Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with the Republic of Madagascar

September 27, 2005

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report for the Article IV consultation with the Republic of Madagascar may be made available at a later stage if the authorities consent.

On June 1, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Madagascar.1


Since the mid-1990s, Madagascar has made significant progress in terms of macroeconomic stabilization and structural reform. Political stability has been broadly restored following the disputed 2001 presidential elections and the ensuing political crisis. Since that time, the authorities have taken measures to reestablish investor confidence and private sector growth was reinvigorated. Key structural reforms were implemented, albeit with significant delays, in particular in the area of public enterprise reform and the fight against corruption. However, the economy remains vulnerable to shocks, including cyclones, and policy slippages. Progress in domestic revenue mobilization and in strengthening the budget process also remained modest, reflecting in part the country's limited institutional capacity. Madagascar reached the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative in October 2004.

Macroeconomic developments in 2003 and 2004 were dominated by the sharp depreciation of the national currency, and rising inflationary pressures, with year-on-year consumer price inflation reaching 30 percent at end-February 2005. At the same time, the current account deficit widened considerably in 2004, reflecting the significant decline in the volume of vanilla exports and the surge in imports following, among other factors, the tax and tariff exemptions granted in 2003. In spite of a disappointing revenue performance and some expenditure overruns toward the end of the year, the public finances position strengthened in 2004, as the authorities were able to contain overall expenditures, and particularly wages, in the difficult context of mounting inflationary pressures.

In the medium term, real GDP growth is expected to average 6 percent per annum and fiscal consolidation is projected to continue, driven by an improvement of the revenue performance and modest expenditure increases. The current account position should also improve over the medium term. While remaining fragile, the external debt position should remain sustainable, provided the authorities continue to limit new external financing to grants and to highly concessional loans. There are several risks to this outlook however, especially in the external sector, where the impact of the expiry of preferential agreements on textiles exports could turn out to be larger than currently expected.

Executive Board Assessment

Executive Directors commended the Malagasy authorities' greater ownership of economic policies and consequent improved track record of policy implementation in recent years. They welcomed Madagascar's improved growth performance, the authorities' success in stabilizing the exchange rate in the second half of 2004, and the strengthening of the external reserve and debt positions. However, Directors noted that poverty remains prevalent and the external debt vulnerable, and that major uncertainties surround Madagascar's medium-term outlook. They therefore welcomed the authorities' commitment to contain inflation, preserve Madagascar's competitiveness, and gradually build-up official reserves. This commitment, together with accelerated progress on structural reforms and the assistance of the donor community, will be crucial for Madagascar to attain macroeconomic stabilization and the Millennium Development Goals.

Directors stressed that containing inflation, a key macroeconomic objective for 2005, hinges on the steadfast and timely implementation of the envisaged tight monetary and fiscal policies as well as on the evolution of the world prices of oil and rice. Directors welcomed the recent measures taken to improve coordination within the Ministry of Finance and between the Ministry of Finance and the central bank.

Directors expressed disappointment that Madagascar's revenue performance remains weak—reflected in a relatively low revenue-to-GDP ratio—despite prolonged Fund engagement with the country, substantial technical assistance, and the significant customs reforms implemented. They attached high priority to a coherent and predictable tax policy that eschews ad hoc tax exemptions, and to continued strengthening of tax and customs administration. They welcomed the authorities' commitment to pursue medium-term, revenue-enhancing policies in the context of a comprehensive reform of the tax system, and urged the authorities to forge a consensus on the tax reform's goals and strategy.

Directors welcomed the measures taken to avoid the recurrence of the spending slippages that took place in 2003 and 2004, including better control of military wages and the elimination of emergency spending procedures. They emphasized that further strengthening of public expenditure management, including better alignment of the budget with the priorities of the PRSP and proper monitoring of how resources freed by the HIPC Initiative are spent, will be critical for improving the quality and efficiency of public spending. They also encouraged implementation of a comprehensive civil service reform.

Directors encouraged the central bank to take further steps to improve the effectiveness of monetary policy, and to be more proactive in managing liquidity. In this regard, they welcomed the authorities' intention to implement the recommendations of a recent Fund technical assistance mission. They also endorsed the authorities' flexible exchange rate policy, which limits exchange market intervention to smoothing operations, and agreed that the current exchange rate appears to be broadly appropriate. Directors commended the recent efforts to improve the financial system and the progress made in implementing the recommendations of the safeguards assessment report. They encouraged the authorities to strengthen banking supervision further, and looked forward to the findings and recommendations of the ongoing Financial Sector Assessment Program.

Directors stressed that structural reforms are necessary to diversify the export base and maintain external competitiveness in the period ahead. The expiration of the Agreement on Textiles and Clothing in 2005 and the expected end of the third-party apparel provision of the United States' African Growth and Opportunity Act in 2007 reinforce the importance of strengthening competitiveness. Directors were therefore encouraged by the recent pick-up in the pace of structural reform, and urged the authorities to maintain the momentum. They welcomed the lowering of external trade barriers, and emphasized the need for complementary measures to promote a competitive business environment, including the development of a comprehensive strategy for the utilities sector. Land ownership rights and registration remain critical issues that should be resolved as soon as possible. Directors welcomed the creation of the anti-corruption bureau, and more generally the government's efforts to become more transparent, and urged the authorities to continue to implement vigorously the anti-corruption reform program.

Directors welcomed Madagascar's attainment of the completion point under the enhanced HIPC Initiative in October 2004. They supported the authorities' efforts to obtain full HIPC assistance from all creditors, and recommended a prudent borrowing policy and strengthened debt management to preserve external debt sustainability.

Directors observed that Madagascar's limited absorptive and institutional capacity has adversely affected the implementation of structural reforms, and urged the authorities to address this issue promptly with the help of the international community, including the IMF. They underscored that shortcomings in economic and social data hamper policy formulation, implementation, and monitoring. Directors stressed the need to finalize the action plan for capacity building, especially at the Ministry of Finance, the central bank, and the statistical institute, in 2005. Directors emphasized that coordinated and steady donor support will be crucial for the success of the authorities' capacity-building efforts.

Directors generally agreed with the main findings and recommendations of the ex-post assessment report. In particular, they concurred that a successor PRGF arrangement could help Madagascar achieve its poverty reduction goals and make significant progress toward the attainment of the Millennium Development Goals, at a time when the economy remains vulnerable and foreign reserves fairly low. Among the lessons to be learnt for future program design, Directors highlighted the importance of structuring conditionality so as to reinforce the fiscal revenue base, improve public expenditure management, accelerate capacity building efforts, and implement policies that maintain Madagascar's competitiveness. It will also be important to continue to build national ownership of policies through a close dialogue with civil society. Furthermore, better alignment of technical assistance with policy priorities will be crucial to improve the effectiveness of such assistance.

Madagascar: Selected Economic Indicators








(Annual percent change, unless otherwise indicated)

National accounts and prices


Change in real GDP





Change in consumer prices (end of period)






Money and credit


Broad money (M3)






External sector (in terms of SDRs)


Exports, f.o.b.





Imports, c.i.f.





Current account balance (in percent of GDP)


including official transfers





excluding official transfers





Gross official reserves (in millions of SDRs)

(in months of imports of goods and nonfactor services)










(In percent of GDP)

Public finance


Overall government balance


Including grants





Excluding grants





Tax revenue








National poverty rate (in percent of total population)



Source: Malagasy authorities.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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