## _cr05363

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---

### 1. History of IMF Lending Arrangements — program history and disbursements
- Timeframe covered: programs beginning in 1988–89 through the 2001 PRGF; starting point taken as 1988–89.
- HIPC milestones:
  - HIPC decision point: December 2000.
  - HIPC completion point: October 2004.
- PRSP: Full PRSP endorsed by Fund and Bank in 2003; government produced I-PRSP around 2000.
- Selected program entries (amounts in thousands of SDRs):
  - PRGF: Date of Arrangement 3/1/01; Date of Expiration or Cancellation 3/1/05; Amount Agreed 91,650; Amount Drawn 91,650; Percent Drawn 100.0
  - ESAF (11/27/96): Date of Expiration or Cancellation 11/30/00; Amount Agreed 81,360; Amount Drawn 78,860; Percent Drawn 96.9
  - ESAF (5/15/89): Date of Expiration or Cancellation 5/14/92; Amount Agreed 76,900; Amount Drawn 51,267; Percent Drawn 66.7
  - SBA (9/2/88): Date of Expiration or Cancellation 5/15/89; Amount Agreed 13,300; Amount Drawn 2,800; Percent Drawn 21.1
  - SAF (8/31/87): Date of Expiration or Cancellation 5/14/89; Amount Agreed 46,480; Amount Drawn 13,280; Percent Drawn 28.6
- Program implementation notes:
  - Under the 1989 ESAF, only amounts under the first and second annual arrangements were fully disbursed.
  - Under the 1996 ESAF, two disbursements were made under the first annual arrangement; no understanding was reached on a second arrangement; program extended by one year and expired in November 2000 with completion of just two of three envisaged annual arrangements.
  - The 2001 PRGF was the only program in the review period under which all disbursements were made.

### Socioeconomic outcomes and indicators
- Poverty and income:
  - In 2004, an estimated 75 percent of the population lived in poverty.
  - Urban poverty rate in 2004: approximately 40 percent.
  - Income poverty increased by as much as 6 percent by the end of 2002.
- GDP and growth:
  - Today’s real GDP per capita still stands 50 percent below its 1960 level.
  - Per capita GDP: US$430 in 1960; US$220 in 2003.
  - Since 1975, annual population growth averaged 2.8 percent; average annual GDP growth 1.2 percent.
- 2002 shock and recovery:
  - Real GDP contracted by 13 percent in 2002.
  - Per capita real GDP dropped by 15 percent in 2002.
  - Economic growth resumed in 2003; social indicators recovered more slowly.
- Social and access indicators (changes since mid-1990s where noted):
  - Net primary school enrollment: increased from 48 percent to 70 percent.
  - Electricity connections: 19 percent.
  - Water connections: 27 percent.
  - Infant mortality: 86 deaths per 1,000 births.
  - Immunization rates: 36 percent of children.
  - About 80 percent of the rural population has no reliable transport services; of these, one-third has no road access at all.

### Economic and political developments — chronology and impacts
- 1970s: inward-looking strategy; real GDP grew at less than 2 percent annually; real per capita GDP declined.
- Early 1980s: adjustment programs reduced imbalances but did not resolve structural rigidities.
- 1988–90: shift to open, market-oriented economy; 10-month SBA (bridge to SAF/ESAF).
- 1990–1996: policy slippages, adverse weather, and political crisis (mid-1991) caused growth setbacks; real per capita GDP declined by almost 9 percent in 1991 and close to 4 percent in 1992.
- Mid-1990s: renewed reform agenda announced early 1994; political instability continued until impeachment in 1997.
- 1997–2001: stronger stabilization and growth:
  - Between 1997 and 2001, economic growth averaged 4½ percent.
  - Inflation remained subdued; exports doubled; international reserves rose sharply despite three cyclones in early 2000.
- Early 2002: political crisis caused severe economic disruption; crisis resolved by May–July 2002.
- Post-2002: quick macroeconomic recovery in 2003; slower recovery of social indicators and poverty.

### Assessment of Fund involvement — objectives and results
- Stated objectives:
  - Achieve and maintain macroeconomic stability and external viability conducive to sustained growth.
  - Support structural reforms to reduce poverty consistent with I-PRSP/PRSP goals.
- Characterization of results:
  - Uneven results across objectives.
  - Contributions: Positive macroeconomic stabilization; strengthened resilience and external viability; some structural reforms (external sector liberalization, financial sector reform, exchange rate regime).
  - Limited progress: tax policy; tax and customs administration; public expenditure management; privatization; civil service reform.

---

### Inflation and prices; growth and external sector
- Inflation and prices:
  - Inflation fell from 23 percent in 1987 to 11 percent in 1990.
  - Since 1996–97, inflation has, on average, been below 10 percent.
  - Inflation remains volatile and above the objectives; exogenous factors include rise in agricultural and oil prices in 2004.
  - Price liberalization started in 1989 and is now almost complete; domestic oil prices liberalized in 2004.
- Economic growth:
  - Since 1997—with the exception of 2002—growth has been in the 5 percent to 6 percent range.
  - PRSP goal: reduce level of poverty by half in 10 years (by 2013); requires average annual GDP growth of 9.3 percent.
  - MDG halving of poverty by 2015 corresponds with average annual growth rate of 8 percent.
  - Recovery from shocks in 2000, 2001, 2004 and political crisis of 2002 has been faster than before.
- External sector and reserves:
  - International reserves bottomed at SDR 42.7 million by end-1994 (just over one month of imports).
  - At end 2004, gross reserves exceeded SDR 300 million.
  - That reserves level provides only a limited cushion of around three months of imports.
  - External current account deficit (excluding grants) since 1996 has been between 6 percent and 8½ percent of GDP in all but one year (2001); deficits largely financed by aid inflows (mainly grants).
- Exchange rate and competitiveness:
  - Floating exchange rate regime adopted in 1994; helped maintain competitiveness as measured by the REER.
  - Unified interbank FX market initially sluggish; BTM restructuring in 1996 improved operations.
  - Continuous quotation interbank market introduced in 2004 appears to have improved market efficiency.
- External debt and sustainability:
  - HIPC completion point analysis: position could remain sustainable provided sound macroeconomic policies and structural reforms continue.
  - Since 1981 Madagascar rescheduled Paris Club debt 11 times.
  - NPV of debt to exports expected to be reduced to a little over 150 percent in 2004.
  - Debt service to exports will be below 5 percent and debt service to revenue about 10 percent.
  - Sensitivity analysis: sustainable debt position depends on achieving sustained GDP growth rates of at least 6 percent.

### Structural and financial sector reforms
- Trade liberalization and external liberalization:
  - Import tariffs lowered from 80 percent to the 50–60 percent range initially; since 1996 major liberalization under CBI and COMESA.
  - Weighted average import duty rate currently estimated at 18 percent.
  - Export taxes and the export surrender requirement fully eliminated in 1997.
  - Since 2004 the country has four tariff bands; two import taxes merged.
  - Madagascar accepted obligations of Article VIII in 1996.
- Financial sector reform and supervision:
  - Privatization of BTM and BFV occurred between 1996 and 1999 after cleanup steps under the 1996 ESAF.
  - Private domestic and foreign banks permitted to operate.
  - Independent Banking and Financial Supervision Commission established in 1996.
  - Prudential framework aligned with Basel Core Principles.
  - Banking system sound but intermediation remains low.
- Legal reform:
  - 1996 ESAF introduced legal instruments for long-term land lease by foreigners and procedures to effect a lease within 60 days.
  - Improvements in legal framework and magistrates’ capacity improved business climate and rule of law.

### Fiscal weaknesses and tax mobilization
- Fiscal performance:
  - Little progress in strengthening public finances; fiscal deficits kept close to program targets but methods often inconsistent with program design.
  - Disappointing tax revenue performance forced expenditure compression and increased borrowing from the banking system.
  - 2004 tax-to-GDP ratio was 11 percent, equal to level in 1989.
  - Madagascar among countries with the lowest tax revenue/GDP ratio.
- Tax policy issues:
  - Complexity of the tax code; frequent ad hoc exemptions; policy reversals; narrow tax base; high-growth areas (EPZs and mining) subject to very low tax rates.
  - Tax and customs administration remains weak and plagued by corruption.
- Achievements in administration:
  - Informatization of customs controls and introduction of pre-shipment inspections.
  - Creation of a large taxpayers unit.
  - Reorganization of the tax department into regional offices.

