Press Release No. 08/12

Press Release: IMF Executive Board Completes Second and Third Reviews Under Madagascar's Three-Year PRGF Arrangement and Approves US$25 Million Disbursement

January 31, 2008

The Executive Board of the International Monetary Fund (IMF) has completed the second and third reviews of Madagascar's economic performance under a three-year Poverty Reduction and Growth Facility (PRGF) arrangement. The completion of the reviews enables Madagascar to draw an amount equivalent to SDR 15.7 million(about US$25 million), bringing the total disbursements under the PRGF to SDR 31.4 million (about US$ 49.9 million).

In completing the review, the Board also granted waivers for the nonobservance of a quantitative performance criterion pertaining to the ceiling on the net domestic financing requirement of the central government, a quantitative performance criterion on the floor on tax revenue, a structural performance criterion on the implementation of the Central Bank of Madagascar recapitalization plan, and a structural performance criterion on the issuance by the Ministry of Economy, Finance and Budget of quarterly commitment ceilings to all ministries. The Board also modified two performance criteria.

The Executive Board approved the three-year arrangement on July 21, 2006 (see Press Release No. 06/163), for a total amount of SDR 54.49 million (about US$ 87.5 million) to support the government's economic program for 2006-2008.

The PRGF is the IMF's concessional facility for low-income countries. It is intended that PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.

Following the Executive Board's discussion of Madagascar's IMF-supported economic program on January 30, 2008, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, said:

"The Malagasy authorities are to be commended for the progress achieved in implementing their economic program in 2007. Despite higher world energy prices, real GDP growth grew strongly, inflation declined, and the international reserves position improved.

"The key policy initiatives underpinning the 2008 budget are to mobilize revenue, which remains low by international standards; finance priority spending; and strengthen public financial management. The landmark tax policy reform introduced in the 2008 budget aims at simplifying and increasing the efficiency of the tax code and will contribute to the needed revenue mobilization, as will ongoing tax and customs administration reforms. This will allow for an increased allocation of budgetary resources to priority sectors, which will need to be accompanied by steps to further strengthen public financial management.

"The authorities' commitment to continue gearing monetary and exchange rate policy towards reducing inflation while preventing an overshooting of the exchange rate is welcome. The central bank should continue to seize the opportunity provided by large mining investment inflows to build up its foreign exchange reserves while mopping up excess liquidity through open market operations.

"The authorities' intention to finalize and implement their financial sector strategy is welcome. They should persevere in their efforts to improve conditions for private sector-led financial sector development.

"The reform of the national public utility company (JIRAMA) will be important for macroeconomic performance, and an ambitious plan for the electricity sector needs to be designed and implemented.

"Directors noted the Malagasy authorities' failure to ensure the accuracy of information provided to the Board on the waivers granted by the authorities from the required standard procedures for the import, clearance, and valuation of goods. This resulted in a noncomplying disbursement following the conclusion of the first review under the PRGF arrangement in December 2006. Directors took note of the authorities' explanation for the provision of inaccurate information, as well as of the independent audit undertaken. In view of the prompt corrective actions taken to improve controls at the customs administration, and the authorities' commitment to the objectives of the program, the Executive Board decided to waive the incident of nonobservance of the continuous performance criterion that gave rise to the noncomplying disbursement," Mr. Portugal stated.