF and mining sector’s representatives and to submitting it to Parliament by June 2023 (new proposed SB).
- Swift adoption and implementation of gold sector reforms is necessary to lift the ongoing ban on gold exports.
- Key recommendations for the new mining code:
  - Reinstate granting and renewal of exploration and production permits (suspended since 2011) to address backlog and enable legal mining expansion.
  - Include provisions to facilitate government monitoring of mining activities (e.g., attachment of a cahier des charges or specifications to mining permits).
  - Strengthen environmental protection, health and safety rules, and workers’ rights (strict prohibition of child labor).
  - Ensure stability of the legal and fiscal framework and fiscal transparency; systematically apply the new code to all new mining projects and avoid bilateral conventions that reduce transparency.
  - Avoid earmarking fiscal revenues from mineral exploitation to finance the newly created Malagasy wealth fund (as envisaged in the draft communicated to staff) to preserve budget unicity.
  - Weigh greater revenue mobilization (for instance, increasing the royalty rate which currently is 2 percent) with the need to remain attractive for investors; note risk that combining higher royalty rate or sharing agreements with the newly introduced exit tax would lead to tax rate on turnover/exports well above peers, deterring investment and encouraging smuggling.
- Exit tax specifics: 5 percent on exports of transformed minerals, 15 percent on crude mineral and 10 percent on gold.

### Public investment, PIM, and budget composition
- The 2023 budget envisages a 51-percent increase in public investment (from 9.2 in the LFR for 2022 to 12.2 percent of GDP).
- Domestically financed investment would jump by 74 percent.
- The current macroframework includes a more realistic increase of 28 percent compared to the 2022 LFR, taking into account continuation of presidential investment projects started in 2022 and financed by the cession of part of the 2021 SDR allocation (¶24).
- The finalization and publication of a public investment manual by March 2023 (SB) is needed to strengthen the public investment management framework and would contribute to greater public investment efficiency.
- Staff encouraged:
  - Improve investment prioritization based on clear and transparent criteria, including resilience to climate change as recommended by the CMAP.
  - Account for implementation and absorptive capacity constraints; accompany projects with appropriate costing including maintenance and operational costs of existing infrastructure.

### Social spending, safety nets, and human capital
- Strengthening social safety nets and increasing social spending would increase effectiveness of fiscal policy to stabilize the economy.
- Social spending execution improved relative to 2021. Preparation of annual expenditure commitment plans should further strengthen execution in 2023.
- The LFI targets an increase in the social spending IT of 131 percent relative to 2022 executed spending (and of 287 percent for domestic social investment), which staff views as overly ambitious given public investment under-execution trends.
- Staff project a more conservative increase of 57 percent, incorporated in the current framework.
- Beyond building new schools and hospitals, raising outcomes in education and health requires allocating more human capital resources to understaffed establishments and ensuring transparent and merit-based recruitment mechanisms for teachers and health professionals.
- The new social protection strategy to be elaborated in 2023 should include clear objectives and timelines and identify financing sources to improve social safety net coverage.
- Authorities are working toward finalizing the functionality of the single social registry with harmonized eligibility criteria to better target social assistance and emergency cash transfers and starting a pilot project to integrate 60,000 households into the registry (two new proposed SBs, MEFP ¶17).
- Authorities should consider options to increase social protection coverage, enhance services and benefits, and improve safety and occupational health at the firm level, including in the informal and agricultural sector. One proposal is to allow independent workers to voluntarily contribute to the national social security fund (CNAPS) and thus collect social benefits.

### Arrears clearance, financing, and fiscal implications
- Authorities committed to clear the arrears accumulated in 2022 during 2023 (MEFP ¶19).
- As a result, the overall fiscal deficit on a cash basis would widen by 1.6 percentage points relative to the deficit on a commitment basis to 4.0 percent of GDP.
- Authorities would rely on the use of MGA 1100 billion of the August 2021 SDR allocation to close the financing gap.
- Staff cautioned that unnecessary borrowing at non-concessional terms would undermine debt sustainability and reduce future fiscal space.

### Settlement with oil distributors; fuel pricing and JIRAMA
- Settlement of cross-liabilities with oil distributors and cancellation of unused investment credits significantly reduces fiscal risks in 2023.
- The agreement implies sizable exceptional revenue in 2023 and paves the way for resumption of regular oil tax payments starting in January 2023.
- It brings back gross liabilities vis-à-vis oil distributors related to the implicit fuel price subsidy below the program ceiling. Based on current international oil price projections, gross liabilities are expected to return and remain under the MGA 300 billion threshold (continuous SB) in 2023.
- Authorities remain committed to implementing an automatic fuel pricing mechanism by 2024Q1.
- The agreement also covers payment of fuel requisitions for the public utility company JIRAMA (¶26).
- Cancellation of unused investment credits and some unused credits of the COVID fund will reduce the risk of a surprise increase in net treasury operations in 2023; going forward, cancellation of all unused budget credits at the end of a given fiscal year should be systematic.

### JIRAMA specific issues and commitments
- High fuel prices have further weighted on JIRAMA’s financial situation and forced the government to requisition fuel to supply JIRAMA’s thermal powerplants.
- The 2023 budget law allows the government to issue special T-bills to pay for most of those requisitions while a convention between the government and JIRAMA will formalize JIRAMA’s debt vis-à-vis the government and specify the repayment schedule and terms.
- Authorities budgeted MGA 300 billion for JIRAMA’s operational subsidy in 2023 (vs. MGA 500 billion in the 2022 LFR).
- Significant governance issues, including misuse of public funds, have led to changes in JIRAMA’s management, delaying finalization of the recovery plan (December 2022 SB).
- Authorities committed to finalize the installation of prepaid meters for all public administrations by end-2023 to avoid accumulation of arrears to JIRAMA (around 0.4 percent of GDP in 2022 according to JIRAMA, new proposed SB, MEFP ¶25).

### Air Madagascar fiscal risk
- Air Madagascar remains a large fiscal risk.
- A new structure, Madagascar Airlines, has taken over activities of Air Madagascar and its local subsidiary Tsaradia; a new internationally recruited CEO was appointed in December 2022.
- New management will finalize and implement a new recovery plan.
- Air Madagascar’s debt restructuring is still ongoing and preliminary estimates suggest a financing requirement of at least US$ 60 million.
- A government guarantee of US$ 20 million for the leasing of new aircrafts is reported in the 2023 LFI.

*Republic of Madagascar — IMF staff report excerpt.*

### 28.      Despite short-term measures to fill the deficit of the civil servants’ pension fund

### 28.      Despite short-term measures to fill the deficit of the civil servants’ pension fund (CRCM), a deeper reform of the pension system is needed

### Pension system findings and recommendations
- Short-term measures have been taken to fill the deficit of the civil servants’ pension fund (CRCM), but structural imbalances remain.
- Recommended measures to better contain pension spending:
  - Review indexation mechanisms.
  - Reduce annuity rates.
  - Consider creating a unified and uniform pension scheme for all public sector workers (public servants and contractuals).

### Authorities’ views on revenues, fiscal risks, and transfers
- Authorities broadly agreed with staff’s assessment.
- They are confident about achieving tax revenue higher than 12 percent of GDP in 2023 through:
  - Approved tax policy measures.
  - Strengthening controls and the customs and tax administrations.
  - Modernization and digitalization of administration.
- Authorities’ position on specific tax measure:
  - Exit tax on nonrenewable minerals, collected by customs, is considered necessary to incentivize custom value control and reinforce the extracting sector’s contribution to financing economic development.
- Fiscal management and risk acknowledgements:
  - Plan to transfer about MGA 148 billion of unused credits from the COVID fund to the National Contingency Fund pending the approval of a new decree (¶45).
  - Agreed on the need to comply with budget annuality and cancel unused credits for public investment projects.
  - Acknowledged that JIRAMA represents a sizable fiscal risk and are working on strengthening financial oversight.
  - Committed to reallocate spending and increase transfers to JIRAMA if necessary to avoid using fuel requisitions, without jeopardizing social programs.

### Strengthening Public Financial Management, Governance and Anti‑corruption (PFM and governance)
- Overall assessment:
  - Governance in Madagascar remains weak with little progress since the 2019 Article IV Consultation (Annex VII).
  - Rule of law, perceived control of corruption, and government effectiveness slightly improved after legislative changes in 2019–20 but remain well below the SSA average and below emerging markets’ levels.
- Authorities’ strategic plan:
  - Recently updated strategic plan to modernize PFM aims to improve budget execution and transparency.
  - IMF capacity development support includes a Fund-provided long-term expert in the Ministry of Finance (Annex IV).
- Steps taken to improve budget execution:
  - Removed requirement for ministries to obtain spending commitment authorizations from both the Prime Minister’s office and the Presidency for all spending above MGA 200 million or about US$ 44,000.
  - Streamlined spending commitment process expected to support budget credibility (Box 3).
  - Plans to extend preparation of annual expenditure commitment plans to all ministries for the next fiscal year.
  - Plan to reinforce financial controls and resort to more frequent audits by Cour des Comptes and Inspection Générale de l’Etat.
  - New unit (Bureau de Suivi des Engagements) to carry out ex post targeted controls of commitments’ regularity.
  - Budget execution oversight would benefit from improved interoperability of Ministry of Economy and Finance IT systems.
- Fiscal decentralization:
  - Improving fiscal decentralization would enhance effectiveness of local governments and national public institutions; more transparent and predictable transfers and strengthened capacity of decentralized institutions are key.
- Transparency and procurement:
  - Improve coverage and adequacy of quarterly budget execution reports (published since 2021).
  - Reduce delays to adopt the loi de règlement.
  - Strict enforcement of budget annuality is key.
  - All individual public procurement contracts should be posted on the ARMP website.
  - Authorities committed to change legal framework to require identification of ultimate beneficial owners (UBO) of public contracts and allow publication of this information by June 2023 (new proposed SB, MEFP ¶31).
- Malagasy Sovereign Fund (FSM):
  - Authorities reiterated commitment to clarify objectives, investment strategy, financing, and governance of FSM to avoid diversion of funds from the budget, contain fiscal risks, and guarantee transparency, including submission to Parliament and publication of annual reports and financial statements (MEFP ¶29).
  - Necessary decrees should be issued before operationalization of FSM.
- SOE oversight:
  - Timely publication and transmittal of SOEs financial statements are needed to support Ministry of Finance oversight.

### Box 3 — Strengthening Budget Credibility: key findings
- Budget credibility and predictability are critical for investor confidence and the “Plan Emergence Madagascar”.
- PEFA (2021) findings:
  - During 2018–20 deviations between budgeted revenue and spending and outturns were large and significantly higher than the average of Sub-Saharan African countries.
  - Result similar to 2018 evaluation, indicating stalling progress.
- Observed patterns over the past 8 years:
  - Quasi-systemic under execution of spending, especially investment.
  - Growth projections tend to be overly optimistic, leading to overestimation of revenue (COVID-19 amplified this).
  - Overall deficits tend to be smaller than initially anticipated due to large spending under execution, especially of investment.
  - Domestic financed investment is also significantly under executed.
  - Social spending target included in the ECF has consistently been missed.
- Policy implications and recommendations:
  - Base budget and medium-term fiscal projections on transparent and realistic macroeconomic forecasts.
  - Strengthen financial controls and reporting mechanisms to better follow-up available resources and investment projects.
  - Comprehensive diagnostic of the expenditure chain to identify and address remaining bottlenecks; IMF stands ready to help with such a diagnostic (Annex IV).
  - Ensure budgeted capital expenditure allocations are linked to fully identified projects.
  - Strengthen selection and prioritization of projects based on transparent criteria.
  - Improve fiscal reporting to better understand the budget and fiscal stance.

### Accelerating accountability and legal reforms
- Priority reforms to increase accountability:
  - Adoption of a law on public access to information to allow better democratic oversight.
  - Improve citizens’ participation and consultation with private sector and civil society, including on the budget.
  - Creation of the Conseil Economique, Social et Culturel (provided for in 2010 Constitution) to encourage public debate and civil society involvement.
  - Join the Open Government Partnership Initiative to demonstrate commitment to transparency.
  - Adopt laws to protect whistleblowers and a law on public policy evaluation.
  - Provide adequate staff and financial resources to anti-corruption agencies (PACs and ARAI) and preserve their budget allocation (MEFP ¶35).
  - Comprehensive reforms to enhance independence and integrity of the judicial system.
  - Further upgrades of the AML/CFT legal framework to fully comply with international standards.
  - Strengthen enforcement of asset declaration requirements and illicit asset recovery.

### Governance and investment climate concerns
- Lack of transparency and predictability discourages investment and development initiatives.
- Perceived state capture by private interests undermines private sector confidence and public trust.
- Legal business environment improvements needed:
  - Ensure legal stability and predictability; avoid retroactive regulations and apply existing laws.
  - Address corruption risks in land management.
  - Provide effective protection of property rights and enforcement of contracts.
  - Ensure a level-playing field and create effective grievance redress mechanisms.
- Authorities’ response:
  - Firm commitment to improve PFM and fight corruption.
  - PFM modernization plan includes:
    - Financial control of spending based on hierarchical system.
    - Internal audit strengthening.
    - Improved cash flow management.
    - Strengthening transparency, efficiency, and oversight of public procurement.
    - Reforms to reinforce external control and audits by inspection bodies.
  - Plan to increase budget allocated to anti-corruption agencies.
  - Drafting a law to frame civil society’s activities and participation in public debate.
  - Acknowledged private sector concerns about laws’ retroactivity.

### Advancing monetary and financial reforms (sections 38–44)
- Monetary policy stance and readiness:
  - BFM should stand ready to tighten policy to contain inflationary pressures.
  - Real rates remain close to zero; private credit is expanding; BFM has continued to inject liquidity.
  - Impact of fuel price increase in July and salary adjustments in May has not dissipated and could lead to sizeable second-round inflation effects in the short term.
  - Monetary policy transmission is weak and lengthy; consider this in assessing stance.
  - Staff advised BFM to remain ready for additional monetary tightening if and as needed.
  - BFM committed to modernizing framework for monetary operations, macroeconomic forecasting, and policy analysis with IMF technical assistance.
- Foreign exchange policy:
  - FX interventions should be limited to smoothing volatility and building external buffers, without resisting underlying market forces.
  - Widening current account deficit and lower foreign currency inflows following reform of the vanilla sector weigh on the exchange rate; reserves have declined but remain within adequacy range.
  - Authorities tightened conditions for residents to hold a bank account in foreign currency and intensified monitoring of compliance with FX repatriation and surrender requirements.14
  - Authorities committed to gradually phase out surrender requirement over the medium term when market conditions allow.
  - Staff encouraged review of the FX intervention algorithm introduced in 2018 and improvement of interbank currency market (MID) functioning with Fund technical assistance.
- Gold and reserves strategy:
  - BFM revising operational strategy for inclusion of gold in reserve assets and MoU with Ministry of Mines and Strategic Resources (MMSR) before considering resumption of gold purchases (MEFP ¶42).
  - Updated foreign exchange reserves strategy approved; operational strategy being amended to address IMF recommendations, notably on governance reforms.
  - MoU with MMSR being revised to delineate BFM’s role in mining sector.
  - Authorities intend to remove the export ban on gold in 2023.
- Monetary policy framework and public debt market:
  - Development of interbank market and strengthening interest rate channel are conditions for successful transition to interest rate targeting.
  - Staff encouraged close cooperation between Ministry of Economy and Finance and BFM to develop public debt market and build a yield curve.
- Banking sector resilience and regulation:
  - Strengthen bank regulations, enforce prudential regulation, and closely monitor NPLs.
  - Adoption of a financial stability law (approval by Council of Ministers pending) would enhance financial stability and BFM’s regulatory/supervisory role.
  - To maintain well-capitalized banking system, BFM should pursue compliance with Basel II and Basel III frameworks and proactively require capital increases based on stress test results.
  - Consider increasing minimum capital requirements and adopting a capital conservation buffer.
  - Authorities should consider increasing the minimum capital ratio above 8 percent currently, and adopting the capital conservation buffer and the leverage ratio set up by Basel III.
  - Revise existing regulation on internal control to align with international standards and adopt a new regulation on corporate governance.
  - Risk-based supervision is being implemented with AFRITAC South support; full implementation will require further efforts including implementation in the AML/CFT area.
- Financial inclusion:
  - Despite improvements, financial inclusion remains low, particularly in rural areas.
  - Improving access to finance is key to increase investment in agricultural resilience and productivity and improve food security (Box 4).
  - Staff encourage authorities to update national inclusion strategy (which ended in 2022) and support development of fintech solutions.
  - Implementation of a national switch will allow interoperability of all electronic payment systems and facilitate development of digital payments by reducing transaction costs.
  - The e-ariary project to create a central bank digital currency might contribute to financial inclusion but requires careful consideration of implications for monetary policy and financial stability and necessary operational and legal safeguards.
- Authorities’ views on monetary policy and inclusion:
  - BFM broadly agreed with staff’s assessment and is closely monitoring developments; stands ready to tighten policy if needed.
  - BFM noted possibility to hold exceptional monetary policy meetings between regular quarterly meetings.
  - Argued liquidity injections are justified by poorly functioning interbank market and liquidity shortages across banking system.
  - Concurred on importance of increasing financial inclusion to boost private investment and household income.

### Box 4 — Improving Financial Inclusion of Smallholder Farmers: key points
- Vulnerability and agriculture:
  - Madagascar ranked 12th out of 180 countries in Climate Risk Index (CRI-2021) for 2000–19, indicating high exposure and vulnerability to extreme events.
  - Almost 80 percent of Madagascar population rely on agricultural activities where subsistence farming is main livelihood; access to arable land and agricultural productivity are low.
- Financial inclusion as resilience:
  - Improving financial inclusion of smallholder farmers identified as a way to improve resilience to climate shocks.
  - September 2022 WFP program to assist 62,000 smallholder farmers in Great South (Androy, Anosy, Atsimo-Andrefana) targeting nine most drought affected districts.
  - Program aims to strengthen farmers’ skills, access to information and markets, promote climate adaptive production techniques, and support robust storage facilities.
  - WFP agricultural microinsurance within integrated social protection “FAGNAVOTSE” program: 5,478 beneficiaries (of which almost 70 percent women) received training in insurance as agricultural risk management tool; each beneficiary became member of a village savings and credit association (VSLA).
  - VSLAs reported to potentially help reduce extreme poverty rates by 14 percent.
  - Access to affordable financial products (payments, savings, credit, insurance) essential to smooth cashflows, overcome liquidity constraints, transfer risks, and provide autonomy and flexibility.
- Remaining gaps:
  - Financial intermediation remains low compared to peers, particularly in rural areas; most households and firms save and borrow informally, and few use digital finance.

*Source: IMF staff report text (excerpt).*

### Box 4. Improving the Financial Inclusion of Smallholder Farmers (concluded)

### Box 4. Improving the Financial Inclusion of Smallholder Farmers (concluded)

### Obstacles to financial inclusion for smallholder farmers
- High bank operating costs and lack of physical access to banking services in rural areas.
- Poor road quality and lack of electricity that hinder access to basic banking services.
- Lack of collateral and credit history complicating access to credit for land, seeds, tools, short-term income gaps, or recovery from weather emergencies.
- Out of an estimated 8–10 million land parcels in Madagascar, less than 1 million bear a land certificate giving the holder all legal property rights, including using land as collateral.
- Lack of valid identification documents and limited financial literacy that prevent use of suitable financial products and services.
- Weak consumer protection and regulation undermining confidence in electronic payments.

### Recommended reforms to increase financial inclusion of smallholder farmers
- Advance land tenure reform and property rights so that land could be used as collateral.
- Adopt digital identification to ease access to financial services for those lacking formal identification.
- Advance digitalization efforts:
  - Improve mobile connectivity, speed, and coverage.
  - Expand mobile banking and require expansion of telecommunications infrastructure to rural areas, which would also enlarge access to early warning systems and up-to-date market and weather information supporting agricultural production, distribution, and sales.
- Encourage banks and MFI’s partnerships with mobile money operators and Cash In Cash Out (CICO) agents where physical branches are not feasible.
- Reduce informality by requiring that government payments be made through bank accounts or mobile money.
- Promote financial literacy by expanding the dedicated modules of the CB website and providing in-person workshops.
- Ensure customer protection by allowing customers access to complete information on their credit final conditions and establishing secure and reliable platforms to protect data and funds.
- Advance efforts to implement a national payment Switch to allow interoperability of all electronic payments, leading to a reduction in transaction costs.
- Enhance the credit reporting system to reduce asymmetric information problems.