### Financial soundness and deepening — selected indicators
- Financial Soundness Indicators (selected entries):
  - Regulatory capital to risk-weighted assets: lowest ratios include 8.6, 9.7, 10.1, 12.0, 11.4, 10.7, 9.4, 8.4.
  - Nonperforming loans to total gross loans: 21.1 (1998), 8.4 (1999), 8.4 (2000), 10.3 (2001), 19.5 (2002), 16.7 (2003), 14.2 (2004), 12.9 (Jun. Est.).
  - Return on assets: 3.2 (1998), 4.3 (1999), 4.0 (2000), 2.8 (2001), 1.1 (2002), 3.2 (2003), 4.3 (2004), 4.4 (Sept. Est.).
  - Liquid assets to total assets: 35.9, 37.0, 36.9, 44.2, 52.1, 50.5, 49.4, 48.7 (by year).
  - Total assets (In billions of Malagasy francs): 4,222.0 (1998), 4,931.0 (1999), 5,668.0 (2000), 6,723.0 (2001), 6,965.2 (2002), 7,685.9 (2003), 9,350.0 (2004), 9,431.8 (Sept. Est.).
  - Total profits before tax (In billions of Malagasy francs): 137.2 (1998), 214.0 (1999), 226.5 (2000), 186.6 (2001), 79.7 (2002), 249.6 (2003), 199.8 (2004), 310.1 (Sept. Est.).
- Financial deepening indicators (selected):
  - Broad Money (M2) as percent of GDP: 19.1 (1985), 17.9 (1990), 18.0 (1995), 19.3 (2000), 22.1 (2001), 23.3 (2002), 23.0 (2003).
  - Credit to Private Sector (percent of M2): 64.3 (1985), 47.6 (1990), 43.0 (1995), 40.6 (2000), 40.0 (2001).

---

### Public Expenditure Management (PEM), monetary policy, privatization, and civil service reform
- PEM:
  - Early 1990s: inclusion of public investment plan into budget; presentation of central government operations on cash, commitment, and payment-order basis.
  - Ambitious 1996 ESAF reform agenda often delayed.
  - Recent improvements driven by PRGF conditionality critical to reaching HIPC completion point.
  - Progress: strengthened local treasury offices; new budgetary classification; streamlined budgetary procedures.
  - Overall: slow progress in PEM reform remains a bottleneck in the fight against poverty.
- Monetary policy reform:
  - Attempts to adopt indirect instruments began early; effectiveness initially limited by market depth.
  - Treasury bill market and money market developed in mid-1990s; administered interest rates abolished and credit ceilings removed as markets developed.
  - Remaining weaknesses: shallow markets and weak central bank liquidity management.
- Privatization:
  - Slow historically; accelerated after 1996 legal and institutional framework approval.
  - Commercial banks first to be fully privatized.
  - In 1996, legal state monopolies abolished in power, petroleum, telecommunications, and air transport.
  - PRGF-period outcomes: TELMA and HASYMA privatized; SIRAMA, Air Madagascar, and JIRAMA put under private management but remain majority government-owned.
- Civil service reform:
  - Progress slow; wage bill not high by regional standards and repeatedly cut due to revenue shortfalls.
  - 1997 ESAF civil service reform package faced implementation delays due to political resistance.
  - A statute introducing merit-based advancement, code of ethics and discipline approved by National Assembly in 2001 but not implemented.

### Private sector development, EPZs, and social policies
- Private sector development:
  - Slow overall; foreign and domestic investment picked up around turn of century after macro stability and land lease provisions.
  - Constraints: instability in early 1990s, low domestic savings, low quality public services, lack of infrastructure, legal monopolies, nontransparent regulations, prohibition on foreign land ownership.
- EPZs:
  - Created in 1989; contributed increasingly to employment and exports.
  - Success factors: favorable fiscal regime, available labor, relatively low wages, political and economic stability, eligibility under AGOA.
  - Concern: limited spillover effects to other sectors.
- Social and sectoral policies:
  - Until PRSP process, social policies mainly reached urban population and increased urban–rural poverty wedge.
  - PRSP-JSA notes significant recent progress in rural development, education, health, infrastructure, HIV/AIDS, nutrition, rural water and sanitation, and social protection.
  - MDG projections at current trends:
    - Likely to be met by 2015: gender equality, complete enrollment in primary school, halting HIV/AIDS spread, malaria, and deforestation.
    - Slim likelihood by 2015: halving extreme poverty and hunger, 100 percent primary school completion, reducing by 2/3 infant and maternal mortality.

### Compliance with conditionality, ownership, and implementation capacity
- Compliance:
  - Record on quantitative performance criteria uneven; early ESAF met all quantitative PCs in first two reviews; later reviews had up to 50 percent of PCs and indicative targets not met.
  - Floor on tax revenue systematically problematic; PCs often narrowly missed.
  - Structural benchmarks mixed but improving.
  - Compliance rates: ESAF implemented 40 percent of conditionality; PRGF 87.5 percent.
  - Comparison with African averages: under the 1996 ESAF Madagascar was below African average of 61 percent for 1995–2000; under PRGF Madagascar was above African average of 65 percent.
- Explanatory factors for limited success:
  - Frequent interruptions of reform by political crises and external shocks.
  - Low ownership of reforms until mid-1990s.
  - Limited absorption and implementation capacity evident from mid-1990s.
- Program design and implementation lessons:
  - Macro-stabilization objectives generally adequate; Fund involvement enhanced stabilization capacity.
  - Monetary policy advice to rely on indirect instruments initially over-optimistic.
  - Fiscal policy constrained by underperforming tax revenues; programs allowed for large fiscal deficits (before grants).
  - Conditionality focused heavily on tax and customs administration; almost no tax policy measures included since 1997.
  - Fund arrangements showed flexibility with adjusted floors on net foreign assets, tax revenue, and bank credit to government to accommodate shocks.
  - Broad structural reform agenda since 1996 may not have fully accounted for limited implementation capacity and political resistance.

---

### Ownership, donor coordination, technical assistance, and governance
- Ownership and program alignment:
  - Growing ownership evident from domestic consultative process preceding PRSP and in PRGF negotiations.
  - PRGF goals fully consistent with PRSP and supported by authorities.
  - High degree of compliance with structural agenda under PRGF reflects high ownership.
  - Prospect of HIPC debt relief provided additional incentive.
- Capacity constraints and technical assistance:
  - Civil service weak; ministries lack technical skills; PEM weaknesses aggravated problems.
  - Madagascar received extensive technical assistance; implementation generally weak.
  - FAD fielded 20 missions in the period under review and deployed one long-term advisor; STA had 6 missions; 15 MFD missions visited since 1993 (12 since 1998).
  - Limited absorption capacity and misalignment of TA recommendations with authorities’ priorities constrained impact.
- Collaboration with World Bank:
  - Division of labor satisfactory: Bank focused on sectoral structural reforms; Fund relied on Bank technical expertise; cooperation close on PRSP.
  - Episodes of friction: Bank reluctant to engage in wide-ranging civil service reform; during 2002 crisis Bank stayed while Fund did not, causing tensions later resolved.
- Donor coordination and aid volatility:
  - Coordination varied; 2002 crisis led to donor division.
  - Lack of solid PEM framework impaired donor assistance effectiveness.
  - Aid flows volatile: drops during political uncertainty (1992, 1998, 2002) and sharp increases in 1997, 1999, 2003.
- Governance:
  - Weak governance and corruption hindered progress; international watchdogs typically put Madagascar between 20 and 50 on 0–100 scale.
  - Improvements reported in past three–four years; tax and customs administration still widely perceived as corrupt.

---

### Policy challenges, priorities, and recommendations for medium term
- Overarching challenge: achieve higher economic growth and reduce poverty significantly.
- PRSP (June 2003) goal: reduce poverty rate by half in 10 years via improved governance, pro-poor growth, and improved social service delivery.
- Constraints: low domestic savings, external viability, limited skilled workers, weak public administration.
- Macroeconomic and structural priorities:
  - Accelerate growth; foster private sector-led growth and further privatization.
  - Diversify the economy; rebuild infrastructure; enhance agricultural productivity; capacity building.
  - Attention to post-AGOA period (AGOA III third-party fabrics provision set to expire in 2007) to ensure EPZs contribute more to development and link better to domestic economy.
  - Finalize a time-bound technical assistance plan and coordinate donor delivery.
- Fiscal and financial priorities:
  - Make fiscal position sustainable; tax policy reform priority.
  - Establish a tax code that is simple, stable, transparent; eliminate ad hoc exemptions.
  - Broaden tax base cautiously, given low taxation of EPZs and mining.
  - Address low domestic savings via financial deepening, enhance intermediation, develop microfinance, and remove impediments to financial services.
- Structural reform priorities (Fund focus areas):
  - Tax and customs administration: implement action plan with FAD assistance; prioritize management improvement, simplification, and improved IT; tackle tax evasion and fraud decisively.
  - Public expenditure management: strengthen links between budgets and PRSP, budget preparation, treasury–budget links, internal/external controls, and expenditure tracking.
  - Trade liberalization: simplify tariff structure; improve export services; strengthen domestic supply response; prepare for SADC accession benefits; adjust to new textile market conditions.
  - Corruption and governance: implement anti-corruption strategy; independent anti-corruption bureau established end of 2004; focus on judicial efficiency and consolidating customs improvements.

