Press Release No. 19/207

IMF Staff Completes Program Review Mission to Madagascar

June 11, 2019

• Economic growth is expected to exceed 5 percent again this year, reflecting higher public investment spending and intensified private sector activity.
• The authorities’ plans to boost public investment and social spending critically depend on continued effort to raise revenue and reduce lower priority spending, especially subsidies in the fuel and electricity sectors.
• The authorities and staff agreed to continue improving governance and the business climate, including by stepping up the fight against corruption.

A team from the International Monetary Fund (IMF) led by Charalambos Tsangarides, Mission Chief for Madagascar, visited Antananarivo on May 29-June 11, 2019. The team held discussions with the authorities on the fifth review of Madagascar’s economic reform program supported by the IMF’s Extended Credit Facility (ECF). [1]

At the end of the mission, Mr. Tsangarides issued the following statement:

“The discussions made good progress and are continuing, with a view to bringing the review to the Executive Board of the IMF for consideration in the coming weeks.

“Economic conditions continue to improve, and the macroeconomic outlook remains favorable. In 2018, growth reached 5.2 percent driven by a rebound in agricultural production and investment. Despite higher oil prices, the current account recorded a surplus, thanks to strong vanilla and mining exports. After peaking in late 2017, inflation steadily decelerated to 6.1 percent at end-2018. For 2019, economic prospects remain positive, with growth expected to stabilize above 5 percent supported by investment, exports, improvement in the energy sector, and construction.

“ The implementation of the ECF-supported program has remained satisfactory through 2018 and is expected to remain on track in 2019 . The authorities met all the end-2018 performance criteria, despite a shortfall in domestic revenue collection. However, the indicative target on domestically financed priority social spending was missed. The central bank successfully accumulated record levels of foreign exchange reserves. The authorities made good progress on the structural reform agenda, albeit at a slower pace than envisaged. However, delays in adjusting fuel pump prices in a context of high world oil prices led to increased liabilities to distributors which could weigh negatively on the budget.

“Staff welcomed the authorities’ commitment, in line with the General Policy Program of the State (Politique Generale de l’Etat) to accelerate economic reforms, improve governance, and step up the fight against poverty, including through the ECF-supported program. Addressing these priorities will critically depend on improving domestic revenue collection, including by revising tax expenditures and exemption regimes, as well as containing lower priority public spending, such as subsidies in the fuel and electricity sectors. While budget execution has been low so far in 2019, the recently adopted revised finance law improves the quality of spending with more budgetary space allocated to infrastructure, health, and education expenditures. Given the associated limited deterioration of the overall fiscal balance, a strict prioritization of investment projects and monitoring of debt sustainability will be critical to sustain economic growth.

“Staff urges the continuation of the ongoing discussions between the authorities and the operators to implement the plan on fuel pricing; setting a new fuel price structure is an essential step before settling existing liabilities with distributors. To avoid the recurrence of arrears to the distributors in the future, staff urged authorities to adopt a pricing mechanism that aligns pump prices with costs, reflecting world price developments, along with targeted social measures to protect the most vulnerable from the impact of potential future price adjustments. Improving the financial situation of the public utility JIRAMA to ensure it does not weigh on the budget will require continued efforts to raise revenues and improve governance, including by intensifying the fight against fraud. Staff also support cost-cutting measures that could be achieved through the ongoing renegotiation of contracts with electricity and fuel suppliers.

“ The authorities and staff agreed to continue improving governance and the business climate, including by stepping up the fight against corruption , a key objective of the new government and the ECF-supported program. In this respect, the adoption of the draft law on illicit asset recovery has become an urgent priority to complete the legal framework to fight corruption. Staff also commended the authorities for structural reforms undertaken at the central bank to strengthen the monetary policy framework and boost financial sector development, and at the Ministry of Economy and Finance to better manage fiscal risks and strengthen public procurement procedures.”

“The mission met with Prime Minister Christian Ntsay, Minister of Economy and Finance Richard Randriamandrato, Minister of Energy, Water, and Hydrocarbons Vonjy Andriamanga, Central Bank of Madagascar Governor Alain Rasolofondraibe, senior officials, and development partners.”

“The mission thanks the Malagasy authorities for their strong cooperation and the constructive discussions.”