### Building resilience to climate shocks
- CMAP recommendations: define maintenance plans for infrastructure assets most vulnerable to climate change; strengthen climate-sensitive budgeting by introducing and enriching a climate document appended to the annual budget; leverage budget classification reform to implement climate budget tagging (Annex VIII).
- National Adaptation Plan should provide more data on climate impacts and identify new financial resources for adaptation investments.
- Adoption of two decrees governing the National Contingency Fund’s (FNC) operations and organizational structure is needed to make it operational and boost resilience.
- Authorities plan to transfer unused credits from the COVID fund to the FNC; staff note a new dedicated budget allocation would be more transparent and consistent with budget annuality.

### Addressing food security
- Short term:
  - Establish regional or community grain reserves for lean seasons or shocks.
  - Provide adequate financial and human resources to the National Risk and Catastrophe Management Bureau (BNGRC).
- Medium and long term:
  - Develop sustainable and climate-smart agricultural practices, including better water management and easier access to affordable fertilizers to support food production and productivity.
  - Improve and expand the road network to facilitate market access and food distribution.
  - Expand access to electricity and telecommunications to support cash transfer systems via mobile devices.
- Given limited government resources, improving Green PFM and public investment management is key to enhance investment efficiency and attract climate financing.
- Capacity building at central and local government levels to improve quantification of financing needs, preparedness, and crisis response rollout.

### Gender gaps and resilience
- Narrowing gender gaps could yield significant economic gains and greater resilience.
- Gender equality associated with faster growth, better income distribution, more economic diversification, better access to finance, and faster recovery from shocks.
- Madagascar's Country and Policy Institutional Assessment score on gender equality remains above the SSA average, but the gender gap in access to the financial system widened from 1 percent in 2011 to 4 percent in 2017.
- Eliminate discriminatory laws and policies to facilitate female entrepreneurship and access to credit for women.

### Authorities’ actions and program issues
- Authorities have started implementing CMAP recommendations:
  - Discussions between the Ministry of Finance and the Ministry of Environment to harmonize climate risk assessment in financial and budgetary management.
  - A National risk financing strategy developed with donors’ help is expected to be adopted this year.
  - Functional nomenclature to identify climate-related expenditure prepared for the LFI 2023 appendix.
  - Work to set norms for more resilient infrastructure spending and to integrate climate change risk in macroframework projections and budget baseline.
- Waiver requests and staff recommendations:
  - A waiver for non-observance of the central bank’s net foreign assets (NFA) performance criterion is recommended because the deviation is minor in nature (less than 4 percent of the downward-adjusted target).
  - Staff support a waiver of non-observance of the domestic primary deficit ceiling based on the temporary nature of the breach and remedial measures taken by the authorities.
- Program target modifications and new structural benchmarks for 2023–2024:
  - Modification of periodic quantitative performance criteria at end-June 2023 and revisions to most indicative targets.
  - Five new structural benchmarks for June, October, and December 2023 on:
    - changing the public procurement legal framework to allow for the collection of UBO information;
    - finalizing the revision of the mining code and submitting it to Parliament;
    - finalizing the functionality of a social registry;
    - starting a pilot project to integrate 60,000 households in this registry;
    - installing prepaid electricity meters for all public administrations.
  - Approval of a 2023 budget consistent with program objectives and removal of the spending authorization requirement were implemented as prior actions for the completion of this review.

### Program implementation, financing, and risks
- Staff will continue close work with authorities and the World Bank to contain program implementation risks.
- Contingency measures: if budget execution deviates or JIRAMA subsidy proves insufficient, authorities would consider new revenue measures and/or spending reallocations or reductions in a revised budget law.
- World Bank support:
  - Advising to stabilize JIRAMA’s financial situation and accelerate recovery.
  - Approved a US$ 250 million Safety Nets and Resilience Project to support development of the social protection system, including implementation of the new social registry.
- Capacity development priorities aligned with program objectives: improve execution of social spending (resident expert on budget expenditure tagging), transfer pricing reform, and central bank support on modeling, interbank and FX markets functioning, and liquidity management for transition to interest rate targeting.
- Program financing status:
  - Program remains fully financed with firm commitments for the next 12 months and good prospects for the remainder of the program period.
  - Projected external financing sources are sufficient to satisfy external financing requirements until 2024 (Table 9).
  - Compared to the previous review, projected budget support was reduced in 2023 and 2024 reflecting delays by some partners and hesitancy amid electoral uncertainty.
  - Lack of non-IMF budget support in 2022 and 2023 slightly reduced burden sharing over the program period since the second review.
  - Limited room for domestic banks to provide additional financing; disbursements under IMF ECF reviews would be directed to the budget.
- Capacity to repay the Fund:
  - Annual planned repayments peaking in 2026 at 0.70 percent of GDP, 5.0 percent of government revenue, and 2.4 percent of exports.
  - Existing and prospective Fund credit expected to peak in 2023 at 4.8 percent of GDP and 46.8 percent of government revenue and is expected to decline thereafter.
- Safeguards and BFM:
  - Since the 2021 safeguards assessment, BFM implemented the majority of recommendations and completed its transition to International Financial Reporting Standards.
  - Outstanding recommendations: completion of an external quality assessment of the internal audit function (preparations begun), and phasing out BFM’s involvement in unrefined gold purchases; BFM is establishing safeguards around these purchase operations.

### Staff appraisal and policy recommendations
- Economic context:
  - Madagascar faces persistent external and domestic headwinds, high poverty, and acute vulnerability to climate shocks.
  - Recovery from the pandemic faster than expected, but growth estimated to have slowed in 2022 due to global slowdown, higher inflation reducing purchasing power, and cyclones damaging infrastructure and disrupting production.
  - Medium-term outlook broadly favorable with sizeable potential in tourism and mining.
- Inflation and social protection:
  - Persistent high inflation requires close monitoring and targeted measures to support the most vulnerable.
  - Inflation expected to remain high over the medium term.
  - Staff welcome authorities’ efforts to enhance and expand social protection and recommend accelerating implementation.
- Risks to the outlook:
  - Significant and tilted to the downside: domestic political situation, chronic institutional fragility, low COVID-vaccination rates, adverse commodity price shocks, global growth slowdown.
  - Fiscal and financial risks from failure of systemic state-owned enterprises and delayed structural reforms.
  - High vulnerability to climate shocks.
- Program performance and reforms:
  - Implementation of ECF-supported program mixed with respect to quantitative targets: two out of five QPCs missed by a small margin at end-June 2022; three end-June ITs missed by larger margins.
  - Significant progress on structural reforms; all continuous SBs met except ceiling on gross fuel liabilities and publication of better quarterly budget execution reports.
  - Staff welcome removal of spending authorization requirement; systematic preparation of annual commitment plans recommended.
  - Creation of a dedicated budgetary mission for the Cour des Comptes in the 2023 budget to enhance independence.
- Fiscal policy advice:
  - Staff agree with a small relaxation of the fiscal consolidation path for 2023 to navigate the complex environment.
  - Payment in 2023 of overdue oil taxes will imply a domestic primary surplus to clear past arrears and accumulated liabilities to oil distributors.
  - Encourage reassessment of costly tax expenditures and gradual removal of some costly VAT exemptions alongside strengthening social safety nets.
  - Recommend reconsidering an exit tax on gold and mining exports that may encourage illegal mining and smuggling.
  - Advocate removal of costly and distortionary tax exemptions; revision of the mining code in line with IMF technical assistance and World Bank advice.
  - Crucial that mining revenue be fully directed to the budget without earmarking of permit or royalty proceeds to the sovereign wealth fund.
- Governance, financial sector, and monetary policy:
  - Pursue efforts to foster budget credibility and fiscal transparency: fully abide by budget annuality by cancelling unused credit at end of fiscal year; clearly identify and evaluate budgeted investment projects.
  - Strengthen legal framework for public procurement contracts, including requiring identification of ultimate beneficial owners and amending the 2018 AML/CFT law to align with FATF recommendations.
  - Agreement with oil distributors on settling cross-liabilities reduces fiscal risks, but JIRAMA risks remain sizeable and require bold reforms with a realistic business plan.
  - BFM should be ready to further raise interest rates to contain inflation if needed; continue building forecasting capacity and develop interbank and repo markets before moving to interest rate targeting.
  - Recent reform in the vanilla sector appears to have significantly reduced FX inflows and should be reconsidered.
  - Adoption of a financial stability law recommended to enhance financial stability and strengthen BFM’s regulatory and supervisory role.
- Public trust and anti-corruption:
  - Reinforce public trust in institutions; enforce anti-corruption framework with adequate staffing and resources for anti-corruption agencies.
  - Improve public access to information to allow effective democratic oversight and enhance business climate through predictable legal framework, effective application of laws, and adequate protection of property rights.
- Climate and gender policies:
  - Narrow gender gaps and develop climate-sensitive policies to build resilience to climate shocks.
  - Implement CMAP recommendations and address food insecurity by strengthening emergency response capacity, increasing agricultural productivity, improving infrastructure, and developing social safety nets.

*Source: 1mdgea2023002 - Box 4. Improving the Financial Inclusion of Smallholder Farmers (concluded).*

### 68.      Based on Madagascar’s performance and commitments under the program, staff

### 1mdgea2023002 - 68.      Based on Madagascar’s performance and commitments under the program, staff

### Program assessment and IMF staff recommendation
- Staff supports the completion of the third review under the ECF arrangement and the request for waiver of non-observance and modification of performance criteria.
- The attached Letter of Intent and Memorandum of Economic and Financial Policies set out appropriate policies to support the program objectives.
- The capacity to repay the Fund is adequate and risks to program implementation are manageable.
- It is recommended that the next Article IV consultation be held on a 24-month cycle.

### Real sector and growth developments
- Investment is well below 2008 levels.
- A strong recovery in consumption, mining, manufacturing, and net exports supported the growth rebound in 2021, despite the negative impact of a delayed border reopening on tourism and very low investment.
- Recent growth improvements were reversed by the COVID-19 pandemic.
- Multiple waves of the pandemic interrupted the tourism sector recovery.

Key statistics (real sector indicators cited in the source)
- Real GDP (year-on-year percent change) and sectoral contributions shown across charts (demand and supply side); graphical evidence indicates volatility across 2006–2022 with pronounced impacts from 2020 pandemic shocks.

### Inflation and external sector developments
- Total inflation has been on the rise since mid-2020, driven most recently by food, transportation costs, and higher fuel prices.
- The current account deficit widened in 2020 due to the collapse in tourism receipts and is expected to decline slowly in the medium term.
- The real effective exchange rate has remained relatively stable in recent years.
- Vanilla export revenue has dropped since end-2019 due to muted demand and increased global competition.

Selected external sector figures (as reported)
- Current account balance (including grants): -2.3 (2019), -5.4 (2020), -5.0 (2021), -4.4 (2022), projections through -3.5 (2028) — (percent of GDP).
- Gross official reserves (millions of SDRs): 1,196 (2019), 1,338 (2020), 1,630 (2021), 1,540 (2022), projections to 2,517 (2028).
- Months of imports of goods and services: 4.2 (2019), 6.0 (2020), 5.8 (2021), 5.1 (2022), projected 5.0 (2028).

### Fiscal developments and public finances
- The wage bill increased to about 48 percent of tax revenue in 2022 but remains below the 2020 peak.
- Transfers declined starting 2021 due to lower transfers to JIRAMA.
- Tax revenue recovered from the pandemic shock since mid-2022 and customs revenue were boosted by international oil prices.
- Underexecution of domestically financed public investment persists in 2022, while social spending has recovered.

Key fiscal figures (percent of GDP unless otherwise noted)
- Total revenue (excluding grants): 10.8 (2019), 9.9 (2020), 10.5 (2021), 11.4 (2022), projected 13.8 (2028).
- Tax revenue: 10.6 (2019), 9.5 (2020), 10.2 (2021), 11.1 (2022), projected 13.6 (2028).
- Grants: 3.1 (2019), 2.5 (2020), 0.7 (2021), 1.8 (2022), projected 0.6 (2028).
- Total expenditures: 15.4 (2019), 16.4 (2020), 14.0 (2021), 18.1 (2022), projected 19.2 (2028).
- Capital expenditure: 5.8 (2019), 6.8 (2020), 5.3 (2021), 8.6 (2022), projected 9.2 (2028).
- Overall balance (commitment basis): -1.4 (2019), -4.0 (2020), -2.8 (2021), -4.8 (2022), projected -4.8 (2028).

### Monetary and financial sector developments
- Excess bank reserves, usually volatile with strong seasonal effects related to the vanilla cycle, have been declining and are concentrated in a few banks.
- Base money growth has been driven by currency in circulation and liquidity injections.
- Until the pandemic, broad money growth was driven by accumulation of net foreign assets and credit to the private sector; since the COVID-19 crisis, net domestic credit to government has been on the rise.
- Overall, banks remain adequately capitalized, liquid, and profitable, but significant heterogeneity among banks has been exacerbated by the pandemic.
- Credit growth has been slowing since mid-2022, and NPLs seem to have peaked.

Selected monetary/financial metrics (as reported)
- Broad money (M3) growth and reserve money dynamics shown in charts across 2018–2022; excess bank reserves distribution (Dec-2022) concentrated in few banks.
- Non-performing loans to total gross loans (4-quarter average) peaked in 2021–2022 then stabilizing (charts and Table 8 indicators).

### Medium-term outlook and financing
- Investment-driven increases in the current account deficit are expected to be financed by concessional borrowing.
- Despite the shock of the pandemic, gross official reserves are expected to continue increasing.
- Growth is expected to remain slightly above the Sub-Saharan Africa average, sustained by scaled-up public investment.
- Public investment scaling-up is ongoing; deficits are mostly externally financed.

Medium-term projections and public debt dynamics (select entries from tables)
- Investment (percent of GDP): 21.2 (2019), 19.5 (2020), 23.3 (2022), projected 25.7 (2028).
- Gross national savings (percent of GDP): 20.4 (2019), 12.3 (2020), 15.3 (2022), projected 21.8 (2028).
- Public debt (percent of GDP): 41.0 (2019), 51.2 (2020), 52.3 (2021), 47.8 (2022), projected 55.9 (2028).
- External public debt (incl. BFM liabilities): 27.0 (2019), 36.8 (2020), 38.5 (2021), 36.1 (2022), projected 44.2 (2028).

### Capacity to repay and IMF exposure
- The capacity to repay the Fund is assessed as adequate.
- Table of Fund obligations and outstanding IMF credit indicates projected Fund obligations and outstanding credit across 2023–2036; illustrative magnitudes include totals (existing and prospective credit) of 39.7, 46.1, 67.8, 106.4, 109.9, 105.9, 108.7, 86.3, 41.7, 31.9, 17.2, 5.0, 2.6, 2.6 (Millions of SDRs) for successive years shown in the source.

### Policy implications and priorities (drawn from program content)
- Continue implementation of the Letter of Intent and Memorandum of Economic and Financial Policies to support program objectives.
- Sustain tax revenue recovery and strengthen customs revenue management (noting recent boost from oil prices).
- Address underexecution of domestically financed public investment to realize planned public investment scaling-up.
- Maintain prudent external borrowing composition, prioritizing concessional financing to finance investment-driven current account deficits.
- Monitor and address heterogeneity in the banking system, containing concentrations of excess reserves and supporting bank balance-sheet resilience.
- Preserve reserve accumulation and external buffers as gross official reserves are expected to continue increasing.

*International Monetary Fund — Selected excerpts and figures from the Madagascar staff report, as provided in the source content.*

### Annex I. Global Risk Assessment Matrix

### Annex I. Global Risk Assessment Matrix

### External Risks
- Intensifying spillovers from Russia’s war in Ukraine  
  - Likelihood: High  
  - Expected Impact if Realized: Medium. No direct impact is expected due to limited linkages with Russia and Ukraine. However, the war in Ukraine would affect Madagascar indirectly through commodity price volatility, extended supply disruptions, tighter financial conditions, and lower growth in trading partners limiting tourism flows and remittances.  
  - Recommended Policy Response: Implement policies to cope with commodity price shocks as described below. Reduce non-priority spending to preserve programmed fiscal targets. Accelerate broad-based structural reforms to boost competitiveness, remove bottlenecks to growth and support economic diversification.

- Commodity price shocks  
  - Likelihood: High  
  - Expected Impact if Realized: Medium. Lower external demand and commodities prices for metal and vanilla could reduce export revenues and reduce production in mining sectror. Rising food and energy prices lead to food insecurity, higher consumer prices, dampen disposable income of households, and lead to a decline in consumption and deteriorated current account. Also, higher energy prices will raise fuel and electricity costs weighing on government transfers and complicating ongoing energy reforms. Uncertainty leads to social and economic instability.  
  - Recommended Policy Response: Finalize the automatic fuel price adjustment mechanism. Allow greater exchange rate flexibility to buffer external price shocks. Accelerate structural reforms to improve economic efficiency and enhance diversification. Support vulnerable households with additional targeted measures.

- De-anchoring of inflation expectations  
  - Likelihood: Medium  
  - Expected Impact if Realized: Medium. Supply shocks could raise headline and core inflation. Lack of clear nominal anchor and monetary policy framework cause a rapid de-anchoring of inflation expectations.  
  - Recommended Policy Response: Tighten monetary policy to respond to possible second-round effects from imported food and energy prices and restore price stability to avoid de-anchoring inflation expectations. Strengthen the monetary policy framework. Pursue structural reforms to improve productivity.

- Abrupt global slowdown or recession  
  - Likelihood: Medium  
  - Expected Impact if Realized: Medium. A global slowdown would spillover to Madagascar through trade and financial channels leading to widening of external imbalances and pressures on international reserves.  
  - Recommended Policy Response: Maintain greater exchange rate flexibility to absorb external shocks and preserve international reserves and recalibrate monetary policy to contain inflation. Prioritize structural reforms to improve competitiveness.

- Local Covid-19 outbreaks  
  - Likelihood: Medium  
  - Expected Impact if Realized: Medium. The slow pace of vaccination leaves the economy vulnerable to a new wave of Covid-19 contamination, forcing new restrictive measures. Investment could slowdown and economic recovery could be delayed, increasing fiscal pressure.  
  - Recommended Policy Response: Continue vaccination campaign and prioritize health spending. Strengthen social safety nets. Prepare a contingency fiscal plan on how to mitigate the impacts of a new outbreak and a new lockdown.

### Notes on the Risk Assessment Matrix
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. The conjunctural shocks and scenario highlight risks that may materialize over a shorter horizon (between 12 to 18 months) given the current baseline. Structural risks are those that are likely to remain salient over a longer horizon.

### Domestic Risks
- Deepening geo-economic fragmentation and geopolitical tensions  
  - Likelihood: High  
  - Expected Impact if Realized: Medium. Intensified geopolitical tensions would affect Madagascar through a decline in trade and lower investor confidence.  
  - Recommended Policy Response: Improve public spending efficiency and commit to a credible medium-term fiscal consolidation.

- Higher frequency and severity of natural disasters related to climate change  
  - Likelihood: Medium  
  - Expected Impact if Realized: High. Loss of real and human capital, disruptions in trade and lower growth. Extreme precipitation and drought could affect food production.  
  - Recommended Policy Response: Reallocate fiscal spending to finance recovery work and appeal to donors for post-disaster financing. Build the country’s resilience for adaptation to climate change in the agriculture and rural livelihoods. Strengthen disaster risk management and preparedness to provide rapid support to affected population.

- Widespread social discontent and political instability  
  - Likelihood: Medium  
  - Expected Impact if Realized: High. Higher food and energy prices trigger social protests and disrupt economic activity; growing political polarization ahead of 2023 presidential elections and instability weaken policymaking and confidence, undermine economic activity, disrupt the reform agenda, and exert pressure on the budget.  
  - Recommended Policy Response: Focus reforms on areas less sensitive to sociopolitical environment. Improve inclusiveness of government policies. Encourage authorities and development partners to increase social safety nets and avoid early withdrawal of financial support to households and companies. Step-up anti-corruption and AML/CFT efforts.

- Larger than anticipated transfers to SOEs (e.g., JIRAMA and Air Madagascar)  
  - Likelihood: High  
  - Expected Impact if Realized: Medium. Transfers to SOEs reduce other priority expenditures. Potential economic disruption if SOEs’ operations are affected.  
  - Recommended Policy Response: Identify options to protect key public services. Encourage authorities and development partners to protect social priority spending. Strengthen governance structures, including government oversight of key SOEs. Strengthen the credibility of the medium-term fiscal and expenditure frameworks by strengthening budget execution.