---

### Continued Fund engagement, risks, and exit strategy
- Recommendation: a successor-PRGF arrangement to assist in achieving poverty reduction goals.
- Rationale for PRGF:
  - Economy remains vulnerable; significant medium-term balance-of-payments needs due to large investment needs and low domestic saving rate.
  - Continued Fund support would facilitate mobilization of donor support in grants and technical assistance.
  - Donors are keen on further Fund involvement.
- External assistance guidance:
  - External borrowing should be measured and remain at highly concessional rates; external assistance preferably in the form of grants.
- Structural reform guidance:
  - Build on momentum from completed PRGF; actions and benchmarks should be specific and selective.
- Risks and political considerations:
  - Main risks stem from political side despite broad consensus on reform direction.
  - Democracy maturing but political upheaval remains a risk.
  - Broader-based growth recommended to reduce political resistance.
  - Careful coordination and prioritization with authorities needed to minimize political resistance to conditionality.
- Exit strategy and sequencing:
  - Re-evaluate Fund involvement after successor program.
  - If progress sustained, consider moving toward a low-access PRGF; if not, re-evaluate the Fund’s position and credibility of involvement.

---

### Selected MDG indicators (as presented, selected entries preserved)
- Goal 1 highlights:
  - Population below US$ 1 a day (percent): ... 49.1 ...
  - Poverty gap ratio at US$ 1 a day (percent): ... 18.3 ...
  - Share of income or consumption held by poorest 20 percent (percent): ... 6.4 ...
  - Prevalence of child malnutrition (percent of children under 5): 40.9 34.1 ... 33.1 20.5
  - Population below minimum dietary energy consumption (percent): 35.0 40.0 36.0 ... 17.5
- Goal 2 highlights:
  - Net primary enrollment ratio (percent of relevant age group): ... 60.6 68.7 ...
  - Percentage of cohort reaching grade 5: 21.5 39.7 33.6 ...
  - Youth literacy rate (percent age 15-24): 72.2 76.3 80.8 81.5
- Goal 4 highlights:
  - Under-five mortality rate (per 1,000): 168.0 156.0 139.0 135.0 54.0
  - Infant mortality rate (per 1,000 live births): 103.0 95.0 86.0 84.0
  - Immunization against measles (percent of children under 12-months): 47.0 55.0 55.0 61.0
- Goal 7 highlights:
  - Access to improved water source (percent of population): 44.0 ... 47.0 ... 72.0
  - Access to improved sanitation (percent of population): 36.0 ... 42.0 ...

### Comparative macro and sectoral highlights (selected averages and ratios)
- 1995 Real GDP per capita (in 1990 U.S. dollars): Madagascar 228; Ethiopia 164; Tanzania 177
- Key averages (average 2001-03 unless stated):
  - Private sector credit growth (average 2001-03): Madagascar 9.4 percent.; Ethiopia -2 percent.; Tanzania 35 percent
  - Credit to private sector in percent of GDP (average 2000-03): Madagascar 9.2; Ethiopia 22.9; Tanzania 5.8
  - Broad money in percent of GDP (average 2000-03): Madagascar 22.8; Ethiopia 46.3; Tanzania 20.8
  - Foreign direct investment (average 2001-03): Madagascar 0.8 percent of GDP.; Ethiopia 0.3 percent of GDP.; Tanzania 3.3 percent of GDP
  - Current account deficit excluding grants (average 2001-03): Madagascar 5.6 percent of GDP (4.4 percent, including grants); Ethiopia 11.8 percent of GDP (4.7 percent, including grants); Tanzania 8.5 percent of GDP (3.9 percent, including grants)
  - Fiscal deficit (average 2001-03): Madagascar 8.9 percent of GDP (5.1 percent, including grants); Ethiopia 13.6 percent of GDP (7.7 percent, including grants); Tanzania 6.4 percent of GDP (1.5 percent, including grants)
  - Domestic savings (average 2001-03): Madagascar 11.1 percent of GDP; Ethiopia 2.5 percent of GDP; Tanzania 9.6 percent of GDP
  - Private investment (average 2001-03): Madagascar 10.2 percent of GDP; Ethiopia 9.7 percent of GDP

*Source: _cr05363.*

### 1. History of IMF Lending Arrangements .........................................................................4

### 1. History of IMF Lending Arrangements

### Program history and disbursements
- Timeframe covered: programs beginning in 1988–89 through the 2001 PRGF; starting point taken as 1988–89 because of the important shift in economic course.
- HIPC milestones:
  - HIPC decision point: December 2000.
  - HIPC completion point: October 2004.
- PRSP: Full PRSP endorsed by Fund and Bank in 2003; government produced I-PRSP around 2000.
- Table 1 (selected entries, amounts in thousands of SDRs):
  - PRGF: Date of Arrangement 3/1/01; Date of Expiration or Cancellation 3/1/05; Amount Agreed 91,650; Amount Drawn 91,650; Percent Drawn 100.0
  - ESAF (11/27/96): Date of Expiration or Cancellation 11/30/00; Amount Agreed 81,360; Amount Drawn 78,860; Percent Drawn 96.9
  - ESAF (5/15/89): Date of Expiration or Cancellation 5/14/92; Amount Agreed 76,900; Amount Drawn 51,267; Percent Drawn 66.7
  - SBA (9/2/88): Date of Expiration or Cancellation 5/15/89; Amount Agreed 13,300; Amount Drawn 2,800; Percent Drawn 21.1
  - SAF (8/31/87): Date of Expiration or Cancellation 5/14/89; Amount Agreed 46,480; Amount Drawn 13,280; Percent Drawn 28.6

### Socioeconomic outcomes and indicators
- Poverty and income:
  - In 2004, an estimated 75 percent of the population lived in poverty.
  - Urban poverty rate in 2004: approximately 40 percent.
  - Income poverty increased by as much as 6 percent by the end of 2002 (following the 2002 political crisis).
- GDP and growth:
  - Today’s real GDP per capita still stands 50 percent below its 1960 level.
  - Per capita GDP: US$430 in 1960; US$220 in 2003.
  - Since 1975, annual population growth has averaged 2.8 percent, compared with an average annual GDP growth of 1.2 percent.
- 2002 shock:
  - Real GDP contracted by 13 percent in 2002.
  - Per capita real GDP dropped by 15 percent in 2002.
  - Recovery: economic growth resumed in 2003, but social indicators recovered more slowly.
- Social and access indicators (changes since mid-1990s where noted):
  - Net primary school enrollment increased from 48 percent to 70 percent.
  - Electricity connections: 19 percent (doubled since mid-1990s but remains low).
  - Water connections: 27 percent (doubled since mid-1990s but remains low).
  - Infant mortality: 86 deaths per 1,000 births.
  - Immunization rates: 36 percent of children.
  - About 80 percent of the rural population has no reliable transport services; of these, one-third has no road access at all.

### Economic and political developments (chronology and impacts)
- 1970s: inward-looking strategy; real GDP grew at an average annual rate of less than 2 percent; real per capita GDP declined.
- Early 1980s: adjustment programs supported by IMF and World Bank reduced imbalances but did not resolve structural rigidities.
- 1988–90: shift to open, market-oriented economy; 10-month SBA (bridge to SAF/ESAF).
- 1990–1996: policy slippages, adverse weather, and political crisis (mid-1991) caused growth setbacks:
  - Real per capita GDP declined by almost 9 percent in 1991 and close to 4 percent in 1992.
- Mid-1990s: renewed reform agenda announced early 1994; political instability continued until impeachment in 1997, after which reform momentum improved.
- 1997–2001: stronger stabilization and growth:
  - Between 1997 and 2001, economic growth averaged 4½ percent.
  - Inflation remained subdued; exports doubled; international reserves rose sharply despite exogenous shocks (three cyclones in early 2000).
- Early 2002: political crisis (disputed 2001 presidential election) caused severe economic disruption; crisis resolved by May–July 2002 when the new president was sworn in and internationally recognized.
- Post-2002: quick macroeconomic recovery in 2003, but slow recovery of social indicators and poverty.

