Press Release: IMF Approves Three-Year ESAF Loan for Madagascar

November 27, 1996

The International Monetary Fund (IMF) today approved a three-year loan for Madagascar under the Enhanced Structural Adjustment Facility (ESAF) 1, for an amount equivalent to SDR 81.4 million (about US$118 million), to support the government's economic reform program for 1996-99. The first annual loan, equivalent to SDR 27.1 million (about US$39 million), is available in two equal semiannual installments.


Real per capita income in Madagascar has fallen over the past two decades by more than 40 percent. In 1994, the authorities sought to restore confidence by introducing policies to liberalize the economy. In a broad reform of the exchange and trade system, they allowed the Malagasy franc to float in an interbank foreign exchange market, but, in the absence of adequately tight financial policies, inflation soared and economic activity stagnated. However, tight monetary policy in 1995 succeeded in bringing down inflation to 10 percent by October 1996 from an annual peak of 64 percent in April 1995.

On the structural front, revised statutes calling for the independence of the central bank were adopted in June 1994, and a new banking law was adopted in early 1996. Progress was also made in liberalizing the vanilla, flour, and petroleum industries, and preliminary steps were taken to open up regional air transportation. Finally, key legislation on divestiture of public enterprises and private sector promotion was passed by the national assembly in August 1996.

Medium-Term Strategy and the 1996-97 Program

The government's medium-term objectives are to restore confidence in order to create the conditions for a sustained recovery of private investment, and to seek a reduction in poverty. Economic growth is programmed to reach 4.5 percent by 1999 from 2 percent in 1996, while year-on-year inflation is expected to fall to 3 percent in 1999 from 10 percent in 1996.

Consistent with the medium-term framework, the program for 1996-97, which is supported by the first annual ESAF loan, aims to increase real GDP growth to 3.0 percent in 1997; reduce inflation to 7 percent by the end of 1997; and to contain the external current account deficit (excluding official transfers) at 7.2 percent of GDP in 1997.

To these ends, the government intends to reduce the overall fiscal balance (excluding grants) to 6.9 percent of GDP in 1997 from 8.5 percent in 1996. Accordingly, it will seek to increase tax revenue to 9 percent of GDP in 1997 from 7.8 percent in 1996, mainly by broadening the tax base and strengthening tax and customs administration. Current expenditure (excluding interest) will be maintained at about 6 percent of GDP, and the government will pay particular attention to the resources allocated to basic health services, primary education, public security, and the judiciary. Monetary policy will help rein in inflation by limiting the growth of broad money. In line with the decline in inflation, the central bank will lower nominal interest rates, while maintaining them at positive real levels.

Structural Reforms

Structural reforms under the program will seek to improve the business environment; divest public enterprises; strengthen tax and customs administration and reform the value-added tax; improve government operations; combat poverty by improving basic health and primary education facilities, as well as public security; raise agricultural productivity; and complete the liberalization of the foreign exchange market. The government will also initiate a civil service reform aimed at attracting, training, and motivating skilled personnel.

Addressing Social Issues

The government's strategy to alleviate the pervasive poverty in Madagascar lies in improving the provision of essential services. Accordingly, it will restructure expenditures with a view to promoting growth and enabling the least privileged social groups to participate in the country's development.

The Challenge Ahead

The two main risks to the program are that a continuation of political instability may prevent a return of confidence, and that the authorities may not succeed in reforming tax and customs administration, so that fraud would continue to be pervasive and investor confidence would remain low.

Madagascar joined the IMF on September 25, 1963, and its quota 2 is SDR 90.4 million (about US$131 million). Its outstanding use of IMF financing currently totals SDR 39.8 million (about US$58 million).

Madagascar: Selected Economic Indicators

1995* 1996** 1997** 1998** 1999**
(Percent change)
Real GNP Growth 1 .8 2.0 3.0 3.6 4.5
Consumer price index (end-of-period) 37.3 10.0 7.0 5.0 3.0
(Percent of GDP)
Overall fiscal balance, excluding grants (deficit-) -9.0 -8.5 -6.9 -6.6 -5.5
External current account, excluding grants (deficit-) -10.4 -7.7 -7.2 -7.4 -6.5

Sources: Malagasy authorities; and IMF estimates and projections
* Preliminary.
** Program.

1 The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years, with a 5-year grace period.

2 A member's quota in the IMF determines, in particular, its subscription, its voting power, its access to IMF financing, and its allocation of SDRs.


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