- Lack of progress or reversals in governance reforms, especially for SOEs  
  - Likelihood: High  
  - Expected Impact if Realized: High. A lack of transparency and evenhandedness may compromise additional concessional support, hinder private investment (incl. PPPs), and harm negotiations with fuel suppliers.  
  - Recommended Policy Response: Undertake promised reforms and renew commitment to operating SOEs (e.g., JIRAMA) in a transparent and equitable manner. Step-up anti-corruption and AML/CFT efforts.

- Weak investment implementation capacity  
  - Likelihood: High  
  - Expected Impact if Realized: Medium. Insufficient execution of capital investment projects over years would lead to larger infrastructure gap, slower economic growth and constrain foreign direct investment.  
  - Recommended Policy Response: Monitor available domestic capacity and prioritize investments with highest returns. Improve transparency in planning, monitoring, and auditing steps for investment projects.

- Banking sector stress  
  - Likelihood: Low  
  - Expected Impact if Realized: Medium. A surge in non-performing loans could deteriorate confidence and lower capital, affecting banking sector stability and credit to the private sector.  
  - Recommended Policy Response: Enhance regulation and supervision. Communicate with banks on measures needed to ensure a prompt resolution of NPLs and adequate capitalization. Strengthen the resolution and crisis management frameworks.

- Slower pace of reforms  
  - Likelihood: Medium  
  - Expected Impact if Realized: High. Negative impact on social outcomes, confidence, and growth.  
  - Recommended Policy Response: Build consensus on reforms. Improve communication. Invest in human capital and institutions.

### Annex II. Status of Key Recommendations from the 2019 Article IV Consultation

- Fiscal Policy
  - Create fiscal space by mobilizing domestic revenue and sharply reducing the need for transfers to SOEs.  
    - Current Status: Net tax revenue reached the program target of 10.4 percent of GDP in 2021. Domestic tax collection under-performed in part because of slower than expected activity. Authorities managed to recover more than half of outstanding tax arrears in 2021.
  - Address the fiscal risk associated with fuel pricing. Implement an automatic fuel price mechanism.  
    - Current Status: Fuel pump prices were increased by 43 percent on average in July 2022. A new fuel reference price structure was adopted in July of 2022 and the government is still working on designing policies to mitigate the impact of future pump price increases. The implementation of an automatic fuel price mechanism was delayed to 2024. A new business plan for JIRAMA is being finalized in consultation with the World Bank. JIRAMA’s arrears remain to be repaid over the next three years.
  - Ensure higher priority spending in social sectors.  
    - Current Status: Spending in social sectors remains low and substantially under-executed. Social ministries did not prepare formal annual expenditure commitment plans. The authorities are working with the World Bank to increase cash transfers to the poorest households.

- Monetary and Exchange Rate Policy
  - Manage bank liquidity, thus supporting credit while containing inflation pressures.  
    - Current Status: Liquidity needs have remained stable. Inflation was contained to single digits until 2022 and the global commodity price shock. Official reserves are assessed as adequate.
  - Improve the interest rate channel of monetary policy transmission. Transition from reserve aggregates to interest rate targeting, by developing the interbank lending.  
    - Current Status: The reform of the operational framework for monetary policy is on track for a transition to interest rate targeting by 2023. To this end, the BFM formally implemented a symmetric interest rate corridor system in 2021, established overnight deposit and lending facilities while discontinuing the publication of the policy rate to avoid confusion with these new reference rates, and worked to align interbank market rates with the maturity of operations, the risks, and the overall level of liquidity. With the support from Fund TA, a macroeconomic forecasting model based on the Forecasting and Policy Analysis System (FPAS) was developed. The authorities are implementing the securities repurchase operations law since December 2021 aimed at encouraging longer-term interbank loans. Efforts to narrow the interest rate corridor contribute to stabilize the short-term interest rate on the money market. BFM is preparing to issue fixed term deposit certificates to complete the short-term maturity yield curve. The first official medium-term inflation projection by BFM is to be included in the 2023 budget law.
  - Phase out the surrender requirement on export proceeds.  
    - Current Status: Over the medium term, the authorities are still committed to implement a gradual phase out of the FX surrender requirement on export receipts, but only when conditions are sufficiently favorable so as not to endanger exchange rate stability.

- Strengthening Financial Sector Resilience and Financial Inclusion
  - Implement the new banking and financial stability laws.  
    - Current Status: The banking law, the insurance law, the law on electronic money and electronic money institutions and the microfinance law have been promulgated. The instructions relating to the capital of banks, solvency, liquidity, risk concentration and the provisioning of credit risks of banks, considered as priorities, have been developed or are being developed. BFM is pursuing compliance with the Basel II and Basel III frameworks and anticipate adoption of the regulatory texts in the second half of 2022. The Banking and Financial Supervision Committee is working on the implementation of the new risk-based supervision mechanism, including the conduct of annual inspection programs prioritizing systemically important institutions as well as those with vulnerabilities.
  - Step-up efforts to improve financial inclusion.  
    - Current Status: To address low levels of financial literacy, the BFM has developed a dedicated module on its website and conducted several awareness and communication campaigns. To promote greater access and better use of financial services, several microfinance institutions (MFIs) have received support to extend their access points in underserved areas and in implementing remote banking solutions (agency banking, mobile money and mobile banking). A guarantee fund for micro-enterprises and agricultural entrepreneurs, including start-ups, has been set up with the participation of six banks and two MFIs. The implementation of the project of a national payment Switch is scheduled for end-2022 and will allow the interoperability of all electronic payments, leading to a reduction in transaction costs and contributing to an improvement in financial inclusion and better effectiveness, security, and resilience of the national payment system.

- Promoting Better Governance and Business Climate
  - Enforce the new anti-corruption legal framework.  
    - Current Status: Effective enforcement of the anti-corruption legal framework is slow and should be accelerated. The decree creating the coordination and orientation committee for anti-money laundering and countering the financing of terrorism (AML/CFT) was adopted in June 2022 and published in August. The five-year strategy for Madagascar’s financial intelligence unit, SAMIFIN, was approved by the Council of Ministers in June 2022. The operationalization of the agency for illicit asset recovery is effective since June 2022 with the swearing-in of its general director and an operational budget allocation included in the 2022 revised budget law.
  - Strengthen the Public Financial Management to improve the governance of public resources.  
    - Current Status: The dissolution of the investment agency OCSIF has delayed the finalization of a public investment manual. The publication of an independent, third-party audit report of public procurement contracts relating to the response to the COVID-19 pandemic, was completed on July 6, 2022. Detailed information regarding COVID-19 related procurement contracts was published online but does not include information on the beneficial owners of entities being awarded contracts.
  - Improve the business climate with the aim to strengthen the quantity and quality of investment.  
    - Current Status: The authorities are committed to operationalizing the PPP National Committee established by the law by the end of December 2022. The finalized national PPP strategy, which provides a framework for the implementation of PPP investment projects, is expected to be adopted by the end of June 2023. The authorities are also committed to improving the transparency of PPPs.

*Annex I. Global Risk Assessment Matrix; Annex II. Status of Key Recommendations from the 2019 Article IV Consultation — Republic of Madagascar, INTERNATIONAL MONETARY FUND.*

### Annex III. Implementation Status of Key 2016 FSSA

### Annex III. Implementation Status of Key 2016 FSSA

### Short-Term Recommendations — Implementation Status
- Intensify onsite supervision of banks and MFIs.
  - Status: Completed.
  - Details: The new banking law entered into force on March 5, 2021, enhanced the powers and independence of the Banking and Financial Supervision Committee (CSBF) by ensuring its budgetary autonomy. The onsite inspection resources have been increased and became more targeted based on data provided through the automated prudential reporting system.
- Begin to implement risk-based supervision.
  - Status: Completed.
  - Details: Authorities strengthened risk-based prudential supervision. The CSBF implemented the new risk-based supervision mechanism, including annual inspection programs giving priority to institutions of systemic importance and entities with vulnerabilities. Risk-based supervision in the AML/CFT area is planned in accordance with the objectives of the 2018-2022 national strategy.
- Regularly conduct stress tests and use results to inform banking supervision.
  - Status: Completed.
  - Details: Since 2016, annual stress tests conducted by the banking supervisor are used to inform supervisory prioritization.
- Give the BCM all needed powers to promote financial stability, in cooperation with the CSBF and MFB.
  - Status: Completed.
  - Details: BCM statutes were revised to reinforce independence and give a broad mandate to pursue financial stability.
- Expand definition of related parties and intensify supervision of concentration risks.
  - Status: Completed.
  - Details: The new banking law (entered into force on March 5, 2021) and subsequent directives address banks’ capital, solvency, liquidity, risk concentration, and classification and provisioning of credit risks, in line with international standards.
- Improve asset classification and provisioning rules.
  - Status: Completed.
  - Details: The new banking law (entered into force on March 5, 2021) provides guidelines on asset classification and treatment of and provisioning for problem assets.

### Medium-Term Recommendations — Implementation Status
- Increase the quantity and quality of the CSBF’s human resources.
  - Status: Completed.
  - Details: CSBF recruited new staff and provided legal protection for its staff and Board members.
- Enhance the powers and independence of financial supervisors.
  - Status: Completed.
  - Details: The new banking law (entered into force on March 5, 2021) enhanced CSBF powers and independence, ensured budgetary autonomy, legal protection for board members and staff, and developed well-defined criteria and a transparent selection process for CSBF members.
- Increase minimum capital requirements for credit institutions and MFIs.
  - Status: Completed.
  - Details: Adoption of Decree No. 2021-205 on February 24, 2021 increased minimum capital requirements of MFIs, incorporating risk factors such as exchange rate risk and operational risk.
- Enhance banks’ internal control regulation and introduce detailed corporate governance requirements.
  - Status: Completed.
  - Details: The banking law (entered into force on March 5, 2021) enhanced internal control regulation and introduced corporate governance requirements, including qualification requirements for boards, management and heads of control functions; banks must publish annual reports with quantitative and qualitative disclosures.
- Strengthen legal framework for resolution of credit institutions and MFIs.
  - Status: Completed.
  - Details: The microfinance law and the new banking law enhanced CSBF powers and independence and gave it full supervisory authority and a mandate to resolve institutions’ problems and preserve critical functions via resolution measures.
- Intensify and enhance supervision of insurers and reinforce supervisory independence.
  - Status: In progress.
  - Details: Insurance law enhancing supervisor powers and independence has been promulgated. Effective transfer of supervision of the insurance sector to the CSBF was materialized by a handover note signed on December 17, 2021. Since January 2022, CSBF has been receiving support from the U.S. Treasury Office of Technical Assistance. The BFM, with IMF technical assistance, will incorporate insurance companies’ balance sheets in monetary statistics to comply with the Monetary and Financial Statistics Manual and Compilation Guide.
- Institute independent, well-resourced prudential supervision of pension, savings and investment funds.
  - Status: In progress.
  - Details: Authorities developed a strategy paper with three elements: (i) systemic reforms (e.g., transfer of surpluses from the non-civil service retirement and pension fund CPR to the CRCM, consolidation of CPR and CRCM appropriation accounts); (ii) parametric reforms (e.g., raising the retirement age, limiting to 3 the number of children taken into account for the children-related pension increase); and (iii) management measures (e.g., operationalization of software to monitor payments between the Directorate General of the Treasury (DGT) and the Directorate General of Finance and Budget (DGFAG), and physical verification of pensioners and beneficiaries). This document will be examined by the Council of Ministers in the second semester of 2022.
- Conduct independent financial audits of the National Savings Fund (CEM) and the savings network of the postal service, and define restructuring/resolution strategies.
  - Status: Completed.
  - Details: Independent audits of CEM and PAOMA were conducted in 2017. An action plan followed. In March 2019, CEM obtained its license from CSBF to operate as a microfinance institution for deposits and credits and plans to provide electronic money services. PAOMA manages roughly 500,000 savings accounts and plans to develop financial activities via over 250 branch offices; PAOMA is a distributor partner of a local bank authorized to carry out electronic money activities via a Visa payment card.
- Establish legal framework for issuing and using electronic money and implement supervision and oversight mechanism.
  - Status: In progress.
  - Details: The law on electronic money and electronic money institutions has been promulgated. Decrees issued in September 2017, April and June 2018 implemented the law on electronic money, governance and control, and electronic money institutions. Licensing of a first company occurred and two other applications are being processed. The steering committee includes CSBF (DRE, DCP) and BFM (DSP, DSI).
- Adopt a draft law governing the national payment system.
  - Status: In progress.
  - Details: A law regulating the national payment system has been prepared but not yet adopted.

### Long-Term Recommendations — Implementation Status
- Implement a graduated intervention system for problem institutions.
  - Status: In progress.
  - Details: The new banking law (entered into force on March 5, 2021) authorizes CSBF to take administrative or disciplinary measures; enhances internal CSBF processes for progressive intervention and provides for a recovery plan. Early detection and intervention are carried out regularly. Efforts continue to expand CSBF’s intervention and resolution toolset.
- Explore setting up a deposit guarantee mechanism once banking supervision and the resolution framework are strengthened.
  - Status: In progress.
  - Details: A guarantee fund for micro-enterprises and agricultural entrepreneurs, including start-ups, has been set up with participation of six banks and two MFIs.
- Unify and enhance credit risk registries.
  - Status: In progress.
  - Details: A new central credit registry for banks, microfinance, and financial establishments was established in 2016. The law regulating a private credit bureau was adopted in 2017; an international tender was held in 2018. The first private credit bureau was accredited in December 2018 and launched in January 2019.
- Modernize the security registers.
  - Status: In progress.
  - Details: Digitalization of movable and immovable security registers is operational at the national register of commerce and companies. Challenges remain in paperwork for construction and property registration; efforts are underway to improve land property law.
- Improve mechanisms to freeze assets in suspected money laundering cases and recover goods acquired illegally.
  - Status: In progress.
  - Details: Operationalization of the Illicit Assets Recovery Agency (Agence de Recouvrement des Avoirs Illicites - ARAI) is effective since June 2022 with the swearing-in of its general director and an operational budget allocation included in the 2022 revised budget law. BIANCO intends to exploit the dynamic management regime of asset declarations in the anti-corruption law to improve corruption investigations and address illicit enrichment. An implementing decree for the anti-corruption law on dynamic management of asset declarations should be issued by the government by December of 2022 at the latest to complete legal reforms and ensure consistency in anti-corruption actions in the context of operationalization of the ARAI.

*Source: Annex III. Implementation Status of Key 2016 FSSA — IMF document.*

---

### Annex IV. Capacity Development Strategy

### Context and Recent TA Engagement
- Madagascar has been an intensive user of IMF technical assistance (TA) and training since the normalization of its relations with the Fund in 2014, notably in the context of the 2016–2020 ECF and the successor ECF arrangement approved in March 2021.
- Priorities aligned with the new program include reforms at the central bank (BFM), tax policy and administration, Public Financial Management (PFM), financial sector, and the anti-corruption legal framework to achieve higher, sustained and more inclusive economic growth.
- FAD reengagement on tax and customs administrations and PFM in 2015 was followed by specific TA missions; recommendations helped reverse declines in revenue collections.
- Madagascar was a pilot for a Climate Macroeconomic Assessment Program (CMAP) in early 2022, led by FAD, to assess financing needs and macro-fiscal impacts of climate plans and identify green PFM priorities.
- Based on 2015 FSAP recommendations, MCM and AFRITAC South assistance supported: (i) strengthening BFM independence; (ii) modernizing the monetary policy operational framework; (iii) developing foreign exchange markets; (iv) strengthening banking supervision; and (v) improving central bank internal audit functions.
- FIN, MCM, and LEG helped BFM strengthen safeguards and transition to IFRS; BFM concluded transition with issuance of the 2020 accounts and continues to implement the April 2021 update safeguards assessment recommendations.
- STA and AFRITAC South provided intensive TA for National Accounts rebasing, reweighted CPI, dissemination of IIP statistics, monetary and financial statistics (MFS), financial soundness indicators (FSIs), and government finance statistics. A web-based National Summary Data Page was launched in May 2019.
- Between March 2020 and March 2022, all TA missions were carried out remotely.

### Capacity Development (CD) Strategy and Priorities
- Continued IMF TA support will focus on deepening recent reforms and strengthening skills in the Ministry of Economy and Finance, BFM, and the statistical agency, while addressing new high-priority objectives.
- Key priorities include:
  - (i) Modernize customs and tax revenue administrations to improve compliance and reduce tax evasion.
  - (ii) Design and implement tax policies to converge towards taxation levels consistent with the country’s tax potential.
  - (iii) Strengthen PFM through tougher internal controls, better control of fiscal risks (pensions, PPPs, and SOEs), improved public investment management and wage bill control, enhanced forecasting and budgeting, improved expenditure chain and transparency.
  - (iv) Improve policy framework for adaptation and resilience to climate change through green PFM and C-PIMA.
  - (v) Continue multiyear reform of monetary policy framework to gradually transition to interest rate targeting.
  - (vi) Improve functioning of the interbank foreign exchange market and FOREX efficiency.
  - (vii) Strengthen financial sector stability and development through better supervision and adoption/operationalization of a resolution framework.
  - (viii) Improve governance by enforcing legal frameworks and stepping up anti-corruption efforts.
- PFM priorities remain crucial in light of emergency financial support: operationalization of monitoring tools to track emergency spending, the single treasury account, strengthened monitoring of publicly controlled entities, and improving capacity to identify ultimate beneficiary owners of companies involved in public procurement.

### Engagement Strategy
- Engagement with authorities: Regular interactions in program reviews; authorities appreciate opportunities to discuss CD needs with FAD, MCM, LEG during Annual and Spring Meetings and with the country team.
- Coordination within the Fund: Madagascar team holds regular meetings with functional departments to align TA priorities with program objectives and ensure effective sequencing and avoid duplication.
- Engagement with outside partners: Regular discussions on TA with World Bank, African Development Bank, and European Union.
- Authorities request sustained TA support and express interest in long-term experts in revenue administration, tax policy, and medium-term budget framework; they value training opportunities and recommend adapting frequency of TA missions to allow internalization of advice.

### Priorities by Department (Selected Topics and Objectives)
- FAD
  - Domestic tax and customs administration: Increase tax and custom revenue via modernization, effective control/enforcement, and business facilitation for compliant taxpayers.
  - Tax revenue policy: Help Tax Policy Unit make recommendations, including limiting exemptions, based on evaluation of tax exemptions annexed to the budget law.
  - Fiscal risks: Better monitor and plan for identified fiscal risks and improve fiscal risk management.
  - PFM: Budget execution and control: Improve budget classification, cash management (Treasury Single Account), accounting and asset management; strengthen public investment management; improve expenditure chain; improve macro-fiscal and budget framework.
  - Climate macroeconomic assessment program: Enhance national planning PFM systems and provide recommendations for implementation of climate policies and climate-related investment projects.
- MCM
  - Monetary policy implementation and operations: Help BFM progressively migrate from strict monetary targeting to an interest rate targeting regime.
  - Development of the interbank market: Assist BFM to foster a well-functioning interbank market (currently shallow and fragmented).
  - Development of forward FX markets: Help create an environment for a forward FX market (conditional on progress in spot FX market and interest rate targeting).
  - Foreign reserve management: Advise on reserve management strategy to include gold and operational strategy for gold purchases, refining and storage to prevent quasi-fiscal risks.
  - Banking supervision and regulation: Help supervisor regulate, supervise and monitor licensed/registered institutions to ensure AML/CFT compliance; strengthen institutional structures, risk-based supervision procedures, bank risk assessment framework, and complete banking regulations.
- STA
  - Real sector - National Accounts and Price: Improve quality of quarterly GDP series and increase frequency of data dissemination; compile rebased CPI and develop PPI.
  - Balance of Payments Statistics: Improve data quality and coverage for balance of payments and IIP; ensure consistency across macroeconomic statistics.
  - Government Finance Statistics: Broaden GFS coverage to general government and material public corporations; initiate compilation of a financial balance sheet.
  - Monetary and Financial Statistics: Compile statistics for the insurance corporations’ sector in line with the 2019 FSI guide methodology.
- LEG
  - Governance: Modify legal framework to allow identification and publication of UBOs of public procurement contracts; support preparation of a follow-up report on audits of government’s response to the COVID-19 pandemic to strengthen accountability.

*Source: Annex IV. Capacity Development Strategy — IMF document.*

### Annex V. External Sector Assessment

### Annex V. External Sector Assessment

### Overall assessment and potential policy responses
- Overall assessment: The estimated external position of Madagascar in 2022 was broadly in line with the level implied by fundamentals and desirable policies based on the current account model. International reserves, while in decline, stand at an adequate level.
- Potential policy responses:
  - Limit foreign exchange interventions to smoothing volatility to cope with external shocks and building external buffers, without resisting underlying market forces.
  - Continue efforts to formalize the mining sector.
  - Gradually phase out the existing surrender requirement on export proceeds while Madagascar’s external position allows for it.
  - Any gold purchases implemented as part of the push to diversify reserve holdings should be implemented in line with Fund TA recommendations.