### Assessment of Fund involvement
- Stated objectives of Fund programs:
  - Achieve and maintain macroeconomic stability and external viability conducive to sustained growth.
  - Support structural reforms to reduce poverty, including domestic and external liberalization, rebuilding public administration capacity, addressing corruption and weak governance, and improving distribution of growth benefits in line with I-PRSP/PRSP goals.
- Results and progress (characterization):
  - Uneven results across objectives.
  - Contributions:
    - Positive: macroeconomic stabilization; strengthening resilience and external viability; some structural reforms (external sector liberalization, financial sector reform, exchange rate regime).
    - Limited progress: tax policy; tax and customs administration; public expenditure management; privatization; civil service reform.
- Program implementation notes:
  - Under the 1989 ESAF, only amounts under the first and second annual arrangements were fully disbursed.
  - Under the 1996 ESAF, two disbursements were made under the first annual arrangement; no understanding was reached on a second arrangement; program extended by one year and expired in November 2000 with completion of just two of three envisaged annual arrangements.
  - The 2001 PRGF was the only program in the review period under which all disbursements were made.

*Source: 1. History of IMF Lending Arrangements (excerpt)._cr05363*

### 15.      Inflation has been brought down, but remains volatile and above the objectives.

### _cr05363 - 15.      Inflation has been brought down, but remains volatile and above the objectives.

### Inflation and prices
- Inflation fell from 23 percent in 1987 to 11 percent in 1990.
- Since 1996–97, inflation has, on average, been below 10 percent.
- The surge during the 2002 political crisis was controlled rapidly.
- Inflation remains volatile and above the objectives, partly due to exogenous factors such as the rise in agricultural and oil prices in 2004.
- Price liberalization started in 1989 and is now almost complete; a significant achievement was the liberalization of domestic oil prices in 2004.

### Economic growth
- Since 1997—with the exception of 2002—growth has been in the 5 percent to 6 percent range, close to program targets, but still below the rates targeted in the PRSP to achieve significant poverty reduction.
- The PRSP’s goal is to reduce the level of poverty by half in 10 years (i.e., by 2013). To achieve that goal, an average annual GDP growth of 9.3 percent is needed.
- The Millennium Development Goals (MDG) call for a halving of poverty by 2015, which corresponds with an average annual growth rate of 8 percent.
- Recovery from recent shocks (natural shocks in 2000, 2001, and 2004, and the political crisis of 2002) has been faster than before, suggesting a basis for sustainable growth may have been laid.

### External sector and reserves
- International reserves were drawn down in the early 1990s, bottoming out at SDR 42.7 million by the end of 1994—just over one month of imports.
- At end 2004, Madagascar’s gross reserves position had reached a historically high level of over SDR 300 million.
- That reserves level is still below the set objective and provides only a limited cushion of around three months of imports, given Madagascar’s sensitivity to shocks.
- The external current account deficit (excluding grants) since 1996 has been between 6 percent and 8½ percent of GDP in all but one year (2001). These deficits have been largely financed by aid inflows (mainly grants).
- The trade structure has shifted: traditional exports faded in relative importance while exports from export processing zones (EPZ) and other exports have grown.

### Exchange rate and competitiveness
- Following a period of loss in competitiveness under a pegged exchange rate, the authorities adopted a floating exchange rate regime in 1994.
- The floating regime has helped maintain the Malagasy franc’s competitiveness, as measured by the REER.
- The unified interbank foreign exchange market was initially sluggish; a dominant, distressed state bank (BTM) hampered operations until its restructuring in 1996.
- The introduction of the continuous quotation interbank market in 2004 appears to have improved market efficiency.

### External debt and sustainability
- Madagascar’s external debt situation improved significantly; HIPC completion point analysis indicated the position could remain sustainable provided sound macroeconomic policies are maintained and structural reforms continued.
- Since 1981, Madagascar rescheduled its debt to Paris Club creditors 11 times.
- With the latest round of debt relief, the NPV of debt to exports was expected to be reduced to a little over 150 percent in 2004.
- Debt service to exports will be below 5 percent and debt service to revenue about 10 percent.
- Sensitivity analysis indicates a sustainable debt position depends critically on achieving sustained GDP growth rates of at least 6 percent.

### Structural reform: trade liberalization and external liberalization
- Early trade liberalization was limited: import tariffs were lowered from 80 percent to the 50–60 percent range; some export taxes were abolished while others (such as on vanilla) remained.
- Political and economic crisis of 1991 saw intensification of restrictions on current account transactions.
- Since 1996, trade liberalization conducted under the Cross-Border Initiative (CBI) and COMESA has made major strides:
  - Weighted average import duty rate is currently estimated at 18 percent.
  - Export taxes and the export surrender requirement were fully eliminated in 1997.
  - Since 2004 the country has four tariff bands, and the two import taxes have been merged.
  - Madagascar accepted the obligations of Article VIII in 1996.

### Financial sector reform and supervision
- Privatization of two state banks, BTM and BFV (National Bank of Commerce), occurred between 1996 and 1999 after intermediate cleanup steps under the 1996 ESAF.
- The authorities have permitted private domestic and foreign banks to operate in the country.
- The independent Banking and Financial Supervision Commission was established in 1996.
- Alignment of the prudential supervisory framework with the Basel Core Principles has contributed to the soundness of the banking system.
- While the banking system is sound, intermediation remains low due to other impediments to financial services.

### Legal reform
- The 1996 ESAF introduced legal instruments for long-term land lease by foreigners and procedures to effect a lease within 60 days.
- Improvements to the legal framework and the work conditions and professional capacity of magistrates have improved the business climate and the rule of law in Madagascar.

### Areas of weak progress — public finances and tax mobilization
- Little progress has been made in strengthening public finances. Fiscal deficits were kept close to program targets, but achievement methods often were not consistent with program designs.
- Disappointing tax revenue performance forced authorities to compress expenditures and to borrow more from the banking system than programmed, constraining basic public services and economic development.
- The 2004 tax-to-GDP ratio was 11 percent, equal to the level attained in 1989.
- Madagascar remains among the countries with the lowest tax revenue/GDP ratio.
- Since 1996, Fund-supported programs sought to address deficiencies in tax policy, tax base, and tax and customs administration, but achievements to date are minimal.
- The introduction of VAT offset trade tax drops from external liberalization to some extent, but tax policy problems remain:
  - Complexity of the tax code.
  - Frequent resort to ad hoc tax and customs exemptions.
  - Policy reversals.
  - Narrow tax base; high-growth areas (EPZs and mining) are subject to very low tax rates.
  - Tax and customs administration remains weak and plagued by corruption.
- Achievements in tax and customs administration include: (i) informatization of customs controls and introduction of pre-shipment inspections; (ii) creation of a large taxpayers unit; and (iii) reorganization of the tax department into regional offices.

### Financial soundness and financial deepening (selected indicators)
- Financial Soundness Indicators (selected entries from Table 4):
  - Regulatory capital to risk-weighted assets: Lowest Ratio reported across years includes 8.6, 9.7, 10.1, 12.0, 11.4, 10.7, 9.4, 8.4.
  - Nonperforming loans to total gross loans: 21.1 (1998), 8.4 (1999), 8.4 (2000), 10.3 (2001), 19.5 (2002), 16.7 (2003), 14.2 (2004), 12.9 (Jun. Est.).
  - Return on assets: 3.2 (1998), 4.3 (1999), 4.0 (2000), 2.8 (2001), 1.1 (2002), 3.2 (2003), 4.3 (2004), 4.4 (Sept. Est.).
  - Liquid assets to total assets: 35.9, 37.0, 36.9, 44.2, 52.1, 50.5, 49.4, 48.7 (by year).
  - Total assets (In billions of Malagasy francs): 4,222.0 (1998), 4,931.0 (1999), 5,668.0 (2000), 6,723.0 (2001), 6,965.2 (2002), 7,685.9 (2003), 9,350.0 (2004), 9,431.8 (Sept. Est.).
  - Total profits before tax (In billions of Malagasy francs): 137.2 (1998), 214.0 (1999), 226.5 (2000), 186.6 (2001), 79.7 (2002), 249.6 (2003), 199.8 (2004), 310.1 (Sept. Est.).
- Indicators of financial deepening (Table 5, selected entries):
  - Broad Money (M2) as percent of GDP for Madagascar: 19.1 (1985), 17.9 (1990), 18.0 (1995), 19.3 (2000), 22.1 (2001), 23.3 (2002), 23.0 (2003).
  - Credit to Private Sector (percent of M2) for Madagascar: 64.3 (1985), 47.6 (1990), 43.0 (1995), 40.6 (2000), 40.0 (2001).

*Source: IMF staff report content as provided in the source document.*

### 31.      Slow progress in PEM reform remains a bottleneck in the fight against poverty.

### _cr05363 - 31.      Slow progress in PEM reform remains a bottleneck in the fight against poverty.

### Public Expenditure Management (PEM) — findings
- Early 1990s achievements: inclusion of the public investment plan into the budget; presentation of central government operations on a cash, commitment, and payment-order basis.
- An ambitious reform agenda was developed under the 1996 ESAF, but measures were often delayed.
- Recent improvements in PEM track record were driven by conditionality in the PRGF that was key to reaching the HIPC completion point.
- Progress was made in strengthening local treasury offices and a new budgetary classification was introduced.
- Some progress in streamlining budgetary procedures accelerated execution of spending in priority areas and improved tracking of this spending.
- Overall conclusion: slow progress in PEM reform remains a bottleneck in the fight against poverty.