### Foreign assets and liabilities: position and trajectory
- Background:
  - Net International Investment Position (NIIP) decreased from -15 percent of GDP in 2006 to -123 percent of GDP at end-2022 (preliminary estimate).
  - Structural break in series in 2018 due to revised estimates of private sector assets and liabilities following an INSTAT survey.
  - Downward trajectory driven by private external borrowing by Madagascar’s mining sector; position broadly stable in recent years after steeper decline between 2007–2013.
  - Almost all external public debt at end-2021 was held by official creditors and is concessional.
  - Private external debts are mostly (around 80 percent) accounted for by mining companies.
- Assessment:
  - Negative NIIP not thought to represent a critical vulnerability to external sustainability given:
    - Public external liabilities almost entirely official (and concessional).
    - Private external liabilities mostly long-term with 80 percent accounted for by the mining sector, which receives income in foreign currency and has sizable debt placed with affiliated headquarters or global group.
  - Risk: mining sector sensitivity to regulatory uncertainty related to a new mining code.
- Key statistics (2022 estimate, % GDP):
  - NIIP: -123
  - Gross Assets: 13
  - Debt Assets: 0
  - Gross Liab.: 136
  - Debt Liab.: 68

### Current account
- Background:
  - Madagascar’s current account remains in deficit due to large investment needs and limited saving.
  - Pandemic impacts: current account deficit widened from -2.3 percent in 2019 to -5.0 percent in 2021.
  - 2022 estimate: current account deficit -5.6 percent of GDP, driven by higher prices for energy and food imports and lower external demand despite higher prices for nickel, cobalt, and vanilla and partial tourism recovery.
  - Deficit expected to persist in 2023.
- Assessment (EBA-lite model and adjustments):
  - CA model suggests a current account gap of -0.9 percent of GDP for 2022, implying external position broadly in line with fundamentals and desirable policies.
  - Adjustors included:
    - COVID-19 adjustor: (-) 2/-0.9 (to account for lockdown-induced tourism reduction).
    - Natural disasters and conflicts: (-)1.4.
  - Policy gap: 0 .8 percent of GDP (positive, lower than 2021 ESA policy gap of 2.8 percent).
- Selected model items and outcomes (Madagascar: EBA-lite Model Results, 2022):
  - CA-Actual: -5.6 (in percent of GDP)
  - Cyclical contributions (from model): (-)0.3
  - COVID-19 adjustors: (-) 2/-0.9
  - Natural disasters and conflicts: (-)1.4
  - Adjusted CA: -6.4
  - CA Norm (from model): -5.5
  - Adjusted CA Norm: -5.5
  - CA Gap: -0.9
  - o/w Relative policy gap: 0 .8
  - Elasticity: -0.2
  - REER Gap (in percent): 4.3 and -0.2 (from two REER methods)

### Real exchange rate
- Background:
  - Real Effective Exchange Rate (REER) appreciated by 1.3 percent over 2022.
  - Nominally, the Ariary depreciated by 12.8 percent in 2022 relative to the US dollar.
- Assessment:
  - CA-model-based REER gap: 4.3 percent end-2022.
  - REER-model-based gap: -0.2 percent.
  - Interpretation: the CA-model points toward a slight overvaluation of the REER.

### Capital and financial accounts: flows and policy measures
- Background:
  - Capital grants totaled some 1.5 percent of GDP over 2022; a longer-run downward trend expected to continue.
  - Net FDI inflows in 2022: 2 percent of GDP (versus pre-pandemic average over 2016-2019 of just under 3.2 percent).
  - Projected FDI inflows expected to increase to a new steady state value just over 2.5 percent of GDP.
  - Adoption of a new FX law remains pending; BFM working to increase liquidity and depth of the foreign exchange market.
  - Success could allow gradual loosening of the surrender requirement on export proceeds (a capital flow management measure under the IMF’s Institutional View).
- Assessment:
  - Risks related to capital and financial account are minimal because there is no portfolio investment.
  - Projected FDI inflows are at risk in case of major setbacks or delays in structural reforms, or a more protracted global crisis.

### FX intervention and reserves level
- Background:
  - De jure floating exchange rate regime with algorithmic interventions to smooth volatility and build reserves on average.
  - End-2022 FX reserves: SDR 1,601 million (14.1 percent of GDP) or 3.9 months of next year’s imports.
  - End-2021 stock of reserves: SDR 1630 million.
  - 2020 reserves: SDR 1,338 million.
  - FX interventions in 2022 increased by 30% compared to 2021.
  - FX purchases in 2022: SDR 78.4 million.
  - FX sales in 2022: SDR 75.2 million.
- Assessment:
  - International reserves assessed as adequate.
  - Reserve coverage declined from 4.7 months of next year’s imports in 2020 to 3.9 months in 2022.
  - Reserve coverage remains above the traditional three-month rule but no longer exceeds the upper bound of 4.2 from an ARA model for credit-constrained economies (assuming cost of holding reserves = 5 percent).
  - Madagascar remains highly vulnerable to additional external shocks (term-of-trade shocks, natural disasters) that could put reserve path at risk.
  - Coverage risks could arise should government spending accelerate faster than anticipated amid an external financing shortfall.

---

### Annex VI. Drivers of Growth Under the Plan Emergence Madagascar

### PEM growth objective and context
- PEM objective: achieve 9 percent average real GDP growth over 2022-2040 supported by a significant increase in human capital.
- Growth historically: high volatility with expansions often interrupted by political crises and natural disasters.
- Highest average growth since 1980 occurred over 2003–08.

### Growth accounting framework and calibration
- Production function: constant-return-to-scale Cobb-Douglas with Y = A K^(1−α) (L h)^α.
- Capital stock computed via perpetual inventory: K_t = I_t + (1−δ) K_{t−1}.
- Calibration and data:
  - Initial capital stock set equal to 2.4 times real GDP (national currency), in line with Penn World Table (PWT 10.0).
  - Depreciation rate δ set at 5 percent.
  - Human capital index h from Penn World Table used as proxy.
  - Labor force data from World Bank’s WDI used as proxy for employment.
  - Labor share α estimated via OLS regression (sample 1980–2019):
    - Coefficient on log capital stock: 0.29 (95-percent confidence interval [0.22, 0.36]).
    - Coefficient on log “quality adjusted” workforce: 0.37 (95-percent confidence interval [0.30, 0.43]).
    - Labor’s share α set to 0.56 (0.37 divided by the sum of 0.29 and 0.37).

### Historical contributions to growth (1980–2019)
- Key findings:
  - Between 1980–2000, labor contributed most to real GDP growth.
  - Between 2000–2019, growth was mostly driven by increases in the stock of capital.
  - Total Factor Productivity (TFP) has reduced output growth since 1980.
  - TFP contribution: average loss in growth of 1.28 percentage points each year.
  - Contribution of education (human capital) has been low and declined in last two decades.
  - Capital’s contribution averaged 2 percentage points over 2000-2019, representing almost 75 percent of observed growth over that period.
- Figure AVI.3 decomposition summary (1980-2019 averages shown in source):
  - TFP: -1.28 (average annual contribution)
  - Capital and labor positive contributions collectively driving growth.

### Projections under the PEM and TFP requirements
- PEM assumptions for investment and human capital:
  - Real investment to GDP ratio assumed: 35 percent in 2023, 38 percent in 2027, and 40 percent in 2040.
  - Historical real investment to GDP ratio: roughly 30 percent over 2010–2019.
  - PEM assumes annual growth in human capital h of 1.65 percent per year, reaching Malaysia's 2019 human capital index level by 2040.
  - Historical human capital index growth: 0.45 percent per year with declining growth over 2010–2019.
- TFP requirements to hit PEM 9-percent growth:
  - TFP contribution needed: 2.3 percentage points in the first decade and 2.4 percentage points in the second decade after PEM implementation — representing a radical improvement in TFP growth.
  - If TFP follows historical average (average loss in growth of 1.28 percentage points each year), annual average real GDP growth under the PEM could reach 6 percent.
  - Alternative, more conservative investment scenario (real investment growth of 5 percent annually through 2040):
    - Required TFP contribution: 3.25 percentage points in the first decade and 4.37 percentage points in the second decade after PEM implementation.

### International perspective on attainable TFP growth
- Distribution of TFP growth worldwide indicates that achieving sustained TFP growth above 3 or 4 percent is highly unusual.
- Examples:
  - Rwanda: average TFP growth of 2.14 percent with average real GDP growth of 7.8 percent per year over 2000–2019.
  - Botswana: average TFP growth of 2.6 percent over 1965–1990 with average real GDP growth of 12.4 percent.

### Policy package to improve productivity
- Drivers of productivity growth grouped into five components (Kim, Loayza, and Meza-Cuadra, 2016):
  1. Innovation: create and adopt new technologies.
  2. Education: spread and assimilate technologies throughout the economy.
  3. Market efficiency: promote effective and flexible allocation of resources across sectors and firms.
  4. Infrastructure: support private sector activity.
  5. Institutions: regulatory, justice, policy, and political systems to provide stability and defend property rights.
- PEM-aligned priorities and recommendations:
  - Priority 1 (velirano 1): Ensure political and social/economic stability; fight corruption to reinforce accountability and trust.
  - Priority 2: Build resilient infrastructure (electricity velirano 2; roads) to support industrial development (velirano 7) and facilitate internal trade; modernize agriculture (sector still employs 15-20 percent of the Malagasy economy).
  - Priority 3: Improve human capital accumulation (velirano 4 for education and velirano 5 for health); prioritize existing infrastructure and teacher training.
  - Priority 4: Ensure a level-playing field for the private sector by lowering entry and exit costs, promoting resource reallocation, strengthening competitiveness, and encouraging formalization of firms; ensure stability of legal and regulatory frameworks.
  - Priority 5: Promote adoption and adaptation of new technologies to the Malagasy context to develop higher value-added activities.

_Annex V. External Sector Assessment (and Annex VI excerpt) — IMF staff analysis as provided in the source content._

### Annex VII. Strengthening Governance and Fight Against

### Annex VII. Strengthening Governance and Fight Against Corruption

### A. Background
- Governance indicators have recently improved but remain well below the average level of Sub-Sahara African countries (SSA).
- Government capacity to mobilize tax revenue remains weak and PFM reforms have stalled since 2018.
- Legal anti-corruption framework has been strengthened, but more emphasis is needed on effective implementation and enhanced civil society access to information to improve government accountability.
- Lack of transparency and predictability of business regulations tends to curb investment prospects.

### B. Fiscal Governance
- Government revenues (excluding grants) represented 10.6 percent of GDP on average over 2017–21, compared with SSA countries average of 16.3 percent of GDP.
- Tax expenditures increased from 1.5 percent of GDP in 2015 to 2.9 percent of GDP in 2021.
  - VAT tax expenditures increased from 0.4 percent of GDP in 2015 to 1.7 percent of GDP in 2021.
  - Customs duties tax expenditures increased from 0.65 percent of GDP in 2015 to 1 percent in 2021.
- Compliance gap: stock of tax arrears at the end of the fiscal year averaged 29 percent of collected taxes.
- Tax administration efforts to improve compliance remain too fragmented.

- PEFA (February 2022) identified significant PFM weaknesses in:
  - Credibility of the budget.
  - Transparency of public finance.
  - Public investment management.
  - Internal and external PFM oversight.

- Fiscal transparency and PFM improvements underway and outstanding actions:
  - Budget functional classification being improved with IMF long-term resident expert support.
  - Execution reports released timely since 2021 but coverage needs enhancement.
  - Authorities committed to preserving annuality of the budget by cancelling unused investment and transfers credits at the end of the fiscal year.
  - Transfers to subnational authorities are not timely communicated.
  - Posting of all individual public procurement contracts on the ARMP website has recently stopped and should be reinstated.
  - Legal framework for public procurement should require identification of the ultimate beneficial owner.

- Public Investment Management issues:
  - Large share of investment projects reported as “Provisions for investment operations” without clear identification, evaluation, prioritization, or communicated selection criteria.
  - Authorities committed to publish a public investment manual (SB initially set to December 2021, postponed to March 2023); dismantling of OCSIF led to significant delay.

- Internal and external controls:
  - Financial independence of the Cour des Comptes strengthened by giving it a budgetary mission and direct access to Ministry of Economy and Finance information systems.
  - Internal and external audits need further strengthening; administrative sanctions proposed by Inspection Général de l’Etat are not always enforced; civil servant accountability remains weak.
  - No systematic follow up on Cour des Comptes audit recommendations.

- Malagasy Sovereign Fund (FSM) governance risks:
  - Law N°2021-024 creating the FSM not yet supplemented by application decrees.
  - Law specifies public procurement code will not apply to FSM operations; FSM operations to be subject to a manual of procedures that has not yet been released.
  - FSM will be partially financed by revenues from natural resources which may affect budget unity.
  - Authorities committed to clarifying FSM objectives, investment strategy, financing, and governance; avoid diversion of funds from the budget; contain fiscal risks; guarantee transparency through submission to Parliament and publication of annual reports and financial statements.

### C. Fight Against Corruption and AML/CFT
- Anti-corruption institutional framework:
  - Updated national anti-corruption strategy and national good governance strategy finalized in 2020.
  - Agencies in place include ARAI (Agence de Recouvrement des Avoirs Illicites), Comité pour la sauvegarde de l’Intégrité (CSI), pôles anticorruption (PAC), Bureau Indépendant Anti-Corruption (BIANCO), and SAMIFIN (FIU).
  - Out of six PACS originally envisaged, only two are currently operational; opening of a third planned for 2023 (initially planned for December 2021).

- Resource and implementation constraints:
  - Credits allocated in budget laws to anti-corruption agencies have stagnated since 2020 and remain insufficient; many agencies have little or no budget for investment.
  - For 2023, authorities committed to increase the ARAI budget to ensure its effective operationalization but did not increase the budget allocation of other anti-corruption agencies.
  - Staffing challenges: absence of a national competitive examination for recruitment of magistrates for three years in a row has led to a shortage of qualified professionals; need for adequate training for newcomers.
  - Fragmentation and lack of cooperation between judicial bodies delay prosecution of corruption cases and few sanctions are taken.
  - Audit institutions have been less affected by staff shortages.

- AML/CFT:
  - Government adopted the national strategy for AML/CFT in June 2022, taking into account national risk evaluation results and addressing some FATF-identified shortcomings.
  - A law modifying and completing the 2019 Law on AML/CFT to align with FATF international standards has not yet been submitted to Parliament.

### D. Access to Information and Business Climate
- Access to information improvements needed to enable Parliament and civil society oversight:
  - Large delay (close to 2 years) in adopting the Loi de règlement (finance settlement bills) undermines Parliament and civil society capacity to act as corruption watchdogs.
  - Limited time given to Parliament and civil society to examine the budget law project weakens oversight.
  - Government should adopt laws to:
    - Guarantee public access to information.
    - Protect whistleblowers.
    - Require public policy evaluation.
  - Effective operationalization of the Conseil Economique, Social et Culturel (provided for in the 2010 Constitution) would support civil society involvement in policymaking.

- Restoring private sector confidence and public trust:
  - Ensuring public service continuity is crucial to foster private investment.
  - Market restrictions requiring permits and licenses to operate and/or export (e.g., recently in the vanilla sector) facilitate rent seeking and should be avoided.
  - Existing laws should be effectively applied; retroactive regulations should be avoided, especially in the tax area.
  - Land administration management should be modernized and decentralized.
    - World Bank reports that only 8000 land titles are issued per year and around 10 million plots remain to be registered.
  - Protection of property rights assessed as one of the weakest in the world in the World Economic Forum 2019 Global Competitiveness Report and should be reinforced.

*Source: Annex VII. Strengthening Governance and Fight Against Corruption.*

### 9. Quantifying the impact of climate and climate change on growth and fiscal aggregates

### 9. Quantifying the impact of climate and climate change on growth and fiscal aggregates

### Climate impacts on growth projections and modeling
- Madagascar’s macroeconomic and fiscal projections do not factor in climate and climate change risks despite the country being consistently and increasingly hit by natural disasters.
- Following the CMAP assessment, staff have revised down medium-term growth projections from 5 to 4.5 percent to better account for the recurring impact of climate on potential growth and the lack of improvement in total factor productivity.
- Model-based simulations using the Debt, Investment, Growth, and Natural Disasters (DIGNAD) model suggest that:
  - Investments to scale up resilient infrastructure and build human capital, with the objective of reaching SDGs, using the proceeds from mitigation measures and additional grants, might boost growth while preserving fiscal sustainability.
  - Achieving such outcomes would require a significant acceleration of reforms supported by improved governance and public investment management capacity.
- The DIGNAD model is a dynamic small open economy model designed to simulate the impact of one natural disaster and associated policy trade-offs between debt accumulation, public/private investment, and growth.

### Macroeconomic outlook and recent developments
- Growth and inflation:
  - Following a contraction of 7.1 percent in 2020, real growth in 2021 is estimated at 5.7 percent.
  - Multiple climatic shocks at the beginning of 2022 and rising food and energy prices will impact growth in 2022 and 2023, which should nevertheless average at least 4.2 percent in these two years.
  - This performance is better than that of sub-Saharan African economies (expected to be around 3.8 percent).
  - At the end of November 2022, inflation reached 10.8 percent year-on-year.
  - Projected end-of-period inflation: around 11 percent in 2022 and approximately 9 percent in 2023.
- External sector and reserves:
  - Current account deficit projected to rise to about 5.6 percent of GDP in 2022 and 5.7 percent of GDP in 2023, from 5.0 percent of GDP in 2021.
  - Foreign exchange reserve coverage of imports of goods and services projected to fall from 5.8 months in 2021 to 4.3 months in 2022 and 3.7 months in 2023.
  - Outlook remains subject to significant uncertainties and risks, including climate shocks, weak revenue mobilization, poor public expenditure execution, and election-related uncertainties.

### Performance under the ECF-supported program and structural reforms
- Quantitative performance and fiscal anchor:
  - Net foreign assets: central bank net foreign assets were SDR 591 million against a target of SDR 615 million (floor missed).
  - Domestic primary balance: -MGA 336 billion against a benchmark of -MGA 293 billion (overshot by MGA 43 billion).
  - The program will submit a waiver request to the Fund’s Executive Board for these non-compliances.
- Other quantitative and indicative target outcomes:
  - Quantitative performance criteria for net domestic asset ceilings and the continuous criteria for external debt were met.
  - Collection of customs taxes on non-oil products exceeded budget law targets, while total customs revenue was below the end-June 2022 benchmark—attributed to cross-liabilities with oil companies.
  - Floors for domestic tax revenue collection and social spending were not met due to climate shocks, delays in tax measures, and problems in social ministries’ budget execution.
- Structural reform progress:
  - Prior actions and 5 out of 9 continuous/scheduled structural benchmarks since June 2022 have been met.
  - Achievements include establishment of a monthly monitoring table for commitment authorization requests and continued sharing of payment information to JIRAMA suppliers.
  - Remaining gaps in budget execution reports (breakdown by type, comparison to initial budget law, cash movements and external financing) are being addressed with IMF Fiscal Affairs Department support.
  - The continuous criterion on keeping gross liabilities to oil distributors below MGA 300 billion was not met but an agreement in late December 2022 is expected to allow the state's gross commitments to return below the cap.
  - Reforms to speed up public expenditure execution include abolishing the commitment authorization request (DAE), strengthening financial control services, and establishing an a posteriori commitment monitoring office under the Office of the President.
  - The 2023 budget creates a dedicated budgetary mission for the Cour des Comptes to strengthen its autonomy.

### Expected contribution of the program to growth and poverty reduction
- Alignment with the Madagascar Emergence Plan (PEM):
  - PEM targets: increase GDP per capita to $4,000 in 2040 (from $522 in 2019); raise the human capital index to 0.60 (from 0.39 in 2020); lower the poverty rate to 35 percent (from 78.8 percent in 2012).
  - Estimated investment effort: $13.7 billion by 2030 (with 64 percent private investment) and $74.3 billion by 2040 (with 85 percent private investment).
- Program contributions:
  - Strengthening macroeconomic stability, fiscal transparency, and public financial management to create fiscal space for public investment and human capital development.
  - Prioritizing social spending, including development of a shock-responsive cash transfer program to improve resilience to shocks including those related to climate change.
  - Reforms to improve fiscal transparency, anti-corruption, and anti-money laundering frameworks to support investor confidence and private investment.