### Monetary policy reform — findings
- Attempts to adopt indirect instruments started early, but initial conditions for effectiveness were not met.
- Gradual development of a treasury bill market and a money market in the mid-1990s made open-market operations increasingly feasible.
- Administered interest rates were abolished and credit ceilings removed as these markets developed.
- Financial sector reform improved transmission of monetary policy through indirect instruments.
- Remaining weaknesses: markets remain shallow and the central bank’s liquidity management capabilities weak, often contributing to inconsistent policy responses.

### Privatization — findings
- Privatization was slow historically, despite being a policy objective since the late 1980s; only a handful of public enterprises was effectively privatized until recent years.
- Progress accelerated after 1996 approval by parliament of a legal and institutional framework for privatization.
- Commercial banks were the first strategic companies to be fully privatized.
- In 1996, legal state monopolies were abolished in key sectors: power, petroleum, telecommunications, and air transport.
- Recent PRGF-period outcomes: TELMA (telecommunications) and HASYMA (cotton) privatized; SIRAMA (sugar), Air Madagascar, and JIRAMA (electricity and water) put under private management but remain majority government-owned.
- Overall: privatization has been slow but major enterprises have been taken out of public management in the past four to five years.

### Civil service reform — findings
- Progress implementing civil service reform has been slow and is a bottleneck for progress in other areas.
- The wage bill was already not high by sub-Saharan standards (see Table 6) and was cut repeatedly due to fiscal revenue shortfalls; salary reform and other reforms were hampered by these shortfalls.
- An ambitious ESAF civil service reform package in 1997 faced implementation delays because of political resistance.
- A statute introducing merit-based advancement, a code of ethics and discipline was approved by the National Assembly in 2001 but was not implemented.

### Private sector development and EPZs — findings
- Private sector development has been slow; foreign and domestic investment started to pick up around the turn of the twenty-first century after three to four years of macroeconomic stability and benefitting from legal provisions allowing foreigners to lease land up to 99 years.
- Factors hampering private sector development included: macroeconomic and political instability in the first half of the 1990s, low domestic savings, low quality of public services, lack of infrastructure, legal monopolies of public enterprises in several sectors, nontransparent and unpredictable application of government regulations affecting potential investors, and the prohibition for foreigners to own land in the country.
- The EPZ regime, created in 1989, has contributed increasingly to employment and exports; its success is attributed to a favorable and stable fiscal regime, available labor with matching skills, relatively low wages, relative political and economic stability, and Madagascar’s eligibility under AGOA.
- Concern: spillover effects of EPZs on growth of other sectors remain limited.

### Social and sectoral policies — findings
- Until the PRSP process began, social and sectoral policies did not yield significant results; education and health policies mainly reached the urban population and increased the poverty wedge between urban and rural populations.
- PRSP-JSA (Country Report No. 04/403, 12/10/04) notes significant progress in recent years in rural development, education, health, infrastructure, HIV/AIDS, nutrition, rural water and sanitation, and social protection.
- Projections on MDGs at current trends:
  - Likely to be met by 2015: gender equality, complete enrollment in primary school, halting HIV/AIDS spread, malaria, and deforestation.
  - Slim likelihood of meeting by 2015: halving extreme poverty and hunger, 100 percent primary school completion, reducing by 2/3 infant and maternal mortality.

### Compliance with program conditionality — findings
- Record on meeting quantitative performance criteria (PCs) is uneven: early ESAF (1988) met all quantitative PCs in the first two reviews; in some later reviews up to 50 percent of PCs and indicative targets were not met.
- Compliance with the floor on tax revenue proved systematically problematic; PCs were often narrowly missed, indicating limited implementation capacity more than inconsistent policies.
- Structural benchmarks record was mixed but improving; more challenging benchmarks (e.g., privatization and a start with civil service reform) were not implemented early on.
- Structural conditionality intensified in the most recent programs; track record during the most recent PRGF improved with progress in privatization, fiscal policy management and, to a lesser extent, civil service reform.
- Compliance rates:
  - Under the ESAF, Madagascar implemented 40 percent of the conditionality.
  - Under the PRGF, this share rose to 87.5 percent.
  - Comparison with African averages: under the 1996 ESAF Madagascar was far below the African average of 61 percent for the period 1995–2000; under the PRGF Madagascar was far above the African average of 65 percent.

### Policy implementation — experience and lessons
- Key explanatory factors for limited broad-based success:
  - Frequent interruptions of reform efforts by political crises and external shocks.
  - Low ownership of reforms until the mid-1990s; political crises and lack of ownership were often interrelated.
  - Limited absorption and implementation capacity of the country became increasingly evident from the mid-1990s.
- Program design and implementation:
  - Macro-stabilization objectives were generally adequate and Fund involvement enhanced authorities’ stabilization capacity; stabilization capacity improved notably in the quick reaction to control inflation after the 2002 political crisis.
  - Exchange rate policy advice was appropriate; monetary policy advice to rely on indirect instruments was initially over-optimistic given weak markets, infrastructure, and implementation capacity.
  - Fiscal policy design was constrained by underperforming tax revenues; programs allowed for large fiscal deficits (before grants) which were justified by development needs, but limited room existed to shrink deficits over time given low tax revenues.
  - Program conditionality focused heavily on tax and customs administration due to disappointing revenue performance; almost no tax policy measures were part of the conditionality since 1997.
  - Limited implementation capacity and resistance from vested political interests prevented faster reform in tax policy and administration.
  - Fund arrangements showed flexibility: floors on net foreign assets of the central bank, tax revenue, and bank credit to the government were adjusted several times to accommodate natural disasters and economic and political shocks.
  - The broad-based structural reform agenda since 1996 may not have fully accounted for limited implementation capacity and lingering political resistance from vested interest groups.

### Ownership and implementation capacity — findings
- Until the mid-to-late 1990s, program implementation was hampered by lack of ownership and political resistance, especially for far-reaching measures like privatization and civil service reform.
- A turning point occurred in the second half of the 1990s: civil society, social and religious groups converged on structural reform as the pathway out of poverty and began to view IFIs, including the IMF, as vehicles to achieve reform.
- Political change in 1996-97, motivated in part by perceptions that the president obstructed reform, aligned the interests of the new president, the government, and civil society; ownership of Fund-supported programs improved significantly from 1997–98 onward.
- Civil society support brought corruption and governance to the forefront, although initial results in these areas were weak.

*Source: _cr05363 - 31.      Slow progress in PEM reform remains a bottleneck in the fight against poverty.*

### 51.      Growing ownership became even more evident from the domestic consultative

### _cr05363 - 51.      Growing ownership became even more evident from the domestic consultative

### Ownership and program alignment
- Growing ownership was evident from the domestic consultative process that preceded the publication of the PRSP, and from the contents of the PRSP.
- The same sense of ownership was felt in negotiations on the most recent PRGF.
- The goals of the PRGF were fully consistent with the PRSP framework and were fully supported by the authorities.
- High degree of compliance with the structural agenda under the PRGF is a reflection of the high sense of ownership of program and PRSP.
- Prospect of debt relief at the HIPC completion point provided an additional incentive for government engagement, but significant change in the climate surrounding Fund program negotiations occurred even without that.

### Cultural factors and legal framework
- Cultural factors contributed to the authorities’ cautious attitude toward Fund-supported programs, reflecting longstanding caution with respect to foreign investment in domestic, productive resources.
- Critical modifications to the legal framework to facilitate foreign entry and provide investment security were introduced slowly.
- Footnotes in source: See IMF, “Governance Note” August 1997. It was not until 2002 that the fight against fraud and corruption started in earnest.

### Capacity constraints and technical assistance
- Program implementation continues to suffer from limited absorption capacity.
- The civil service is weak and ministries lack adequate technical skills; weaknesses in public expenditure management have aggravated problems.
- Consequences:
  - Weak civil service makes implementation of specific policies difficult.
  - Civil service cannot fulfill role as advisor or institutional memory, leading to ad hoc or inconsistent policies.
- Madagascar has been a recipient of extensive technical assistance in monetary, fiscal, and statistical areas, but implementation has generally been weak; technical assistance has so far made only a small dent in capacity problems.19
- Limited success in technical assistance seems attributable to:
  - Limited absorption capacity—several implementing agencies chronically lack adequate funding, with repercussions on staffing and equipment.
  - Technical assistance recommendations not always aligned with authorities’ priorities; where authorities did not see the need, implementation did not occur though Fund-supported programs assumed advice would be implemented.
- Footnote detail: Fiscal Affairs Department (FAD) fielded 20 missions in the period under review and deployed one long-term advisor. Statistics Department (STA) had 6 missions in the period under review and a total of 15 MFD missions visited the country since 1993, of which 12 have done so since 1998.