### Fiscal policy and revenue mobilization measures
- Fiscal consolidation and targets:
  - The domestic primary balance is expected to improve in 2023 and become positive by the end of the program in 2024 (excluding one-time revenue from settlement with oil distributors).
  - The 2023 initial budget law assumes a tax burden of 12 percent of GDP, which is 1.1 percentage point higher than last year.
  - Gross domestic tax revenues are expected to reach 6.2 percent of GDP; customs revenues are expected to reach 5.9 percent of GDP.
  - Government performance estimates are more optimistic than IMF staff, with gross domestic tax revenues MGA 369 billion higher than those envisaged in the program's baseline scenario.
- Planned legislative and administrative measures:
  - Application of a 3 percent tax rate on the income of exporters of agricultural and forestry products.
  - Reinstatement of the VAT rate at 20 percent for diesel and gasoline as of January 2023.
  - Withholding of certain taxes in the vanilla industry.
  - Better VAT management.
  - Application of the AIRS (advance payment of income and synthetic taxes) of 2 percent for export transactions excluding vanilla.
  - Better traceability of products subject to excise duty.
  - Increase in excise duty on tobacco.
  - Expansion of the electronic payment system.
  - Commitment to finalize a revision of the mining code in close consultation with the World Bank, the IMF and mining sector representatives, and to submit it to Parliament by June 2023 (structural benchmark).

### Key statistics and numerical highlights
- Growth projections revised from 5 to 4.5 percent (medium-term).
- DIGNAD model referenced for disaster and policy trade-off simulations.
- 2020 contraction: 7.1 percent.
- 2021 growth: 5.7 percent.
- 2022–2023 average growth projection: at least 4.2 percent.
- Sub-Saharan Africa growth benchmark: around 3.8 percent.
- Inflation: 10.8 percent (end-November 2022); around 11 percent (end-2022); approximately 9 percent (2023).
- Current account deficit: 5.6 percent of GDP (2022); 5.7 percent of GDP (2023); 5.0 percent of GDP (2021).
- Reserve coverage (months of imports): 5.8 months (2021); 4.3 months (2022); 3.7 months (2023).
- Central bank net foreign assets: SDR 591 million (actual) vs SDR 615 million (target).
- Domestic primary balance: -MGA 336 billion (actual) vs -MGA 293 billion (benchmark); shortfall MGA 43 billion.
- Gross commitments cap to fuel distributors: MGA 300 billion.
- PEM targets: GDP per capita $4,000 in 2040 (from $522 in 2019); human capital index 0.60 (from 0.39 in 2020); poverty rate 35 percent (from 78.8 percent in 2012).
- Investment needs: $13.7 billion by 2030 (64 percent private); $74.3 billion by 2040 (85 percent private).
- 2023 tax burden assumed: 12 percent of GDP (1.1 percentage point higher than last year).
- Gross domestic tax revenues target: 6.2 percent of GDP.
- Customs revenues target: 5.9 percent of GDP.
- Government estimate: gross domestic tax revenues MGA 369 billion higher than program baseline.
- Mining code submission to Parliament by June 2023 (structural benchmark).

*Source: 1mdgea2023002 - 9. Quantifying the impact of climate and climate change on growth and fiscal aggregates (Extracted from the Memorandum of Economic and Financial Policies and related program documents).*

### 13.      As for customs administration, the contemplated reforms continue to be part of the

### 1mdgea2023002 - 13.      As for customs administration, the contemplated reforms continue to be part of the

### Customs administration reforms (paragraph 13)
- Continued inclusion of customs reforms in the 2020-2023 strategic plan.
- Key measures planned for 2023:
  - (i) harmonization of the provisions of the Malagasy Customs Code relating to free zones with the Revised Kyoto Convention;
  - (ii) implementation of a scanning system for 100 percent of imported and exported goods;
  - (iii) establishment of a new customs analysis center.
- Planned changes to the customs tariff:
  - (i) exemption from customs duties for a number of goods to revive a given sector (tourism) and to contribute to the country's energy transition;
  - (ii) introduction of exit duties on non-renewable resources in order to increase their effective contribution to the national economy;
  - (iii) completion of the elimination of tariffs in relation to the commitments made under the interim Economic Partnership Agreement with the European Union;
  - (iv) continued efforts to categorize tariff lines in accordance with national tariff policy and the model issued by UNCTAD for certain strategic products.

### Budget contingency (paragraph 14)
- New measures, in addition to those already identified, could be adopted in a revised budget law if the achievement of the tax revenue objectives were to be compromised.

### Control expenditures and improve their execution — overall fiscal stance (paragraphs 15–19)
- Fiscal objective for 2023:
  - Achieve a domestic primary deficit of 0.4 percent of GDP, excluding one-time revenues related to the agreement with oil companies.
- 2023 public expenditure aggregate projections:
  - Current expenditures, excluding net Treasury operations: around MGA 6,900 billion.
  - Payroll expenditures: estimated at MGA 3,869 billion.
  - Transfer expenditures: will be maintained at MGA 1,827 billion.
  - Budgeted investment spending: MGA 8,675 billion (an increase of more than 70 percent from MGA 5,020 billion spent last year).
- Payroll and pension management reforms:
  - AUGURE system development status as of end-December 2022:
    - Version 2 development 75 percent complete for modules related to salaries.
    - Version 2 development 25 percent complete for modules related to pensions.
  - Additional AUGURE 2 modules to be developed in 2023 include: training, missions, staff evaluation, work schedules, staff of national public institutions and decentralized territorial authorities, volunteers, staff paid by technical and financial partners and Parents’ Association (FRAM) teachers, pensions, staff from specific ministries and Provisional Planning and Oversight of the Workforce, Posts, and Skills (GPEEC).
  - Specifications for the development of the new Payroll Management Tool (PMS 2.0) are being prepared.
  - Strategic reform document on the management of public pension funds has been submitted to the Higher Civil Service Council (CSFOP) for study and will be examined during the next regular session of Parliament.
  - Measures in the 2023 budget law to reduce the deficit of the Civilian and Military Retirement Fund (CRCM):
    - Digitization of pension payments through e-Poketra;
    - Adoption of draft decrees allowing for the transfer of the surplus of the non-civil-service retirement and pension fund (CPR) to the CRCM;
    - Gradual clearing of the pension funds' suspense accounts that record contributions paid not yet subject to revenue orders;
    - Improvement of revenue collection among national public institutions and decentralized territorial authorities.

### Social spending and social protection (paragraph 17)
- Commitment to accelerate execution of social spending and improve the social protection system.
- Identified causes of chronic underperformance in social spending execution:
  - Insufficient resources to cover new budget allocations and arrears;
  - Weak capacity in social ministries;
  - Cumbersome expenditure execution procedures, including commitment authorization procedures;
  - Frequent changes in budget officials.
- Planned measures:
  - Development of annual commitment plans by social ministries with IMF technical assistance to facilitate and accelerate commitment of expenditures in 2023 (structural benchmark for end-January 2023).
  - Technical and financial support from World Bank, World Food Program, and UNICEF to strengthen social protection.
  - Allocation of $5 million (MGA 18 billion) for 2023 to the Intervention Fund for Development (FID) for operational activities under the social safety net program for 36,900 households in 10 districts, organized around:
    - Productive social safety nets (development and agricultural production activities);
    - Cash transfers for human development (schooling and nutritional support);
    - Response for early recovery from natural disasters in sensitive areas (cyclone, flood, severe food insecurity, etc.).
  - Commitment to ensure budget allocations to the FID are effectively disbursed on time for use within the year.
  - Establishment of a single social registry with clarified functionalities, data-sharing conditions, and data protection measures (structural benchmark, October 2023).
  - Pilot project to collect information for 60,000 households by December 2023 (structural benchmark).
  - Update of the 2019–2023 social protection strategy and an intervention calendar; updated strategy to be proposed to the Cabinet in November 2023.

### Public investment execution (paragraph 18)
- Commitment to strengthen execution and efficiency of public investment spending to meet PEM targets.
- Prioritization of projects based on expected impacts and absorptive capacity; progressive inclusion of climate change-related criteria following CMAP recommendations.
- Clarification of institutional and operational responsibilities for public investment management following dissolution of the Investments and Financing Coordination and Monitoring Agency (OCSIF).
- Completion and publication of the public investment manual prioritized (structural benchmark for end-March 2023).
- Commitment to respect budget law priorities approved by Parliament, cancel appropriations not committed at end-December, and include new appropriations in subsequent budget laws if necessary.

### Domestic arrears (paragraph 19)
- Commitment to clear in 2023 all domestic arrears accumulated in 2022 following delayed payment of oil customs taxes.
- Commitment to preserve achievement of the domestic primary balance target while protecting social spending.

### Continue structural reforms to reduce fiscal risks — fiscal risk disclosure (paragraphs 20–23)
- Inclusion of a fiscal risks annex in the budget law continued.
- Annex 18 to the 2023 budget law identifies potential sources of discrepancies between budget forecasts and outcomes, including:
  - (i) risks related to developments in the real sector;
  - (ii) risks related to changes in the level of exchange rates;
  - (iii) risks related to the fragility of the "pay as you go" pension system.
- These are in addition to risks previously identified, including those related to public debt, public guarantees, climate change, and inflation trends.
- Climate change framework progress:
  - Updated Nationally Determined Contribution (NDC2) calling for a 24 percent reduction in emissions and the country's resilience by 2030.
  - NDC2 covers sectors classified as sources of emissions, sectors with absorption capacities, and sectors vulnerable to climate change; an implementation plan with cost breakdown developed.
  - Revised National Climate Change Policy (PNLCC) and developed National Climate Change Policy Action Plan (PANLCC).
  - National Adaptation Plan (NAP) identifies 12 structural programs including strategic sectoral priorities.
  - NDC2 and NAP adopted by the Cabinet.
  - Madagascar's Adaptation Communication (ADCOM) developed per adaptation committee guidelines (AC20/GUI/5B).
  - Work underway on long-term low-carbon development strategy (LTS) to aim for carbon neutrality by 2050.
  - Gender and climate change strategy developed.
  - Work on institutional transparency framework of the Paris Agreement and finalization of priority programs that could be financed by the Green Climate Fund (GCF).
- Strengthening risk and disaster management:
  - Commitment to provide BNGRC with necessary human, material, and budgetary resources and ensure timely availability of budget.
  - September 2022 Council of Ministers decree modified BNGRC organizational chart to allow transfer of management of the National Contingency Fund (FNC) to BNGRC; FNC procedural manual and financing code finalized.

### Climate resilience and policy actions (paragraph 23)
- Planned implementation of CMAP recommendations with IMF technical support to build resilience and policy responses to economic impacts of climate change.
- Recent policy decisions aligned with mitigation and environmental protection:
  - Upward adjustment of fuel prices at the pump in July 2022;
  - Establishment of new residential and business rates for electricity consumption;
  - Upward adjustment of the excise duty on tobacco;
  - Decision to exempt imports of new vehicles, other than those with compression or spark ignition, from duties and taxes (2023 budget law).
- Disaster risk management progress and programs:
  - Development of a risk financing strategy and participation in several insurance mechanisms;
  - REPLICA program to increase disaster response capacity;
  - Development of the National Recovery Plan following cyclone damage in early 2022;
  - Establishment of Nutritional and Medical Rehabilitation Centers in the south for drought response;
  - Development and implementation of adaptation strategies underway.

### Automatic fuel price adjustment mechanism and related measures (paragraph 24)
- Plan to implement an automatic fuel price adjustment mechanism by the end of the first quarter of 2024.
- Measures undertaken:
  - Agreement on a new price structure in July and increase of pump prices by an average of 43 percent on July 11, 2022, with differentiated increases by fuel type.
  - Public and private sector wage increases announced in April 2022 helped mitigate impact on household purchasing power.
  - Agreement between the government and the Madagascar Group of Oil Companies (GPM) on the government's gross liabilities to oil distributors at end-December 2021.
  - December 2022 agreement between government and GPM on settlement of all cross-debts at end-2021 and 2022 related to administration of prices at the pump, stipulating:
    - Payment by the government of its debt arising from the difference between the administered pump price and the market price (implicit subsidy) to GPM members;
    - Settlement by the GPM of all its tax obligations to the government.
  - Settlement of these liabilities will result in recording of transfer expenditures in the Treasury's consolidated statement of operations corresponding to the amount of the government's gross liabilities; part to be settled by issuance of special Treasury bills and the rest paid in cash.
  - Settlement of import duties and taxes will result in a credit to the Other Net Operations of the Treasury accounts.
  - The agreement with the GPM also covers payment for all requisitions made by the government for JIRAMA in 2022.
  - Reinstatement of VAT on petroleum products at 20 percent as of January 2023 to reduce accumulation of VAT credits vis-à-vis oil companies (VAT had been reduced to 15 percent in July 2022).
  - Government's gross liabilities to oil companies, excluding VAT, remain capped at MGA 300 billion (continuous structural benchmark); any excess without a pump price increase will be subject to an additional transfer to fuel distributors to return below the ceiling.
  - Continued development of price mitigation measures for the most vulnerable segments, including strengthening social protection programs on the basis of existing studies (structural benchmark, June 2023) with World Bank support.

### JIRAMA turnaround strategy and financial position (paragraph 25)
- JIRAMA financial position and developments:
  - As of December 31, 2021:
    - Operating deficit: MGA 360 billion.
    - Total debt: estimated at MGA 1,947 billion.
  - Revenues recovered toward MGA 1,000 billion in 2021 due to OPTIMA3 tariff optimization (implemented July 1, 2021), intensified collection, and anti-fraud efforts.
  - OPTIMA Business (tariff optimization for non-residential customers) implemented in August 2022, five months later than planned.
  - Programs implemented include "One Week, One Neighborhood" (deal with power outages), "Hazavana ho an'ny Tanana" (restore public lighting), "2424" program (aim to ensure 24-hour availability in district capitals), and investments in water infrastructure (extension of Mandroseza station, installation of 10 satellite containerized production stations, replacement of aging water pipes).
  - Changes in JIRAMA management delayed finalization of the new business plan (structural benchmark not met at end-December 2022).
  - With World Bank support, a new strategy to restore JIRAMA’s financial situation is being developed for medium-term recovery.
- 2023 transfer and arrears plans:
  - Transfer needs for JIRAMA for 2023 estimated at MGA 453 billion.
  - 2023 budget law provides for a budget of MGA 300 billion; decisions to be made during the year to provide additional funds as necessary to avoid requisitions.
  - Commitment to ensure reallocation does not reduce transfers to social institutions and ministries; World Bank and IMF staff to be informed of budget transfer details to JIRAMA suppliers.
  - Government committed to paying its audited water and electricity bills estimated at MGA 30 billion for 2022.
  - JIRAMA estimates government arrears at MGA 305 billion.
  - Prepaid electricity meters to be rolled out for all government agencies by end-December 2023 as part of the new business plan (structural benchmark).
  - Payment plan for JIRAMA's suppliers’ arrears (MGA 1,257 billion as of December 31, 2021) to be implemented over the next three years.

### Air Madagascar fiscal risk (paragraph 26)
- Air Madagascar identified as a significant fiscal risk.
- Preliminary estimates indicate:
  - Financing requirement of at least $60 million.
  - Need for debt restructuring for Air Madagascar and its subsidiary Tsaradia.
- A business plan including a medium-term recovery plan has been developed at the request of the National Social Security Fund (CNAPS), the second largest shareholder after the government.
- The 2023 budget law provides for a sovereign guarantee to support the company’s lease of an Embraer and a Boeing to serve short-, medium-, and long-haul routes.
- Government commitment to consult with the Fund and the World Bank prior to any public financing of the company.

*Republic of Madagascar — International Monetary Fund, extracted chapter content.*

### 27.      We will further strengthen oversight of state-owned enterprises to contain fiscal risks.

### 27.      We will further strengthen oversight of state-owned enterprises to contain fiscal risks.

### Oversight of State-Owned Enterprises (SOEs)
- The unit specifically in charge of regular monitoring of state-owned enterprises within the Ministry of the Economy and Finance will take advantage of the training and monitoring tool provided by the AFRITAC South technical assistance mission in October 2022.

### Public-Private Partnerships (PPPs)
- A review of the institutional and legal framework for PPPs should better integrate PPP management into planning and execution of investments and control financial and fiscal risks.
- The law of February 3, 2016 defines the legal and institutional framework for PPPs.
- Commitments:
  - Activate the National Committee established by the law before June 2023 to make the PPP management framework operational.
  - Adopt the finalized national PPP strategy, which provides a framework for implementation of PPP investment projects, by the end of June 2023.
  - Improve transparency of public transactions involving PPPs.

### Malagasy Sovereign Wealth Fund
- Vigilance on fiscal risks potentially arising from establishment of the Malagasy Sovereign Wealth Fund; commitment to contain them with best practices in sovereign wealth funds.
- Commitments to:
  - Clarify the fund's objectives, investment strategy, financing, and governance to avoid diversion of budget revenues and an increase in public debt.
  - Ensure transparency of the fund's operations, including submission of annual reports and financial statements to Parliament and their regular publication.

### Strengthen Public Financial Management and Economic Governance
- Consolidate gains in budgetary transparency while correcting noted deficiencies.
- Notable transparency actions taken:
  - Online publication of all available information on COVID-19 expenditures, including public procurement contracts executed in connection with the pandemic.
  - Publication of the results of the four audits by the Cour des Comptes concerning the pandemic response, and publication of the audit of COVID-19 contracts by an independent firm.
- Ex-post oversight strengthening:
  - Cour des Comptes has been given full access as an external auditor to the information systems of the Ministry of the Economy and Finance, including SIGMP, SIGOC, SIGTAS, NIFONLINE, SIIGTA and ASYCUDA.
  - Work underway to identify needs and provide necessary responses for access to the Integrated Public Financial Management System (SIGFP).
  - Created a budgetary mission for the Cour des Comptes within the 2023 initial budget law (structural benchmark for end-December 2022) to strengthen budgetary autonomy.
- Implementation monitoring:
  - Continue implementing the action plan responding to the Cour des Comptes's recommendations.
  - Cour des Comptes to prepare a report to be published before March 2023 detailing implementation status of each recommendation and actions to ensure accountability of those responsible for irregularities (structural benchmark).
- Publication of budget data:
  - Continue to publish online, via the Salohy platform of the General Directorate of the Treasury, data on public expenditures by sector, ministry, and program on a payment basis (http://app.tresorpublic.mg/dpp.mef.mg/).
  - Continue publication of a quarterly report on budget execution (published since June 2021) and improve content/presentation with IMF long-term expert support to improve coverage of deferred payments and facilitate reconciliations with the Treasury's consolidated statement of operations.

### Public Procurement Transparency and Governance
- Standard price lists established as reference for public procurement contracts.
- Commitments and measures:
  - Improve availability of all individual public procurement contracts on the ARMP website.
  - Amend legal framework for public procurement before June 2023 to allow collection of information on beneficial owners of bidding companies or other legal entities (structural benchmark); publish this information on the ARMP website for all beneficiaries of public contracts whether or not awarded competitively.
  - Submitted several draft decrees to the Council of Ministers to strengthen the legal framework:
    - Updated draft decree on the Code of Ethics specifying sanctions for violations of the Public Procurement Code.
    - Draft decree on the person responsible for public contracts to professionalize the position and define appointment procedures.
    - Draft decree to bring the Tender Board into compliance with the Public Procurement Code.
    - Draft decree defining the general mechanism and operational procedures of the National Procurement Commission.
  - Progress on digitization: e-Governance Procurement operational since September 2021; Procurement Review System launched in February 2022.
  - Considering implementation of "Integrity Pacts" with civil society for major public procurement contracts.

### Public Finance Reform (PSMFP)
- Updated Strategic Plan for the Modernization of Public Financial Management (PSMFP).
- Actions taken:
  - IMF Fiscal Affairs Department technical assistance in September 2022 supported updating the public finance reform strategy and action plan.
  - Strategy presented to and approved by members of the Public Finance Reform Steering Committee in October 2022.
- Next steps:
  - Implement updated action plan.
  - Directorate for Coordination and Monitoring of Reforms (DCSR) will work with technical and financial partners to develop monitoring and evaluation tools and methods for reforms across the Ministry.