### Collaboration with the World Bank
- Division of labor generally satisfactory:
  - World Bank focused on sectoral structural reforms: privatization and private sector development, basic infrastructure, agriculture, education and health, civil service reform, legal reform, and poverty monitoring and evaluation.
  - Fund relied to a great extent on Bank’s technical expertise; cooperation was close on the PRSP.
  - Bank became more active in some sectors, such as agriculture, since publication of the PRSP.
- Episodes of friction:
  - World Bank reluctant to engage in wide-ranging civil service reform, delaying Fund work in that area; Bank preferred pointed interventions in specific public-sector units due to negative experiences elsewhere.
  - During the 2002 political crisis, the Bank kept its presence in Antananarivo while the Fund did not; the Bank advised the new president on a wide range of policy issues. Advice on tax exemptions inconsistent with the Fund’s views created tensions that have since been resolved and coordination is now smooth.

### Donor coordination and aid volatility
- Donor coordination has gone through ups and downs and generally could have been better; lack of coordination sometimes led to competition among donors.
- The 2002 crisis led to donor confusion and division into two camps; at other times coordination was optimal (e.g., 1997 cooperation on revoking tax exemptions).
- Lack of a solid public expenditure management framework impaired effectiveness of donor assistance; lack of a good tracking system impeded smooth channeling of funds to projects.
- PRSP calls for improvements in public expenditure management and better donor coordination; initiatives have been taken.
- Aid flows were uneven over time: aid flows dropped significantly during periods of political uncertainty (1992, 1998, and 2002) and showed sharp increases in 1997, 1999, and 2003, coinciding with a new program or resumption of a program. Reductions, interruptions, and volatility in aid flows sometimes interfered with smooth program implementation.20
- Footnote: Staff Reports contain some references that shortfalls in aid flows contributed to nonobservance of the ceiling of bank credit to the government.

### Lessons for the future: governance, civil society, and conditionality
- Constant involvement to keep authorities focused on stabilization produced satisfactory macro stabilization outcomes; maintaining constant dialogue—even in absence of a Fund program—has proven beneficial.
- Positive example: exchange rate regime established in 1994 outside the program, but with Fund assistance, turned out to be a success.
- Negative example: absence of resident representative during 2002 political crisis damaged Fund reputation and required effort to regain government confidence.
- Involvement of civil society (social and religious groups) in policy dialogue facilitated achieving program objectives; dialogue between Fund and civil society in mid-1990s helped convince important groups of need for structural reform and strengthened government ownership.
- Weak governance and corruption hindered progress; various international governance and corruption watchdogs typically put Madagascar between 20 and 50 on a scale from 0 (worst) to 100 (best).21 Sources agree on improvements in past three–four years, but parts of administration—particularly tax and customs administration—are still widely perceived as corrupt.
- Tax policy and administration shortcomings:
  - During last two programs, waivers were typically given when tax revenue did not meet the floor.22 This happened four times out of 10 reviews in the 1996 ESAF and seven times out of 11 reviews in the PRGF.
  - Sometimes shortfalls justified (e.g., impact of cyclones); on other occasions shortfalls were due to policy reversals or non-implementation of structural measures.
  - Reviews justified waivers because authorities had taken additional measures in run-up to review or had committed during review to strengthen tax and customs administration.
  - Observation: although increasing tax revenue was considered essential, it was apparently never considered important enough to trigger noncompletion of a review, perhaps out of fear of losing momentum in structural reform.
- Conditionality and enforcement:
  - Program conditionality could have incorporated more tax policy measures; combining failure to meet quantitative performance criterion on tax revenue with PCs or SBs on tax policy could have justified a harder line during program reviews.
  - A tougher approach once worked: in 1997 the Fund set removal of specific ad hoc customs exemptions as a condition for agreeing on a Fund program; coordinated donor support helped achieve the result.23
- Civil service reform:
  - More insistence on civil service reform in mid-1990s could have been beneficial in medium-to-long term; inability to attract skilled staff impaired capacity to mobilize revenue and deliver essential public services.
  - Need to decompress salary scale and introduce performance contracts cited as crucial objectives as early as 1995; partial implementation only began after 2000.
- Selectivity in conditionality:
  - Initially, structural reform agenda could have benefited from a more parsimonious approach given limited absorptive capacity.
  - When government showed stronger ownership in late 1990s, reform agenda and program conditionality broadened significantly under the ESAF; Fund program conditionality was actually below Fund average and Africa average (in the 1996 ESAF 23 PAs, PCs and SBs, compared with 33 Fund wide and 31 for Africa).24
  - However, a UN report shows that in 1999–2000 Madagascar had the highest number of IFI conditionality to meet (30, with the average for the group of countries at 23).

### Policy challenges for the medium term: objectives and constraints
- Overarching challenge: achieve higher economic growth and reduce poverty significantly.
- PRSP (June 2003) goal: reduce the poverty rate by half in 10 years by working along three axes: improved governance, growth that benefits the poor, and improved social service delivery.
- Constraints: low domestic savings, external viability, limited availability of skilled workers, and a weak public administration network.
- To achieve broader goals, continue reforms in most areas discussed in the report.

### Macroeconomic challenges
- Durable success in reducing poverty and achieving sustained development requires further acceleration of growth; current economic growth rate is still not in range required to achieve PRSP and MDG goals.
- Future programs should contain ambitious measures to accelerate growth, including:
  - Fostering private sector-led growth (including further privatization).
  - Further diversifying the economy.
  - Rebuilding infrastructure.
  - Enhancing productivity in agriculture.
  - Capacity building.
- Special attention needed to post-AGOA period (AGOA III “third-party” fabrics provision is set to expire in 2007) to ensure EPZs contribute more to development and link better to domestic economy.
- Further capacity building is key: enhance absorption and implementation capacity through technical assistance in monetary, financial, fiscal, and statistical fields, accompanied by civil service reform to ensure capacity retention.
- Authorities finalizing a time-bound technical assistance plan to define and prioritize needs; when finalized it will be taken to donors to coordinate delivery.

### Fiscal and financial priorities
- Make fiscal position sustainable in the medium term; tax policy reform should be a priority.
- Authorities need to establish a tax code that is simple, stable, transparent, and eliminates loopholes; important first step: eliminate any remaining ad hoc exemptions.
- Work should be geared toward broadening the tax base; the tax base is relatively narrow, excluding or only lightly taxing some important sectors (such as the EPZs and the mining sector). Changes should be handled with care and implemented over time to balance competitiveness and revenue.
- Address low level of domestic savings: build on sound banking system, enhance financial intermediation and access to credit, develop other intermediation channels such as microfinance to reach rural population, and remove impediments to financial services.25 Financial deepening will help boost domestic savings, contribute to poverty reduction, and make country less vulnerable to external shocks.

### Structural reform priorities (Fund focus areas)
- Tax and customs administration:
  - An action plan to rehabilitate tax and customs administration has been formulated recently with FAD technical assistance; implementation began under the just-completed PRGF.
  - Under a new program, priority needs include management improvement, simplification of procedures, and improved IT.
  - Gains in efficiency and effectiveness of customs procedures should lead to better duty collection, offsetting some tariff reduction effects; tax evasion and fraud should be tackled decisively.
- Public expenditure management:
  - Strengthen links between approved budgets and budget outturns, and between PRSP and annual budgets to protect priority spending, safeguard spending discipline, prevent accumulation of expenditure arrears, and ensure efficient delivery of public services.
  - Necessary actions: (i) strengthen budget preparation process; (ii) strengthen link between treasury and budget; (iii) strengthen internal and external controls; and (iv) develop an expenditure tracking system.
- Trade liberalization:
  - Given dependency on external trade, further liberalization recommended; implement recommendations of Diagnostic Trade Integration Study.
  - Focus areas: continue simplifying tariff structure; improve export services; strengthen domestic supply response to export opportunities; develop strategy to maximize benefits from joining SADC; prepare measures to adjust to new textile market conditions in near term; foster cross-border sector cooperation.
  - Regional trade initiatives literature suggests engaging more in nondiscriminatory liberalization and taking additional measures to facilitate trade.27,28
- Corruption and governance:
  - An anti-corruption strategy has been developed and an independent anti-corruption bureau was established at end of 2004.
  - Government urged to implement anti-corruption reforms focusing on government services; corruption perceived to be pervasive in police, medical centers, land-titling agencies, customs, and lower courts (Country Report No. 04/403, 12/10/04).
  - Progress essential to improve business climate; give special attention to making judicial system more efficient and effective (World Bank providing technical assistance) and consolidate recent customs improvements.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05363.pdf*

### 75.      To assist in achieving Madagascar’s poverty reduction goals, there is a strong

### _cr05363 - 75.      To assist in achieving Madagascar’s poverty reduction goals, there is a strong

### Continued Fund engagement and justification
- A successor-PRGF arrangement is recommended to assist Madagascar in achieving its poverty reduction goals.
- Rationale for a PRGF:
  - Madagascar’s economy remains vulnerable, domestically as well as externally.
  - The country is expected to continue to have significant balance-of-payments needs in the medium term, given the very large investment needs and the low domestic saving rate.
  - Continued Fund support would facilitate the mobilization of donor support, in the form of grants and technical assistance.
  - Donors are keen on having further Fund involvement.
- External assistance guidance:
  - External borrowing should be measured and remain at highly concessional rates.
  - External assistance should preferably be in the form of grants.
- Structural reform guidance:
  - The structural reform agenda should build on the momentum achieved during the recently completed PRGF, and continue in the areas listed above.
  - Fund involvement should assist in building up a diversified economy.
  - Actions and benchmarks should be specific and selective.

### Risks and political considerations
- Main risks stem from the political side.
- Observations on political economy:
  - There is a broad consensus in Madagascar about the need for, and direction of, reforms.
  - Stronger ownership experienced during the most recent years needs to be consolidated.
  - Democracy is maturing, although political upheaval remains a risk.
- Mitigating factors and recommendations:
  - Broader-based growth will help distribute benefits of reforms and contribute to political and economic stability.
  - To minimize risks of political resistance to Fund program conditionality, careful coordination and prioritization, in consultation with the authorities, will be necessary.
  - Madagascar is in very good standing with respect to repaying the Fund; this is not considered among the high-risk factors.

### Exit strategy and program sequencing
- Re-evaluation timing:
  - Fund involvement with Madagascar should be reevaluated after this successor program.
- Scenarios:
  - If the country continues on the current path of economic growth, stability, and structural reform, and lasting impact is made on poverty reduction, Madagascar could then perhaps move toward a low-access PRGF arrangement.
  - If no progress is made, the Fund’s position should be re-evaluated, in particular with respect to the credibility of its involvement.

### Millennium Development Goals — selected indicators and targets (as presented)
- Goal 1. Eradicate extreme poverty and hunger
  - 1. Population below US$ 1 a day (percent): ... 49.1 ...
  - 2. Poverty gap ratio at US$ 1 a day (percent): ... 18.3 ...
  - 3. Share of income or consumption held by poorest 20 percent (percent): ... 6.4 ...
  - Target 2 — prevalence of child malnutrition (percent of children under 5): 40.9 34.1 ... 33.1 20.5
  - Population below minimum level of dietary energy consumption (percent): 35.0 40.0 36.0 ... 17.5
- Goal 2. Achieve universal primary education
  - Net primary enrollment ratio (percent of relevant age group): ... 60.6 68.7 ...
  - Percentage of cohort reaching grade 5: 21.5 39.7 33.6 ...
  - Youth literacy rate (percent age 15-24): 72.2 76.3 80.8 81.5
- Goal 3. Promote gender equality and empower women
  - Ratio of girls to boys in primary and secondary education (percent): 98.9 99.2 ... ... 100.0
  - Ratio of young literate females to males (percent ages 15-24): 85.6 88.8 92.1 92.5
  - Share of women employed in the nonagricultural sector (percent): 26.0 ... ... ...
  - Proportion of seats held by women in the national parliament (percent): 7.0 4.0 8.0 8.0
- Goal 4. Reduce child mortality
  - Under-five mortality rate (per 1,000): 168.0 156.0 139.0 135.0 54.0
  - Infant mortality rate (per 1,000 live births): 103.0 95.0 86.0 84.0
  - Immunization against measles (percent of children under 12-months): 47.0 55.0 55.0 61.0
- Goal 5. Improve maternal health
  - Maternal mortality ratio (modeled estimate, per 100,000 live births): ... 580.0 550.0 ... 127.0
  - Proportion of births attended by skilled health personnel: 57.0 47.3 46.2 ...
- Goal 6. Combat HIV/AIDS, malaria and other diseases
  - HIV prevalence among females (percent ages 15-24): ... ... 0.2 ...
  - Contraceptive prevalence rate (percent of women ages 15-49): 16.7 19.4 ... 16.9
  - Number of children orphaned by HIV/AIDS: ... ... 6,300 ...
  - Incidence of tuberculosis (per 100,000 people): ... ... 254.5 ...
  - Tuberculosis cases detected under DOTS (percent): ... 65.0 60.0 61.6
- Goal 7. Ensure environmental sustainability
  - Forest area (percent of total land area): 22.2 ... 20.2 ...
  - Nationally protected areas (percent of total land area): ... 1.9 1.9 2.1
  - CO2 emissions (metric tons per capita): 0.1 0.1 0.1 ...
  - Access to improved water source (percent of population): 44.0 ... 47.0 ... 72.0
  - Access to improved sanitation (percent of population): 36.0 ... 42.0 ...
- Goal 8. Develop a Global Partnership for Development
  - Fixed line and mobile telephones (per 1,000 people): 2.8 3.0 13.3 14.0 ...
  - Personal computers (per 1,000 people): 1.5 2.6 4.4 ...
- Notes: Sources cited as World Bank; and Fund staff estimates. 1/ Targets 12-15 and indicators 33-44 are excluded because they can not be measured on a country specific basis.

### Comparative macro and sectoral highlights (Madagascar vs. Ethiopia vs. Tanzania)
- 1995 Real GDP per capita (in 1990 U.S. dollars):
  - Madagascar: 228
  - Ethiopia: 164
  - Tanzania: 177
- Banking sector, privatization, and land reform: narrative comparisons presented for each country (Madagascar, Ethiopia, Tanzania) describing timelines and scope of reforms (legislation, privatizations, land act changes).
- Key averages and ratios (specified averages and units preserved):
  - Private sector credit growth (average 2001-03): Madagascar 9.4 percent.; Ethiopia -2 percent.; Tanzania 35 percent
  - Credit to private sector in percent of GDP (average 2000-03): Madagascar 9.2; Ethiopia 22.9; Tanzania 5.8
  - Broad money in percent of GDP (average 2000-03): Madagascar 22.8; Ethiopia 46.3; Tanzania 20.8
  - Foreign direct investment (average 2001-03): Madagascar 0.8 percent of GDP.; Ethiopia 0.3 percent of GDP.; Tanzania 3.3 percent of GDP
  - Current account deficit excluding grants (average 2001-03): Madagascar 5.6 percent of GDP (4.4 percent, including grants); Ethiopia 11.8 percent of GDP (4.7 percent, including grants); Tanzania 8.5 percent of GDP (3.9 percent, including grants)
  - Fiscal deficit (average 2001-03): Madagascar 8.9 percent of GDP (5.1 percent, including grants); Ethiopia 13.6 percent of GDP (7.7 percent, including grants); Tanzania 6.4 percent of GDP (1.5 percent, including grants)
  - Domestic savings (average 2001-03): Madagascar 11.1 percent of GDP; Ethiopia 2.5 percent of GDP; Tanzania 9.6 percent of GDP
  - Private investment (average 2001-03): Madagascar 10.2 percent of GDP; Ethiopia 9.7 percent of GDP

*Source: _cr05363 - 75.      To assist in achieving Madagascar’s poverty reduction goals, there is a strong*

### 13.5 percent of GDP

### 13.5 percent of GDP

### Summary indicators and context
- 13.5 percent of GDP (average 2001-03)
- HIPC Completion point dates listed: October, 2004; April, 2004; November, 2001
- 2003 Real GDP per capita: 220; 202; 217 (in 1990 U.S. dollars)
- Note: "Madagascar, Ethiopia, and Tanzania emerged from decades of economic stagnation under a policy of state controls and planning in 1995. Since then, Tanzania has made greater progress in a number of areas than Ethiopia and Madagascar."