### Budget Execution Improvements
- Priority to improve the budget execution process to achieve strong and inclusive growth.
- Dashboard (set up in September 2022) to monitor processing of commitment authorization requests (structural benchmark) showed improvement in the last quarter of the year but persistent long delays.
- Measures decided:
  - Eliminate commitment authorization requests submitted to the Office of the President and Office of the Prime Minister and strengthen financial control services under authority of the President and technical supervision of the Ministry of the Economy and Finance (2016 law on financial control). Prepare annual commitment plans to verify alignment with budget law objectives.
  - Create by presidential decree a Commitment Monitoring Office under the Office of the President to carry out targeted ex-post monitoring of commitments; composition to include representatives of the Office of the President, Office of the Prime Minister, General Directorate of Financial Control, and General Directorate of the State Auditor General. Ministry of Finance to support preparation of a monthly dashboard summarizing number and amount of commitment requests approved by Financial Control, similar to the dashboard transmitted since September 2022.
  - Strengthen existing financial control bodies based on duties defined by legislative and regulatory documents.
  - Continue the one-stop shop covering the entire expenditure cycle established at the Ministry of the Economy and Finance two years ago.
  - Strengthen interoperability of IT systems used by the Ministry to improve coverage and quality of quarterly budget execution reports.

### Cash Management and Public Accounts
- A new draft law on cash management will be presented to the National Assembly for adoption before the end of the year to advance implementation of the Treasury Single Account.
- Identified 234 active accounts for 55 public entities whose integration into the Treasury Single Account is still subject to legal constraints.
- Another draft law on the status of public accountants, clarifying legal responsibilities in case of irregularities and updating Executive Order 62-081 of September 29, 1962, will be submitted to Parliament before the end of 2023.

### Anti-Corruption and Asset Recovery
- Progress in institutional framework: establishment of the Agency for the Recovery of Illicit Assets (ARAI) and appointment of its Director General; all agencies in the national anti-corruption strategy are now in place and operational (Committee for the Safeguarding of Integrity (CSI), Independent Anti-Corruption Office (BIANCO), Anti-Corruption Units (PACs), Financial Intelligence Unit (SAMIFIN), and the ARAI).
- Commitments to improve efficiency:
  - Ensure each body has sufficient human resources and budgetary autonomy; focus on recruitment of remaining ARAI staff and renewal/recruitment of judicial personnel for PACs; allocate and fully disburse budget provided in the 2023 initial budget law.
  - Accelerate operationalization of the Fianarantsoa PAC and open three additional PACs and new BIANCO regional offices before the end of 2023.
  - Support acquisition and furnishing of premises in Antananarivo for CSI, National Coordination Directorate for Anti-Corruption Units (DCN-PAC), Antananarivo PAC, and ARAI.
  - Support SAMIFIN in joining the EGMONT Group and cover maintenance costs of the GoAML software used in financial analyses; oversee adoption of draft decree on restructuring of SAMIFIN.
  - Implement and publicize the National Strategy for Combating Money Laundering and the Financing of Terrorism as adopted in June 2022; finalize the new national risk assessment requested by the President in order to update the strategy (May 2023).

### Anti-Money Laundering Legal Framework
- Priority to approve a document implementing provisions of Law No. 2018-043 of February 13, 2019, on combating money laundering and the financing of terrorism to align with key FATF recommendations.
- Anticipate issuance of the implementing decree for Law No. 2018-043 of February 13, 2019, on targeted financial sanctions for financing of terrorism and proliferation of weapons of mass destruction.

### Asset Declarations and Recovery
- Continue regular publication of investigative statistics (BIANCO) and implement dynamic management of asset declarations per Law No. 2016-020 of August 22, 2016.
- Actions to be taken:
  - Adopt an implementing decree allowing dynamic use of asset declarations received.
  - Operationalize ARAI with a deterrent legal policy that provides for systematic recovery of the proceeds of corruption.
  - Remind all persons subject to asset declaration of their legal obligations to promote integrity and transparency in public office.

### Business Environment and Digitization
- Progress in digitization of tax payments, issuance of work permits, establishment of a credit bureau, and operationalization of the e-reimbursement of VAT.
- Legislative reforms underway include overhaul of the investment law, tourism code, foreign exchange code, and labor code.
- Continue digitization of business creation via the ORINASA platform with deployment in regions beyond Analamanga where it is already fully operational.
- Deploy digital platform for granting building permits, already operational in the urban municipality of the capital.

### Monetary Policy Framework and Financial Sector Stability
- Final stages of reforming the monetary policy operating framework for migration to an interest rate targeting framework by the end of 2023.
- Actions to support transition:
  - Improve the Quarterly Projection Model (QPM) to provide better estimates of optimal level of the Central Bank of Madagascar (BFM) standing facility rates and to better account for monetary policy transmission channels.
  - Build on recommendations from January 2023 technical assistance on development/use of the Forecasting and Policy Analysis System (FPAS) and implementation of monetary policy in an interest-rate targeting framework.
  - Prioritize capacity-building for senior staff and economists-researchers via technical assistance and study visits to other central banks.
- Planned projects:
  - Construction of a yield curve and development of a government securities market to facilitate liquidity management by the BFM.
  - Development of a continuous interbank market for the ariary.
  - Structural development and deepening of the money market, including development of the secondary market for government and BFM securities.
- Transparency commitments:
  - Publish a projected schedule of BFM interventions in the money market to help anchor expectations and boost BFM credibility.

### Foreign Exchange Market Reforms
- Continue reforms to improve functioning of the foreign exchange market.
- Regulatory and operational measures:
  - Central bank to continue collaboration with the Ministry of the Economy and Finance to adopt a new foreign exchange law.
  - Adopted in August 2022 a new decree modifying management of foreign currency accounts, establishment of the surrender requirement, and improvement of bank reporting to obtain reliable and usable data.
  - Expand foreign exchange market to include additional participants to increase liquidity and market depth and promote competition; preliminary work underway.
  - Ensure current participants conform to standards and best practices through adherence to the FX Global Code with support of the Committee of Central Bank Governors (CCBG) of SADC.
  - Improve efficiency with introduction of a single currency quotation on the interbank foreign exchange market and revision of the algorithm determining BFM interventions.

### Foreign Exchange Reserves and Gold
- Commit to diversifying foreign exchange reserves with introduction of gold into holdings.
- Actions taken:
  - Updated foreign exchange reserve strategy approved by the BFM Board of Directors; operational strategy approved by the Board in April 2022.
  - IMF staff made recommendations and the strategy is currently being amended.
  - Memorandum of Understanding with the Ministry of Mines and Strategic Resources (MMSR) is being revised to better define responsibilities and allow for suspension upon expiration.
- Purchases of unrefined gold or doré will not resume until:
  - (i) implementation of an adequate operational strategy; and
  - (ii) finalization of a revised MoU between BFM and the MMRS.

### Gold Sector Reorganization and Export Recovery
- Continue reorganization of the gold sector to resume exports as soon as possible.
- Progress:
  - Updating regulations governing gold.
  - Implementing procedures for traceability and evaluation of environmental and social practices to provide for a responsible supply chain.
  - Use results of the survey completed in July 2021 and submitted to the Council of Ministers in May 2022 to advance export recovery goals.

*Source: 1mdgea2023002 - 27. We will further strengthen oversight of state-owned enterprises to contain fiscal risks.*

### 44.      We are making progress in implementing our National Strategy for Financial Inclusion

### 44.      We are making progress in implementing our National Strategy for Financial Inclusion (2018–2022)

### Progress on financial inclusion implementation
- Financial education:
  - The strategic framework document and the national financial education program are in the process of being approved by our higher authorities.
- Access to and use of financial services:
  - Three microfinance institutions are in the process of implementing remote banking solutions: agency banking, mobile money, and mobile banking.
  - Four microfinance institutions have set up a shared information and management system (MIS).
  - Two microfinance institutions have benefited from support to extend their access sites in underserved areas.
- Policies, legal, regulatory, and institutional framework:
  - A database on financial inclusion in the country has been set up and a decree governing the supply of data has been adopted.
  - A draft regulation supplementing this decree and setting out the procedures for transmitting information is being finalized.
  - A draft law on collateral registers is being developed.
- Surveys and measurement:
  - The second edition of the FinScope Consumer Survey is being prepared; funding is secured and implementation is planned early this year.
- National payment switch:
  - The project to implement the national payment switch is still underway despite a delay in the delivery of some platform materials that should have been completed by the end of December 2022; the system should be operational this year.
- e-Ariary digital currency:
  - The central bank conducted an in-depth study of possibilities for a digital equivalent of the ariary.
  - A supplier was selected; the contract with the supplier is in the process of being negotiated.
  - BFM will finalize key elements of the e-Ariary to ensure stakeholder adoption.
  - Planned timeline: launch the technical platform in the third quarter of 2023, with a pilot test planned for the fourth quarter of 2023, potentially involving a few players in the Malagasy financial sector.

### Financial stability, supervision, and systemic risk management
- Sector soundness and resilience:
  - The banking and financial sector proved financially sound and remarkably resilient despite the health crisis.
  - At the end of December 2022, the banking sector remained largely profitable due to continued expansion of activities.
  - All banks were in compliance with prudential requirements because of good capital adequacy, except for one bank in violation due to a decline in its available capital; this institution is being closely monitored with a view to effective implementation of its recovery plan.
  - Microfinance sector: crisis impacts have gradually diminished with recovery in deposit and loan activities and a marked improvement in portfolio quality.
- Loan portfolio quality and vigilance:
  - The quality of bank loan portfolios remains satisfactory if disregarding the one bank with a sharp increase in non-performing loans.
  - Authorities continue vigilant monitoring and stand ready to take corrective measures to contain risks.
- Prudential regulatory reform:
  - A program to reform prudential regulations with technical support from the Fund has been embarked on to align with Basel II and III while incorporating country-specific risks.
  - A plan to update and improve the regulatory framework has been established.
  - Implementation began with the adoption in December 2022 of instructions on regulatory capital and regulatory capital requirements for lending institutions.
  - Staff of the Commission for the Supervision of Banking and Finance (CSBF) received a refresher course on the requirements of Basel II and III.
  - Authorities are committed to continuing development of remaining prudential regulations following a clear timetable.
- Risk-based supervision and stress testing:
  - Authorities will further strengthen the risk-based supervision approach and conduct annual inspection programs accordingly.
  - An annual stress test of the banking sector is conducted to simulate effects of various exogenous shocks and banks' vulnerability factors, focusing on impacts on banks' capital measured through solvency and liquidity ratios.
- FSAP assessment request:
  - A request has been submitted to the World Bank and the International Monetary Fund to conduct an assessment under the Financial Sector Assessment Program (FSAP); the last assessment was conducted in October 2015.

### Statistical data and program monitoring actions
- Support for INSTAT:
  - Continued support (human and financial resources) to INSTAT with technical and financial partner support.
- Specific statistical activities:
  - Complete processing of information from the 2021 Continuous Household Survey to obtain up-to-date data on living conditions and poverty.
  - Use the 2021 Continuous Household Survey to update the consumer basket for the Consumer Price Index (CPI).
  - Continue preparations for a series of surveys on remittances (formal and informal) by the diaspora to assess contribution to GDP.
  - Launch a survey for the Producer Price Index (PPI).
  - Improve calculation and publication of national accounts statistics through more disaggregated data.
  - Proceed with publication of new indices: External Trade Index (ETI) and Industrial Production Index (IPI).
  - Include insurance sector activity statistics in monetary statistics in accordance with the Monetary and Financial Statistics Manual and Compilation Guide once CSBF supervision of the insurance sector is effective.
  - Support the Ministry of Agriculture and Animal Husbandry in implementation of the Agricultural Census planned this year with World Bank financial support; initial results should be available two years after the start of the survey.

### Program evaluation, monitoring timetable, and data provision
- Program evaluation:
  - The program is evaluated on the basis of quantitative performance criteria and structural benchmarks and semi-annual reviews; definitions and reporting requirements are provided in the Technical Memorandum of Understanding (TMU).
- Review schedule:
  - Fourth, fifth, and sixth reviews are expected to be completed on or after: May 15, 2023; November 15, 2023; and May 15, 2024, respectively, based on end-December 2022, end-June 2023, and end-December 2023 periodic performance criteria test dates, respectively.
- Data provision commitments:
  - Data on variables subject to quantitative performance criteria and indicative targets will be provided monthly with a lag of no more than four weeks for NFA and NDA of the Central Bank of Madagascar (CBM) and eight weeks for other data; authorities will promptly transmit any data revisions.
  - The Financial Intelligence Unit (SAMIFIN) will publish quarterly data on reports sent to BIANCO relating to suspicions of laundering of the proceeds of corruption on a freely available website no later than the end of the month following the quarter.
  - BIANCO will publish quarterly on a freely available website (no later than the end of the month following the quarter) data on: number of persons indicted; number of persons convicted by a first instance court decision; number of persons convicted pursuant a final court decision; and number of verifications of assets disclosures of public officials.
  - For variables assessing performance but not specifically defined in the memorandum, authorities will consult with Fund staff on measurement and reporting.

*Source: 1mdgea2023002 - 44.      We are making progress in implementing our National Strategy for Financial Inclusion (excerpt).*

### 10.      The domestic primary balance (commitment basis) is measured as follows:

### 10.      The domestic primary balance (commitment basis) is measured as follows:

### Definition and measurement
- Domestic primary balance (commitment basis) = Domestic tax and non-tax revenue less domestically-financed capital expenditures and current spending excluding interest payments (as defined in the authorities’ table of government financial operations – OGT or Operations Globales du Trésor).
- Tax revenues are measured on a net basis, i.e., net of the refund of VAT credits.
- Current spending excluding interest payments = wages and salaries + goods and services + transfers and subsidies + treasury operations (net) excluding the refund of VAT credits.
- The primary balance is calculated cumulatively from the beginning of the calendar year.

### Numerical example (using data at end-September 2020)
Primary Balance Excluding Foreign Financed Investment and Grants (commitment basis)
- Primary Balance: -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

### Adjustment for program assessment (2023)
- For assessment against program targets, the 2023 domestic primary balance will be computed excluding:
  - the expected exceptional payment of overdue oil customs taxes (total of MGA 1192 bn, to be recorded under “net Treasury operations”), and
  - the projected transfer payments to oil distributors (MGA 913bn) resulting from the December 2022 agreement between the government and oil distributors.

### Related fiscal and external monitoring (key provisions in adjacent sections)
- External debt arrears: overdue debt-service obligations are those unpaid 30 days after due date or after end of agreed grace period; excludes arrears where creditor has accepted in writing to negotiate alternative payment schedules.
- Present value (PV) of new external debt for program monitoring is calculated by discounting future debt service at a discount rate of 5 percent.
- For variable-rate loans linked to benchmarks, the program reference rate for six-month USD LIBOR is 0.42 percent (fixed for duration of the program); specified spreads: Euro, JPY: -50 basis points; GBP: 0 basis points; other currencies: -50 basis points.
- Ceiling on PV of new external debt applies to debt contracted or guaranteed by the government or CBM; exclusions include (i) use of IMF resources, (ii) debts to restructure/refinance/prepay existing debts on more favorable terms up to the restructured amount, and (iii) debts classified as international reserve liabilities of CBM.
- Net Foreign Assets (NFA) of CBM: target floor evaluated using end-period stock at program exchange rates. Reference at end-December 2020:
  - 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
- Net Domestic Assets (NDA) of CBM: target ceiling evaluated using average of ten-day stocks over the quarter at program exchange rates. Reference at end-December 2020:
  - Net credit to government (A) 1043,7
  - Net claims on commercial banks (B) 608,9
  - Credit to private sector (C) 26.2
  - Other items net net (D) 183.1
  - Net Domestic Assets MGA billions (E) = (A) + (B) + (C) + (D) 1861.9

### Indicative and performance targets (selected)
- Floor on priority social spending: cumulative from the beginning of the calendar year; 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:
  - Government tax revenue measured on a gross basis (before refund of VAT credits) and on a cash basis as reported in the OGT.
  - For the year ending December 2020:
    - 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 benchmarks and monitoring details
- Structural benchmark on enforcing collection of outstanding tax arrears refers to “recouvrements des restes à recouvrer” monitored by the Direction Générale des Impôts.
- Structural benchmark on notifying IMF and World Bank staff of budget transfers to JIRAMA’s suppliers: information to be shared includes the “reference d’engagement”, beneficiary enterprise, “objet”, “date d’engagement”, amount, and the agreement or “convention”.
- Structural benchmark on fuel pricing: until adoption of a fuel pricing mechanism, authorities will prevent total estimated gross liabilities to fuel distributors excluding VAT from rising above MGA 300 billion (measured as a cumulative stock); OMH calculates estimated gross liability using the fuel price structure; authorities will provide IMF staff the calculations within four weeks of the end of each month.

### Memorandum items and reporting
- Official external budget support defined as grants and loans (including in-kind aid sold by the government with receipts earmarked) and other exceptional financing incorporated into the budget; excludes grants and loans earmarked to investment projects. Calculated as cumulative flow from January 1, 2021.
- Additional monitoring of social spending as memorandum items includes several specified aggregates and wage-bill items for education and health.

### Use of adjusters (selected adjustments affecting targets)
- NFA and NDA performance criteria will be adjusted for deviations from projected official external budget support and if the cession by the central bank of SDRs allocated in August 2021 (totaling SDR 234.2 million in case of Madagascar) does not occur as planned (equivalent of MGA 800 billion in Q1 2023 or MGA 300 billion in Q4 2023). Deviations calculated cumulatively from January 1, 2021.
  - Floor on NFA adjusted downward (upward) by cumulative deviation of actual from projected budget support, capped at equivalent of SDR 100 million. Any cession of the SDR allocation by the central bank to the government above (below) MGA 800 billion or MGA 300 billion (equivalent to SDR 145.2 million or SDR 54.5 million at the program exchange rate) will increase (decrease) the NFA target by the excess above (shortfall below). Any conversion in foreign currency of the SDR allocation ceded to the government prompts a downward adjustment in the NFA floor by the same amount.
  - Ceiling on NDA adjusted upward (downward) by cumulative deviation of actual from projected budget support, capped at equivalent of SDR 100 million. Any cession of the SDR allocation above (below) MGA 800 billion (MGA 300 billion) will prompt an equivalent adjustment of the NDA target downward (upward) by the excess above (shortfall below).
- Primary balance performance criterion will be adjusted by cumulative deviations of actual from projected official external budget support (grants or loans on concessional terms), calculated at quarterly period-average actual exchange rates.
- Two adjustment factors for external debt ceiling (PV terms):
  - An adjustor of up to 5 percent of the external debt ceiling in PV terms applies in case deviations are prompted by a change in financing terms (interest rates, maturity, grace period, payment schedule, commissions, fees). Not available when deviations are due to increases in nominal debt amounts; subject to debt sustainability.
  - The external debt ceiling at PV will be adjusted downwards by a maximum of US$ 47 million if loans linked to projects financed by the World Bank in 2023 do not materialize.

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

### Annex I. Guidelines on Performance Criteria with Respect to

### Annex I. Guidelines on Performance Criteria with Respect to External Debt

### Definition and Scope of "Debt"
- Debt is defined as a current (i.e., not contingent) liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, which requires the obligor to make one or more payments in the form of assets (including currency) or services at some future point(s) in time; these payments discharge the principal and/or interest liabilities incurred under the contract.
- Under this definition, arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are classified as debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

### Primary Forms of Debt (as specified)
- Loans:
  - Advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits).
  - Temporary exchanges of assets equivalent to fully collateralized loans under which the obligor must repay funds and usually pay interest by repurchasing collateral (e.g., repurchase agreements and official swap arrangements).
- Suppliers’ credits:
  - Contracts where the supplier permits the obligor to defer payments until sometime after the date on which goods are delivered or services are provided.
- Leases:
  - Arrangements under which property is provided for use for one or more specified period(s) usually shorter than the expected service life, while the lessor retains title.
  - For these guidelines, debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement, excluding payments that cover operation, repair, or maintenance of the property.

### Excerpt Origin
- Excerpt from paragraph 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements attached to Executive Board Decision No. 15688-(14/107), adopted December 5, 2014.

---

### Republic of Madagascar — Selected Fund Relations, Financial Data, and Analysis

### IMF Membership, Quotas, and Financial Arrangements
- Membership Status: Joined: September 25, 1963; Article VIII
- General Resources Account:
  - Quota: 244.40 SDR Million = 100.00 %Quota
  - IMF's Holdings of Currency (Holdings Rate): 213.78 SDR Million = 87.47 %Quota
  - Reserve Tranche Position: 30.63 SDR Million = 12.53 %Quota
- SDR Department:
  - Net cumulative allocation: 351.34 SDR Million = 100.00 %Allocation
  - Holdings: 226.78 SDR Million = 64.55 %Allocation
- Outstanding Purchases and Loans:
  - RCF Loans: 271.90 SDR Million = 111.25 %Allocation
  - ECF Arrangements: 366.46 SDR Million = 149.94 %Allocation

### Latest Financial Arrangements (dates and amounts)
- ECF Mar 29, 2021 — Jul 28, 2024: Amount Approved 219.96 SDR Million; Amount Drawn 122.20 SDR Million
- ECF Jul 27, 2016 — Feb 06, 2020: Amount Approved 250.55 SDR Million; Amount Drawn 250.55 SDR Million
- ECF Jul 21, 2006 — Jul 20, 2009: Amount Approved 73.32 SDR Million; Amount Drawn 53.03 SDR Million

### Outright Loans (commitments and draws)
- RCF Jul 30, 2020 — Aug 04, 2020: Commitment 69.23 SDR Million; Drawn 69.23 SDR Million
- RCF Jul 30, 2020 — Aug 04, 2020: Commitment 52.97 SDR Million; Drawn 52.97 SDR Million
- RCF Apr 03, 2020 — Apr 03, 2020: Commitment 122.20 SDR Million; Drawn 122.20 SDR Million

### Overdue Obligations and Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs)
- Principal forthcoming by year:
  - 2023: 37.19
  - 2024: 43.56
  - 2025: 65.30
  - 2026: 103.88
  - 2026 (duplicate row in source): 107.37
- Charges/Interest forthcoming by year:
  - 2023: 3.58
  - 2024: 3.64
  - 2025: 3.63
  - 2026: 3.64
  - 2026: 3.64
- Total forthcoming by year:
  - 2023: 40.77
  - 2024: 47.20
  - 2025: 68.93
  - 2026: 107.51
  - 2026: 111.00

### HIPC and MDRI Implementation (selected figures)
- HIPC Enhanced Framework:
  - Assistance committed by all creditors (US$ Million): 835.75
  - IMF assistance (US$ million): 19.17
  - IMF assistance (SDR equivalent in millions): 14.73
  - Decision point date: Dec 2000
  - Completion point date: Oct 2004
- Disbursement of IMF assistance (SDR Million):
  - Assistance disbursed to the member: 14.73
  - Interim assistance: 5.62
  - Completion point balance: 9.11
  - Additional disbursement of interest income: 1.69
  - Total disbursements: 16.42
- MDRI-eligible debt (SDR Million): 137.29
  - Financed by: MDRI Trust: 128.50
  - Remaining HIPC resources: 8.79
- Debt Relief by Facility (SDR Million):
  - Delivery Date January 2006: GRA N/A; PRGT 137.29; Total 137.29

### Exchange Rate and Safeguards
- Exchange rate (as of January 4, 2022): US$1 = 4,473 ariary
- De jure exchange rate arrangement: free floating; de facto arrangement classified as floating
- Safeguards Assessment (Banque Centrale de Madagascar, BFM):
  - Update safeguards assessment: March 2021 (previous assessments March 2006, September 2008, January 2015, March 2017)
  - Audit opinions on 2020 and 2021 financial statements are unmodified.
  - Recommendations / ongoing priorities:
    - Continue to strengthen the internal audit function.
    - Phase out the unrefined gold purchase program.
    - Implement robust foreign reserves management and operational strategies to safeguard autonomy.
    - Continue reinforcing control systems and maintain IFRS adoption (implemented in 2020).

### Technical Assistance (TA) Highlights since January 2019 (selected themes and years)
- Fiscal Affairs Department (FAD): customs modernization; national risk-based audit plans; PFM regulations; debt management & recovery strategy; Public Investment Management (PIM); fiscal risk management; pension reform; revenue mobilization; tax administration; VAT compliance; COVID-19 fiscal reporting.
- Monetary and Capital Markets Department (MCM): banking supervision and regulation; transition to interest rate based framework; adoption of IFRS; central bank operations; interbank market development; monetary policy implementation; Basel II/III reform; FPAS; national payment system development.
- Statistics Department (STA): national accounts rebasing and updates; price statistics; government finance statistics; external sector statistics; Financial Soundness Indicators (FSI).

### Statistical Issues and Data Adequacy (as of December 2022)
- General:
  - Data provision broadly adequate for surveillance and program purposes, with shortcomings in timeliness, coverage, and methodologies (e.g., treatment of missing observations).
  - New statistics law enacted April 2018.
  - Lack of automation, centralization, and specialization noted.
- National accounts:
  - Revised annual national accounts for 2007-2018 with 2007 base year using SNA 1993 finalized and published.
  - INSTAT started producing experimental quarterly GDP estimates at end-2020; data often released with delays and subject to substantial revisions.
  - Rebasing project planned for 2022-2025 with expected release date in 2025; implementation of 2008 SNA planned.
- Prices statistics:
  - INSTAT producing a reweighted CPI with 2016 base year; current CPI weights based on 2012 expenditure data; plans to update using Permanent Household Survey (EPM).
- Government finance statistics:
  - GFS for budgetary central government regularly compiled and disseminated.
  - Public sector debt statistics (PSDS) being compiled and disseminated to the joint IMF-World Bank quarterly PSDS database.
- Monetary and financial statistics:
  - BFM submits SRF-1SR and SRF-2SR to IMF; SRF-4 SR compilation has not started.
  - Reports Financial Access Survey (FAS) indicators including mobile money and UN SDG indicators.
- Financial soundness indicators:
  - Reports 13 core and 10 additional FSIs for deposit-takers and 2 additional FSIs for real estate markets; FSIs on OFCs and NFCs not yet reported.
- External sector statistics:
  - Follows BPM6 framework; quarterly data compiled using ESRI and enterprise surveys; priorities include automation and coverage improvements.
- External debt statistics:
  - Compilation generally satisfactory; private debt data coverage incomplete; authorities working to reduce debt data gaps with IMF TA.
- e-GDDS / Data dissemination:
  - Implemented enhanced GDDS recommendations by launching NSDP in May 2019.
  - Data for 13 out of 15 e-GDDS categories are disseminated; general government operations not yet published; stock market indicator not applicable.
- No Data ROSC.

### Table of Common Indicators Required for Surveillance (as of December 31, 2022)
- Exchange Rates: Date of latest observation Dec. 2022; Date received Dec. 2022; Frequency D/D/D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation Nov. 2022; Date received Dec. 2022; Frequency M/M/M
- Reserve/Base Money: Nov. 2022; Dec. 2022; M/M/M
- Broad Money: Oct. 2022; Dec. 2022; M/M/M
- Central Bank Balance Sheet: Nov. 2022; Dec. 2022; M/M/M
- Consolidated Balance Sheet of the Banking System: Oct. 2022; Dec. 2022; M/M/M
- Interest Rates: Nov. 2022; Dec. 2022; M/M/M
- Consumer Price Index: Oct. 2022; Dec. 2022; M/M/M
- Revenue, Expenditure, Balance and Composition of Financing – Central Government: Oct. 2022; Dec. 2022; M/M/A
- Stocks of Central Government and Central Government-Guaranteed Debt: 2021; Mar. 2022; A/A/A
- External Current Account Balance: Sep. 2022; Dec. 2022; Q/Q/Q
- Exports and Imports of Goods and Services: Nov. 2022; Dec. 2022; M/M/M
- GDP/GNP: 2020; Oct. 2022; A/A/A
- Gross External Debt: Jun. 2022; Dec. 2022; Q/Q/Q
- International Investment Position: Mar. 2022; Dec. 2022; Q/Q/Q

### Debt Sustainability Analysis (Joint Bank-Fund DSA) — Key Findings
- Risk of external debt distress: Moderate
- Overall risk of debt distress: Moderate
- Madagascar’s Composite Indicator (CI): 2.77, corresponding to a medium debt-carrying capacity (confirmed by October 2022 WEO data and the 2021 CPIA).
- Assessment rationale and conditions:
  - External debt distress risk assessed as “moderate” because a shock to exports pushes Madagascar’s debt burden indicators above relevant thresholds, although no external public and publicly guaranteed (PPG) debt ratios breach their thresholds under the baseline.
  - Overall debt distress assessed as “moderate” because the overall debt-to-GDP ratio breaches its benchmark under various stress scenarios.
  - Some fiscal and financing space exists to scale up investment, contingent on:
    - Ongoing efforts to improve domestic resource mobilization,
    - Continued reliance on concessional external financing,
    - Progress in developing domestic bond markets,
    - Implementation of governance reform agenda.
  - Risks are tilted to the downside, including:
    - Social and political volatility ahead of the 2023 presidential elections,
    - Heightened risk of materialization of contingent liabilities leading to faster deterioration in external and public debt indicators.
  - The distance to risk thresholds under current baseline projections suggests some space to absorb additional shocks.

*Prepared by the African Department; excerpts and data as presented in the Annex I and the Republic of Madagascar staff report materials (as of February 15, 2023).*

### 1.      The DSA includes public and publicly guaranteed external and domestic debt.  Public

### 1mdgea2023002 - 1.      The DSA includes public and publicly guaranteed external and domestic debt.  Public

### Coverage of public and publicly guaranteed (PPG) debt
- PPG debt comprises external and domestic debt including:
  - all external liabilities owed by the central bank;
  - all borrowing from the IMF;
  - government guarantees (example: the US$ 20 million or 0.13 percent of GDP guarantee to Air Madagascar for the leasing of new aircrafts reported in the 2023 budget law);
  - non-guaranteed domestic debts owed by state-owned enterprises (SOEs) where the government has at least 50 percent of the shares (example: JIRAMA and Air Madagascar);
  - domestic arrears (increased from 0.25 percent of GDP in 2021 to about 1.8 percent of GDP in 2022 as a result of a dispute with oil distributors during which oil distributors withheld the payment of oil taxes);
  - external legacy arrears of about 1.4 percent of GDP (related to HIPC);
  - direct guarantees provided by the central government (Text Table 1).
- Borrowing by local governments requires authorization from the Ministry of Finance; no authorization requests to date.
- Debt measure is on a gross basis; currency criterion distinguishes domestic vs external debt.
- Authorities publish quarterly data on both domestic and external debt.
- Reporting of debt statistics on public enterprises needs strengthening by:
  - requiring all public enterprises to submit financial statements to the Ministry of Finance within legal limits;
  - compiling information about public enterprises including debt statistics and monitoring-related risks;
  - publishing this information online in budget documents and fiscal risk statements.

### Contingent liabilities stress test and shock calibration
- A contingent liability shock of 7.2 percent of GDP is simulated to account for potential liabilities. This reflects:
  - default setting for PPPs and financial markets;
  - country-specific calibration for possible additional SOE liabilities (Text Table 2).
- Components used in the 7.2 percent of GDP shock (Total (2+3+4+5) in percent of GDP = 7.2):
  - Other elements of the general government not captured in 1.0 percent of GDP: 0.0 (Default: 1.0; Used for analysis: 0.0)
  - SoE's debt (guaranteed and not guaranteed by the government) Default: 1/2 percent of GDP; Used for analysis: 2.2 percent of GDP
  - PPP: 35 percent of PPP stock; Used for analysis: 0.0
  - Financial market (the default value of 5 percent of GDP is the minimum value): 5 percent of GDP; Used for analysis: 5.0
- Reasons for deviations from default settings:
  - Exposures through PPPs set to zero as PPPs comprise less than 3 percent of GDP (Ravinala Airport stock estimated at 1.8 percent of GDP).
  - Captures potential contingent liabilities, including an external liability of US$ 29 million (0.2 percent of GDP) associated with Air Madagascar.
- Baseline reflects end-2021 domestic debt for SOEs where the government has a majority stake:
  - debt of 3.4 percent of GDP for JIRAMA and of 3.5 percent for other SOEs.
- Adjustment to default SOE shock:
  - default amount of 2 percent of GDP adjusted upwards by Air Madagascar’s external liabilities (US$ 29 million or 0.2 percent of GDP), bringing total SOE-related shock to 2.2 percent of GDP.
- Financial markets default value applied: 5 percent of GDP, reflecting generally solid banks, deposits exceeding loans, majority foreign shareholders, limited dollarization, and banks’ foreign assets exceeding foreign liabilities.

### Recent debt developments and composition (2016–21)
- Amounts (US$m) and percent of GDP for key aggregates (selected highlights from Text Table 3):
  - Domestic debt (2016–2021 amounts US$m): 1,683; 1,840; 2,124; 1,961; 1,864; 1,950
  - External debt (2016–2021 amounts US$m): 2,845; 3,262; 3,548; 3,801; 4,750; 5,422
  - Total PPG debt (2016–2021 amounts US$m): 4,528; 5,102; 5,672; 5,762; 6,615; 7,372
  - SOE debt (2016–2021 percent of GDP): 12.6; 12.3; 17.5; 15.8; 12.8; 13.4
  - Debt borne by BFM on behalf of the government (2016–2021 percent of GDP): 6.8; 8.8; 8.4; 9.8; 14.9; 18.3
- End-2021 PPG debt-to-GDP ratio projected at 52.3 percent, an increase of almost 12 percentage points relative to 2019.
- Majority of PPG debt is external; almost 60 percent of external debt owed to multilateral sources (World Bank, African Development Bank, IMF).

### Debt relief and external support reflected in the DSA
- Debt relief and support included:
  - Debt relief from the IMF under the Catastrophe Containment window of the IMF’s Catastrophe Containment and Relief Trust (CCRT) delivered between April 2020 and April 2022 (amounting to some US$ 32 million).
  - From May 2020 to December 2021 Madagascar benefitted from the Debt Service Suspension Initiative (DSSI), under which some US$ 20 million in debt service was deferred; repayments on these will start in 2024.
  - Over 2022, the World Bank committed US$ 1.3 billion under highly concessional credit terms and grants; a large share directed to the South of Madagascar for a large-scale humanitarian crisis.
- Considering increased commitments, IDA lending disbursements are assumed to increase.

### Macroeconomic assumptions and projections underpinning the DSA
- Growth and output:
  - Real GDP growth: staff projecting 4.2 percent for 2022 (significant downward revision relative to previous DSA).
  - Real GDP growth projected to peak at 4.8 percent in 2024, decelerating thereafter towards estimated potential growth.
  - Estimated rate of potential growth following CMAP: 4.5 percent.
  - Output projection example: Output projected to grow modestly by 4.2 percent in 2023.
- Inflation and borrowing costs:
  - Headline inflation rose from about 4 percent in 2020 to 10.8 percent y-o-y in November 2022.
  - Inflation expected to reach 11.2 percent and 9.3 percent in 2022 and 2023 respectively.
  - Central bank raised the marginal lending facility rate by 290 basis points since the first review.
  - Government borrowing costs revised up in line with stronger inflationary pressures.
- Fiscal balances and composition:
  - Primary deficit widened significantly in 2022 due to disagreement with oil distributors and delayed payment of oil customs taxes.
  - Significant improvement in the primary balance projected in 2023 owing to delayed payments being recognized.
  - Over the medium term, public debt expected to stabilize around 55 percent of GDP under baseline assumptions.
  - Projections assume gradual tax revenue recovery and increase in capital spending.
  - Non-interest current expenditure projected to remain around 9 percent of GDP.
  - Capital expenditure projected to exceed 9 percent of GDP over 2025-27 (compared to less than 6 percent pre-pandemic).
- Revenue mobilization measures cited:
  - streamlining of VAT and free-zone companies’ exemptions;
  - improvements to the taxpayers’ database;
  - strengthening controls in customs administration;
  - broader use of electronic tax declarations and payments and digitalization of related procedures;
  - continued clearance of tax arrears.

### Financing assumptions and prudence
- Financing assumptions broadly reflect authorities’ Medium Term Debt Strategy but are conservative on external financing.
- One main target of the strategy for end-2023: limit share of external public debt relative to total public debt to a maximum of 86 percent (estimated around 74 percent at end-2021; expected to reach 80 percent over projection horizon).
- Deviations from the debt strategy reflect a more conservative approach on volumes of available external financing on concessional terms, resulting in:
  - increased reliance on domestic financing;
  - higher financing costs due to domestic financing and SOE debt.
- Authorities’ mitigation measures:
  - develop the domestic debt market;
  - prioritize securing external financing on concessional terms (including grants).
- External commercial borrowing expected to slowly scale back up from 2031 onwards as fundamentals strengthen.

### Realism checks and risk assessment
- Realism tools: underlying assumptions broadly within reasonable bounds; projected fiscal path not in the tail of historical distribution.
- Main downside risks:
  - further adverse shocks to terms-of-trade (higher prices for rice, wheat, and/or energy);
  - supply chain disruptions;
  - renewed COVID-19 outbreaks;
  - natural disasters (mainly cyclones in the north and droughts in the south);
  - protracted weak budget execution in health and education and reversals in governance reform agenda;
  - weak investment implementation capacity.
- Upside potential:
  - unlocking large-scale projects in energy and extractive industry;
  - implementation of the Plan Emergence Madagascar (PEM) agenda improving growth potential and attracting additional investment.

*International Monetary Fund staff summary based on "1mdgea2023002 - 1.      The DSA includes public and publicly guaranteed external and domestic debt."*

### 9.      Over the medium term (and absent adverse shocks), Madagascar’s ratio of PPG debt-

### 9.      Over the medium term (and absent adverse shocks), Madagascar’s ratio of PPG debt-

### Debt projections and drivers
- PPG debt-to-GDP is projected to remain relatively constant at its current level of around 60 percent.
- PPG external debt-to-GDP is projected to remain relatively constant at its current level of around 45 percent.
- Projected primary deficits are the main force driving debt up.
- A favorable interest-growth differential, aided by trends in prices and the exchange rate, helps keep the debt-to-GDP ratio relatively constant.
- The framework assumes some real appreciation over the medium term driven by the Balassa-Samuelson effect.
- Financing in 2023 includes the issuance of special T-Bills by the government to clear liabilities associated with the 2022 fuel requisitions on behalf of JIRAMA (around 0.44 percent of GDP).

### Public and private investment and growth projections
- Medium-term projections for public and private capital spending have been revised slightly downwards.
- Average 5-year real growth was revised down by about 0.5 pp relative to prior DSA to better account for the effects of natural disasters.
- Authorities plan to scale up infrastructure spending, with institutional reforms to better prioritize projects and improve execution rates.
- Projected contribution of public investment to real GDP growth over the next 5 years is roughly the same as in the previous DSA (despite a small downward revision).
- Private investment is expected to remain relatively constant over the medium term (21 percent of GDP in 2027) with upside risk if structural reforms accelerate and public investment helps crowd-in additional private investment.

### Country classification and stress test scenarios
- Madagascar’s debt carrying capacity is classified as medium; the composite indicator (CI) score is 2.77 (near the cutoff for weak debt-carrying capacity).
- CI score inputs (10-year averages based on 2017-2026) and contributions:
  - CPIA: coefficient 0.385, value 3.240, contribution 1.254 (45% of CI)
  - Real growth rate (in percent): coefficient 2.719, value 3.417, contribution 0.093 (3% of CI)
  - Import coverage of reserves (in percent): coefficient 4.052, value 40.611, contribution 1.655 (59% of CI)
  - Import coverage of reserves^2 (in percent): coefficient -3.990, value 16.493, contribution -0.660 (-24% of CI)
  - Remittances (in percent): coefficient 2.022, value 2.373, contribution 0.052 (2% of CI)
  - World economic growth (in percent): coefficient 13.520, value 2.898, contribution 0.391 (14% of CI)
  - CI Score: 2.77 (100%), CI rating: Medium
- Stress tests:
  - Standardized settings apply except for the growth shock, which simulates a two standard deviation shock (i.e., a reduction of 6.8 percentage points) instead of one.
  - Natural disaster shock: default template one-off shock (10 percentage-point rise in the public external debt-to-GDP ratio alongside a fall in real GDP growth (1.5 percent) and exports (3.5 percent) in 2021).
  - Commodity shock (country-customized): illustrative fall in prices equivalent to 10 percent of commodity exports, with no mitigating effect on imports, alongside declines in real GDP growth of 1.55 percent and in fiscal revenue of 2.32percent of GDP (default values). The shock occurs in 2023 and unwinds gradually by 2032.
  - Residual financing under stress: external interest rates and maturities assumed 25 percent higher and lower, respectively; for overall public debt stress tests, limited recourse to domestic sources in the short run leads to a scenario where 65 percent of additional financing comes from external sources while the interest rate for residual domestic financing would be 100 basis points above baseline.

### External debt sustainability (findings)
- Under the baseline, external PPG debt remains well below thresholds associated with Madagascar’s medium debt-carrying capacity.
- External PPG debt is projected to rise from 38.5 percent of GDP end-2021 to about 48 percent of GDP in 2032.
- Debt-creating flows include sizable current account deficits over the medium term (owing to declines in the trade balance and falling inflows from official transfers) and less advantageous endogenous debt dynamics (due to higher interest rates).
- In PV terms, external PPG debt is projected to rise from 18 percent of GDP end-2021 to about 27 percent of GDP in 2032.
- The long-term rise in PV terms reflects an assumption that borrowing will become less concessional over time and sizable gross financing needs, including expiring grace periods for some loans (including prior IMF financing).
- Under stress scenarios the PV of external debt-to-exports ratio breaches the applicable threshold for a sustained period from 2026 onwards (Madagascar is most vulnerable to export shocks).