### Quantitative performance criteria and benchmarks (Madagascar, 1988–2004)
- Program categories listed across time: ESAF (1988-91), ESAF (1996-2000), PRGF (2001-2004)
- Common quantitative performance criteria and benchmarks tracked (entries show status codes M, NM, or blank where applicable):
  - Ceiling on external arrears — statuses include M, NM
  - Floor on net foreign assets of the central bank — statuses include M, NM
  - Ceiling on net claims of the banking system on government — statuses include M, NM
  - Ceiling on net domestic assets of the central bank — statuses include M, NM
  - Ceiling on contracting or guaranteeing of external debt on nonconcessional loans (both "more than 15 years" and "5-15 years" listed) — statuses include M
  - Floor on tax revenue — statuses include M, NM
  - Ceiling on treasury loans and advances (discontinued from 2000) — statuses include M
  - Floor on petroleum tax payments to the treasury — statuses include NM, M (became indicative target in 1999)
  - Indicative targets: ceiling on reserve money, ceiling on broad money — statuses include M, NM
  - Ceiling on accumulation of domestic arrears — NM, M (PC starting in 2004)
  - Floor on arrears payment (introduced during the Third Review) — statuses include M, NM
- Total number of conditions and shares not met (by review dates):
  - ESAF (1996-2000) review snapshots show Total number of conditions: 8, 8, 8, 8, 8, 8, 6, 6, 6, 6 and Share not met (in percent): 25, 0, 38, 0, 14, 38, 50, 33, 17, 17
  - PRGF (2001-2004) review snapshots show Total number of conditions: 6, 6, 6, 6, 6, 6, 6, 6, 7, 7, 7 and Share not met (in percent): 17, 33, 20, 50, 33, 0, 0, 0, 57, 29, 0
- Number of waivers (where recorded):
  - ESAF period: entries include 2, 4, 0
  - PRGF period: entries include 1, 4, 0, 0, 5, 0
  - Of which: structural performance criteria waivers: 1, 1, 0, 1 (as tabulated)

### Structural conditionality under Fund programs (Madagascar, 1988–2004)
- Organization: listings grouped by policy area with Target date and Met / Not met outcomes. Key areas and selected items:

I. Tax policy and administration
- Prior Actions:
  - Fully implement the new value-added tax (VAT) reimbursement system for free export zone producers. Target: June 1, 1999 — Not met
  - Modify and implement the new contract with the preshipment inspection company, BIVAC. Target: Mid-June 1999 — Not met
  - Adjust prices for petroleum products: increase super gasoline price by 10 percent and regular gasoline by 5 percent. Target: Mid-June 1999 — Not met
  - Implement an effective tax audit program within the large-taxpayer unit (SGE) as the basis of a program to combat tax evasion. Target: July 1, 1999 — Not met
  - Establish a bipartite committee (private-public) to monitor implementation of tax and customs administration reform. Target: End-May 2003 — Met
- Performance Criteria:
  - Start operations of the Tax Bureau for Large Taxpayers. Target: End-March 1997 — Not met
  - ASYCUDA 2.7 customs system to become operational at the 3 main customs offices. Target: June 30, 2001 — Met
  - Bill to revise upward the mining royalty and lower the excise tax. Target: End-2001 — Met
  - Adopt new regulations authorizing deferment of VAT payment obligations on capital goods imports until the monthly declaration following the import. Target: End-June 2003 — Not met
  - Issue a resolution approving the newly installed ASYCUDA ++ software and setting a date for use by customs. Target: End-December 2004 — Met
  - No tax or tariff exemptions beyond those specified in the 2004 budget law. Target: End-December 2004 — Met
- Structural benchmarks (selected):
  - Reduction of the number of prohibited customs nonmenc latures. Target: End-June 1989 — Met
  - Install new version of SYDONIA software in the customs administration. Target: End-1999 — Not met
  - ASYCUDA 3 ++ installed in three most important offices. Target: End-September 2001 — Not met
  - ASYCUDA 3 ++ installed in four more offices. Target: End-December 2001 — Not met

II. Fiscal policy management (including expenditure policy)
- Prior Actions:
  - Complete the harmonization of the budget and the public accounting nomenclature in accordance with Fund technical assistance recommendations. Target: End-June 1999 — Not met
  - VAT reimbursement arrears will be settled. Target: End-May 2003 — Met
- Performance Criteria:
  - Treasury computer system designed to centralize each month the accounts of the 22 main treasury offices will be operational. Target: End-November 2001 — Met
  - Submission of draft budget execution laws for 2000 and 2001 to the Audit Court. Target: End-December 2003 — Met
- Structural benchmarks (selected):
  - Presentation of budget on three agreed bases. Target: End-June 1990 — Met
  - Apply the new nomenclature in the preparation of the budget law for 2000. Target: August 1, 1999 — Met
  - Integrate the administrative personnel database and pay systems. Target: End-June 2001 — Met
  - Separation of functions of the Chairman of the Central Procurement Committee and the Director General of Expenditure Commitment Control. Target: End-June 2001 — Met
  - Study on improvement in operation of the State Inspector General. Target: End-June 2001 — Met
  - Treasury's monthly balance sheets up to end 2001 will be prepared. Target: End-June 2003 — Not met

III. Monetary and exchange rate policies
- Performance Criteria:
  - Introduction of new money market. Target: End-October 1990 — Met
- Structural benchmarks:
  - Replacement of the existing system of exchange rate determination by a continuous interbank system. Target: End-March 2004 — Delayed (Jan. 2004)
  - Issue a resolution by the Board of Executive Directors of the Central Bank (BCM) establishing operational guidelines for BCM intervention in the interbank foreign exchange market. Target: End-December 2004 — Met

IV. Financial sector reform
- Performance Criteria:
  - Complete clearing of the BTM and BFV portfolios with private sector agreement to 25 percent participation in the equity capital of at least one of the two banks. Target: End-June 1989 — Not met
  - Complete organizational, financial and actuarial audits of the pension systems for government workers. Target: End-May 2000 — Met
- Structural benchmarks (selected):
  - Privatization of BNI. Target: End-December 1989 — Not met
  - Finalize a scheme for restructuring nonperforming assets of the two public banks (BTM and BFV). Target: End-September 1997 — Not met
  - Authorize legislation ordering debtors in default to one of the two banks being privatized to pay their debts. Target: End-September 1999 — Met
  - Draw up activity plan for the central bank's internal audit department and organizational chart. Target: End-March 2003 — Met
  - Conduct an internal audit of management of central bank reserves. Target: End-June 2003 — Met
  - Publication of the BCM's 2001, 2002, and sub-present financial statements and attendant audit opinions in the Journal Officiel. Target: End-March 2004 — Met
  - Publish the BCM's complete audited financial statements for 2003. Target: End-December 2004 — Met

V. Civil service reform
- Performance Criteria:
  - Correct the budgetary wage bill for "ghost" workers identified in the civil service census of April 1999. Target: End-August 1999 — Delayed (end-March 2000)
- Structural benchmarks:
  - Completion of census of central government personnel. Target: End-October 1989 — Delayed (Jun-90)
  - Finalization of strategy for civil service reform. Target: End-June 1997 — Not met
  - Implement a new code of conduct for the civil service. Target: End-February 2000 — Not met

VI. Public enterprise reform (including privatization)
- Prior Actions and Performance Criteria (selected):
  - Obtain approval of AFH group shareholders for memorandum of agreement on purchase of state-owned bank BTM. Target: End-May 1999 — Not met
  - Obtain a sales contract for the oil company (SOLIMA). Target: End-June 1999 — Not met
  - Offset JIRAMA's debts to private sector petroleum suppliers with these suppliers' tax obligations. Target: Mid-December 2002 — Met
  - Repayment agreement between government and BCM regarding SOLIMA's debt assumed by the government. Target: End-May 2003 — Met
  - Begin audit of JIRAMA's operations and financial condition. Target: June 15, 2003 — Met
  - Complete the bidding process for the privatization of HASYMA. Target: October 1, 2004 — Met
- Structural benchmarks (selected):
  - Privatization of 20 public enterprises. Target: End-October 1989 — Not met
  - Obtain a sales contract for the national airline (initial timing end-September 1999). Target: End-September 1999 — Not met
  - Obtain a sales contract for the telecommunications company (initial timing end-Sept. 1999). Target: End-September 2000 — Delayed (end-Sep. 04)
  - General shareholders meeting of SOLIMA to examine accounts for fiscal 2000. Target: End-February 2003 — Met
  - General shareholders meeting of SOLIMA to examine accounts for fiscal 2001. Target: End-July 2003 — Met

VII. Sectoral policies / Other
- Prior action:
  - External commercial arrears to a preshipment inspection company will be settled. Target: May 1, 2003 — Met
  - Hire staff and begin operation of the Independent Anti-corruption Bureau. Target: October 1, 2004 — Met
- Structural benchmarks (selected):
  - Elimination of all controls on profit margins. Target: End-March 1989 — Met
  - Abolition of Stabilization Funds for coffee and cloves. Target: End-December 1989 — Delayed (Jun-90)
  - Abolition of restrictions on transfers of dividends and private debt service payments. Target: End-November 1990 — Met
  - Liberalization of air transport on domestic routes. Target: End-November 1990 — Not met
  - Publish in the official gazette the new formula for pump prices for gasoline. Target: End-July 1999 — Met

*Source: Madagascar program material and program tables, 1988–2004.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05363.pdf_