### External private sector debt
- External private sector debt is not assessed to pose a significant threat to external sustainability.
- Around 80 percent of private debt is associated with the mining sector; majority is medium-to-long term; a sizeable portion is with affiliated headquarters or global groups.
- Much mining sector debt does not bear large interest payments and many instruments are not required to be fully reimbursed to parent companies until liquidation.
- Private external debt is projected to rapidly decline as loans related to major mining projects are repaid, with the stock of external private debt falling by over half by 2030.
- Conservatively assumed additional borrowing to sustain mining exports towards the end of the DSA horizon contributes to private debt equivalent to about 5 percent of GDP in 2040.

### Total public debt sustainability (findings)
- Under the baseline, total public debt levels are projected to remain well below the benchmark.
- Total public debt (both external and domestic) is projected to remain just below 60 percent of GDP over the medium-term horizon.
- In PV terms, total public debt-to-GDP is expected to rise from 32.5 percent at end-2021 to about 0 percent over the medium term, still well below the benchmark of 55 percent for medium debt carrying-capacity countries.
- Projected rise in the PPG debt-service-to-revenue-and-grants ratio could introduce liquidity risks.

### Vulnerabilities, risk ratings, and shock sensitivity
- Madagascar is assessed at moderate risk of external debt distress (unchanged). No thresholds are breached under the baseline, but an exports shock breaches the PV of debt-to-exports threshold.
- Granularity assessment: Madagascar has some space to absorb shocks; baseline indicators remain well below thresholds under a median shock, but PV of external PPG debt-to-GDP and debt-service-to-revenue would exceed them under a more extreme scenario.
- Total public debt is most vulnerable to growth shocks; under both the growth shock and the commodity price shock the PV of total public debt-to-GDP is projected to reach levels well above the 55 percent benchmark.
- Overall assessment: Madagascar is at moderate risk of overall debt distress (unchanged). PPG external debt has a moderate risk assessment, while PV of overall debt-to-GDP breaches its benchmark following a growth or commodity price shock.
- Liquidity pressures could arise if concessional external financing is not secured or if domestic debt market development is delayed, including under the baseline and under a natural disaster shock.

### Policy implications and recommendations
- Continue to prioritize securing external concessional financing in line with the medium-term debt strategy.
- Accelerate domestic debt market development to bring down borrowing costs and reduce exchange-rate risk.
- Carefully pace borrowing: a steeper-than-expected increase in borrowing aligned with rapid execution of the government’s ambitious medium-term borrowing plan would carry significant risks, especially without additional external concessional financing.
- Ensure better project selection and favorable financing terms for public investment to limit increases in debt vulnerability.
- Strengthen identification and mitigation of fiscal risks relating to fuel subsidies, SOEs, PPPs, and pensions.
- Improve transparency and accountability of public sector institutions and manage public investment more effectively and rules-based within a credible medium-term expenditure framework.
- Enhance external statistics to improve private debt coverage and overall debt coverage statistics.
- Monitor external private debt developments, particularly in less ringfenced sectors (e.g., banking), which could increase vulnerabilities.

*Source: 1mdgea2023002 - 9.      Over the medium term (and absent adverse shocks), Madagascar’s ratio of PPG debt-*

### 24.      The authorities broadly agreed with staff’s assessment of the debt sustainability

### 24.      The authorities broadly agreed with staff’s assessment of the debt sustainability

### Authorities' position and key judgments
- Authorities broadly agreed with staff’s assessment of the debt sustainability analysis.
- They agreed on the need to rely on more concessional debt while emphasizing the need for more financing to invest in development and resilience to climate change.
- They believe the DSA’s assumptions are too pessimistic and that:
  - a gradual acceleration of growth toward 7 percent in 2025 is feasible;
  - Madagascar’s CI score should improve with their efforts to strengthen public sector management and institutions.

### External Debt Sustainability — Baseline Scenario (2019–2042): Key statistics and projections
- External debt (nominal) 2019–2032 (in percent of GDP): 67.0, 80.5, 69.0, 71.1, 73.0, 66.5, 59.4, 58.0, 58.2, 57.3, 48.1, 55.3, 61.2
- Public and publicly guaranteed (PPG) external debt (percent of GDP) 2019–2032: 27.0, 36.8, 38.5, 42.5, 41.1, 40.8, 41.3, 42.1, 43.2, 47.5, 42.8, 27.4, 43.6
- Change in external debt (percent of GDP) 2019–2032: -3.5, 13.5, -11.5, 2.0, 1.9, -6.5, -7.1, -1.4, 0.2, 0.1, -3.8
- Identified net debt-creating flows (percent of GDP) 2019–2032: -2.1, 8.9, -5.0, 0.9, 1.4, -0.1, -0.2, -0.9, -1.2, -1.8, -2.5, -1.7, -0.8
- Non-interest current account deficit (percent of GDP) 2019–2032: 1.8, 4.9, 4.6, 5.0, 4.9, 4.5, 4.2, 3.3, 3.0, 2.3, 1.1, 2.4, 3.4
- Exports (percent of GDP) 2019–2032: 28.7, 19.7, 23.0, 30.6, 33.6, 33.0, 33.6, 30.5, 29.4, 26.9, 23.6
- Imports (percent of GDP) 2019–2032: 33.4, 28.7, 33.1, 39.5, 41.6, 39.4, 39.4, 35.8, 34.5, 31.1, 26.2
- Net FDI (negative = inflow, percent of GDP) 2019–2032: -2.6, -1.9, -1.7, -2.0, -1.5, -1.9, -2.1, -2.2, -2.3, -2.6, -2.6, -3.4, -2.3
- Endogenous debt dynamics (percent of GDP) 2019–2032: -1.2, 5.9, -7.9, -2.2, -2.0, -2.6, -2.3, -2.0, -1.8, -1.5, -1.0
- Residual (percent of GDP) 2019–2032: -1.4, 4.6, -6.5, 1.2, 0.6, -6.4, -6.9, -0.4, 1.4, 2.0, -1.4, 6.4, -0.3
- PV of PPG external debt-to-GDP ratio (projections presented): 18.7, 19.9, 20.8, 20.8, 21.2, 21.7, 22.6, 26.8, 27.3
- PV of PPG external debt-to-exports ratio (projections): 81.0, 65.0, 61.8, 63.0, 63.0, 71.1, 76.8, 99.7, 115.6
- Total external debt service-to-exports ratio (projections): 177.0, 178.8, 174.3, 163.5, 159.1, 157.1, 157.1, 163.7, 190.9, 181.7
- PPG debt service-to-exports ratio (projections): 11.1, 17.6, 4.4, 3.6, 4.4, 4.1, 4.2, 4.9, 4.9, 5.9, 9.0
- PPG debt service-to-revenue ratio (projections): 29.4, 35.1, 9.6, 10.0, 12.4, 10.5, 10.7, 10.9, 10.5, 11.3, 14.2
- Gross external financing need (Million of U.S. dollars): 699.6, 1,044.7, 1,802.1, 1,205.6, 1,248.5, 1,106.2, 1,254.3, 907.4, 795.7, 1,020.8, 1,488.4
- Key macro assumptions:
  - Real GDP growth (percent): 4.4, -7.1, 5.7, 4.2, 4.2, 4.8, 4.7, 4.7, 4.6, 4.5, 4.2, 2.6, 4.5
  - GDP deflator in US dollar terms (change in percent): -1.8, -0.4, 5.5, 0.4, 0.6, 2.4, 3.4, 3.2, 3.5, 4.7, 4.3, 0.0, 3.4
  - Effective interest rate (percent): 0.7, 0.7, 0.6, 0.9, 1.2, 0.9, 1.0, 1.1, 1.2, 1.6, 2.2, 0.9, 1.2
  - Growth of exports of G&S (US dollar terms, in percent): -7.2, -36.4, 30.4, 38.9, 15.4, 5.3, 10.4, -2.1, 4.3, 7.7, 7.6, 4.0, 10.0
  - Growth of imports of G&S (US dollar terms, in percent): -2.5, -20.5, 28.7, 24.8, 10.6, 1.6, 8.3, -1.8, 4.3, 7.3, 7.2, 3.4, 7.7
- Aid flows (Million of US dollars): 696.0, 603.5, 391.6, 770.1, 777.3, 846.6, 1,058.0, 1,141.1, 1,239.1, 1,659.6, 2,008.7
- Grant-equivalent financing (in percent of GDP) projections: 4.4, 4.3, 4.5, 4.2, 3.7, 3.3, 2.6, 0.9, ... , 3.4
- Nominal GDP (Million of US dollars) (selected projected years shown): 14,105, 13,051, 14,555, 15,233, 15,969, 17,137, 18,561, 20,040, 21,699, 34,237, 81,472
- Memorandum: PV of external debt (projections): 49.2, 48.5, 52.7, 46.5, 39.2, 37.6, 37.6, 36.6, 32.6; In percent of exports: 213.7, 158.6, 156.6, 140.9, 116.7, 123.2, 128.1, 136.0, 138.2

### Public Sector Debt — Baseline Scenario (2019–2042): Key statistics and projections
- Public sector debt (percent of GDP) 2019–2032: 41.0, 51.2, 52.3, 57.1, 53.1, 51.9, 52.2, 53.1, 54.6, 59.4, 53.1, 41.6, 55.5
- Public sector external debt (percent of GDP) 2019–2032: 27.0, 36.8, 38.5, 42.5, 41.1, 40.8, 41.3, 42.1, 43.2, 47.5, 42.8, 27.4, 43.6
- Change in public sector debt (percent of GDP) 2019–2032: -1.9, 10.2, 1.1, 4.8, -4.1, -1.1, 0.3, 0.9, 1.5, 0.8, -3.7
- Identified debt-creating flows (percent of GDP) 2019–2032: -2.5, 6.2, -1.1, 5.6, -3.2, -0.7, 0.2, 0.3, 0.8, 0.1, -0.7, 0.0, 0.4
- Primary deficit (percent of GDP) 2019–2032: 0.7, 3.2, 2.2, 6.1, 2.0, 2.4, 3.3, 3.1, 3.9, 3.9, 2.4, 1.7, 3.7
- Revenue and grants (percent of GDP) 2019–2032: 13.9, 12.4, 11.2, 13.6, 14.6, 15.3, 15.3, 15.1, 14.8, 14.2, 15.0, 11.5, 14.5
- Primary (noninterest) expenditure (percent of GDP) 2019–2032: 14.7, 15.6, 13.4, 19.7, 16.6, 17.6, 18.6, 18.6, 18.6, 17.4, 13.2, 18.2
- Automatic debt dynamics (percent of GDP) 2019–2032: -3.0, 3.1, -4.4, -0.5, -5.3, -3.5, -3.4, -3.4, -3.5, -4.3, -3.5
- PV of public debt-to-GDP ratio (projections): 33.1, 36.3, 33.4, 32.4, 32.6, 33.2, 34.5, 39.4, 38.3
- PV of public debt-to-revenue and grants ratio (projections): 295.5, 267.6, 229.0, 212.4, 213.4, 220.0, 233.6, 277.8, 255.0
- Debt service-to-revenue and grants ratio (projections): 5.7, 7.2, 9.0, 19.7, 40.0, 43.1, 44.1, 44.2, 43.9, 41.8, 49.4
- Gross financing need (percent of GDP, projections): 1.2, 4.0, 4.3, 6.9, 9.5, 9.3, 10.3, 10.3, 10.8, 10.3, 10.2
- Key fiscal/macro assumptions:
  - Average nominal interest rate on external debt (percent): 1.0, 0.9, 0.7, 0.9, 1.1, 0.8, 0.8, 0.8, 0.9, 1.0, 1.3, 0.8, 0.9
  - Average real interest rate on domestic debt (percent): -6.1, -4.1, -6.2, -3.9, -7.1, -1.3, -1.1, -1.4, -1.1, -1.6, 0.8, -6.0, -2.1
  - Inflation rate (GDP deflator, percent): 6.5, 4.3, 6.6, 7.4, 9.5, 8.3, 7.5, 6.9, 6.2, 5.3, 4.9, 6.4, 6.6
  - Growth of real primary spending (deflated by GDP deflator, percent): 12.7, -1.1, -9.6, 53.5, -12.2, 11.4, 10.1, 2.9, 6.8, 4.3, 2.6, 4.5, 8.4

### Stress tests, sensitivity analysis, and realism tools — highlights
- Stress testing framework:
  - The most extreme stress test is defined as the test that yields the highest ratio in or before 2032.
  - Additional financing needs generated by shocks under stress tests are assumed to be covered by PPG external MLT debt in the external DSA.
- Sensitivity analysis tables and figures present alternative scenarios, bound tests (B1–B6), and tailored tests (C1–C4) assessing indicators including:
  - Debt service-to-exports ratio;
  - Debt service-to-revenue ratio;
  - PV of debt-to-exports ratio;
  - PV of debt-to-GDP ratio.
- Selected sensitivity results (examples from tables):
  - Baseline PV of debt-to-GDP ratio (2022–2032 snapshot): 65, 62, 63, 63, 71, 77, 81, 86, 90, 95, 100 (table-format presentation).
  - Tailored natural disaster test shows higher indicators across years (figures illustrate material increases under shocks).
- Realism tools examine:
  - Contribution of government capital and other factors to growth;
  - Fiscal adjustment paths and possible GDP growth under different fiscal multipliers (multipliers displayed: 0.2, 0.4, 0.6, 0.8);
  - Historical and projected public and private investment rates; projected 3-year adjustment distributions.

### Recent economic developments and program performance (authorities' statement)
- Growth and inflation:
  - Real GDP growth: 5.7 percent in 2021; moderated to 4.2 percent in 2022.
  - Inflation reached 11 percent in 2022.
- External sector and reserves:
  - International reserves declined from 5.8 months of imports in 2021 to 4.3 months of imports at end-2022.
- Banking sector: non-performing loans at 7.7 percent at end-2022 (pre-pandemic level 7.3 percent at end-2019).
- Fiscal outcomes and public debt:
  - Fiscal position deteriorated in 2022 due to non-payment of fuel taxes.
  - Public debt increased by 4.8 percentage points to 57.1 percent of GDP.
  - Public debt assessed at moderate risk of distress in the latest DSA.
- Program implementation:
  - Three out of five quantitative performance criteria at end-June 2022 were met; missed QPCs: domestic primary balance and net foreign assets.
  - Indicative floors on domestic tax revenues, customs revenues, and social spending were missed at end-June 2022 and end-September 2022.
  - Five of nine structural benchmarks implemented; some continuous SBs were assessed as missed due to missing information.
  - Authorities requested waivers for the non-observance of the two missed QPCs and completion of the third review.
- Monetary and FX policy:
  - Central bank increased policy rate by 120 basis points in November 2022 (fifth increase since October 2021).
  - Reforms advancing: migration to interest rate targeting framework; reform of FX market with new decree adopted in August 2022; establishment of surrender requirement; improved bank reporting.

### Medium-term outlook and policy priorities
- Outlook:
  - Growth projected to remain stable at 4.2 percent in 2023.
  - Inflation expected to decline below 10 percent in 2023, with risks from second-round effects.
  - Current account expected to widen further; reserve coverage should remain stable.
  - Outlook subject to uncertainties: war in Ukraine, global growth, weather conditions, pace of reforms.
- Policy priorities and program alignment:
  - Authorities committed to program objectives aligned with Plan Emergence Madagascar (PEM).
  - Fiscal program for 2023 aims to pursue fiscal consolidation while creating space for social and sustainable development spending and to halve the domestic primary deficit (text truncated at last sentence in source).
- Governance and PFM reforms:
  - 2023 budget approved in December 2022 in line with program objectives.
  - Removal of spending commitment authorization by both the President and Prime Minister to improve budget execution.
  - Creation of a budgetary unit to strengthen Cour des Comptes' budgetary autonomy and full access to Ministry of Economy and Finance information systems.
  - Strategic Plan for the Modernization of Public Financial Management updated in October 2022.

*Source: Country authorities; and staff estimates and projections.*

### 0.4 percent of GDP in 2023, excluding one-time revenues related to the agreement with the

### 1mdgea2023002 - 0.4 percent of GDP in 2023, excluding one-time revenues related to the agreement with the

### Revenue mobilization and tax measures
- Target: increase in the tax ratio by 1.1 percentage-point to 12 percent of GDP in the 2023 budget.
- Measures supporting the target:
  - Reinstatement of the VAT rate on fuel at 20 percent.
  - Introduction of exit duties on exports of non-renewable resources.
  - Expansion of the electronic payment system.
- Mining sector:
  - Taxation of the mining sector being optimized in the mining code currently under revision in consultation with the World Bank, the IMF, and mining companies.
  - Mining code is expected to be submitted to the Parliament by end-June 2023.
- Contingency: New revenue-enhancing measures could be introduced in case revenue collection falls short of target.

### Expenditure control, public investment, and social protection
- Expenditure focus: controlling expenditures and improving their execution.
- Public payroll and pensions:
  - Modernization of payroll management and reforms of the pension system will continue and are expected to contain growth of related budget appropriations over the medium-term.
- Public investment:
  - The 2023 budget envisages a 51-percent increase in priority public investment to support the economy, well within the ceiling permitted under the DSA.
  - Project prioritization to account for absorptive capacity and climate change considerations as per recommendations from the Climate Macroeconomic Assessment Program (CMAP).
- Social expenditures and protection:
  - Acceleration of the execution of social expenditures and enhancement of the social protection system with support from development partners including the World Bank, the IMF, the World Food Program and UNICEF.
  - Appropriation of $5 million has been made for the Intervention Fund for Development to support:
    - (i) agricultural production and development activities,
    - (ii) schooling and nutrition; and
    - (iii) response for early recovery from natural disasters.
  - Establishment of a single social registry to serve as a reference for all social protection activities undertaken in the country.

### Public financial management and economic governance
- Sustained efforts to strengthen public financial management and economic governance.
- Transparency and procurement:
  - Authorities will consolidate gains in budget transparency and public procurement, while taking necessary actions to correct noted deficiencies.
  - Public procurement legal framework will be amended to allow for the collection of information on the beneficial owners of bidding companies or other legal entities in the first half of 2023.
- Cash management and TSA:
  - A new draft law on cash management, essential to the implementation of the Treasury Single Account (TSA), will be presented to the National Assembly later in 2023.
- Anti-corruption and AML:
  - Implementation of the national anti-corruption strategy and national strategy to combat anti-money laundering will continue with the adoption of necessary implementation decrees and provision of sufficient resources for effective operationalization of concerned institutions, notably the Agency for the Recovery of Illicit Assets.
  - Publication of related activities and statistics will be further improved.

### Public enterprises, PPPs, and sovereign wealth fund
- Public enterprises:
  - Continued reforms and monitoring to strengthen financial autonomy and reduce related fiscal risks.
  - Restructuring of JIRAMA remains a top priority; a new strategy to restore the company’s financial viability is under preparation with World Bank support.
  - Restructuring of Air Madagascar will continue following development of a new business plan and provision of a sovereign guarantee to support leasing of aircrafts.
- PPPs:
  - National PPP strategy has been finalized and is expected to be adopted by June 2023.
  - PPP management framework is projected to be operational by June 2023 with activation of the National Committee.
- Malagasy Sovereign Wealth Fund:
  - Fiscal risks related to the newly created Malagasy Sovereign Wealth Fund will be contained by ensuring that its governance and operations are in line with international best practices.

### Climate resilience and disaster management
- Given high vulnerability to climate change, authorities committed to improve climate resilience by enhancing climate policies and risk and disaster management.
- Actions:
  - Pursue development of the Strategic Framework for Climate Change, including development of the country’s priority programs that could be financed by the Green Climate Fund (GCF).
  - National Risk and Disaster Management Office (BNGRC) will be allocated the human, material and budgetary resources needed to carry out its emergency response mission.
- IMF support:
  - Fund support under the RST would play a critical role in strengthening the country’s resilience against climatic events.

### Conclusion and program requests
- Authorities are strongly committed to the program and are taking necessary steps to advance its implementation amid a difficult external and domestic environment.
- The authorities are requesting:
  - Completion of the Article IV consultations and of the third review of the ECF-supported program and associated decisions.
- Directors’ favorable consideration of these requests will be appreciated.

*Source: 1mdgea2023002 - 0.4 percent of GDP in 2023, excluding one-time revenues related to the agreement with the*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1mdgea2023002.pdf_