IMF Staff Completes 2024 Article IV Mission to Madagascar
IMF News, October 18, 2024
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- Published: October 18, 2024
Mission and context
- Mission led by Frederic Lambert conducted discussions for the 2024 Article IV consultation and first reviews of the arrangements supported by the Extended Credit Facility (ECF) and the Resilience and Sustainability Facility (RSF) during September 30-October 11 in Antananarivo.
- Press Release No. 24/380.
Economic outlook and key statistics
- Growth:
- Madagascar’s growth is expected to remain stable at 4.2 percent in 2024.
- Growth projected to accelerate to 4.6 percent in 2025.
- After 4.2 percent growth in 2023, economic activity remained steady in early 2024.
- Inflation:
- Inflation rose to 7.8 percent in August 2024, driven by energy and food prices.
- Average annual inflation is expected to decline to 7.2 percent in 2025.
- Inflation projected to gradually converge to 6 percent over the medium term.
- External sector:
- The current account deficit would stabilize under 5 percent of GDP.
- Fiscal:
- The primary fiscal deficit is expected to reach 2.7 percent of GDP in 2024, assuming no oil customs tax arrears.
Downside risks and upside factors
- Downside risks:
- Regional conflicts, such as those in Gaza and Israel, and the ongoing war in Ukraine, which could disrupt trade, finance, and commodity prices.
- Domestic risks: water and electricity shortages, deteriorating infrastructure, governance issues, and climate shocks threatening food price stability and security.
- Upside factors:
- Implementing the General State Policy (PGE) reforms could enhance productivity and growth.
Fiscal recommendations and public financial management
- Revenue mobilization:
- Increase tax revenues to finance investment and social spending.
- The 2025 budget should include a combination of tax policy and administrative measures, including a reduction in tax expenditures by MGA 280 billion, to support the government’s revenue objectives.
- Over the medium-term, consider a gradual removal of costly import tax and VAT exemptions and other reforms to expand the tax base.
- Implement a comprehensive excise tax reform and revise personal income taxation towards more progressivity.
- Tax administration reforms:
- Reforms of the tax and customs administrations to improve tax audit transparency and the appeal process and expedite VAT credit refunds.
- Managing fiscal risks:
- Transfers to JIRAMA should be budgeted and gradually reduced.
- Implement JIRAMA’s recovery plan developed with World Bank technical assistance, with strong executive backing.
- Negotiate settlement with fuel distributors to resolve cross-liabilities within the 2024 budget, ensure compliance with fiscal and para-fiscal obligations, and settle government liabilities.
- Absence of settlement with fuel distributors would require expenditure cuts to prevent an increase in the fiscal deficit.
- Fuel pricing mechanism:
- Implement an automatic fuel price adjustment mechanism to adjust pump prices monthly to reflect changes in market prices within a band of +/-200 ariary per liter.
- Public investment and budget execution:
- Improve selection, prioritization, and management of public investment projects to enhance spending efficiency.
- Reinforce public financial management processes to improve budget execution and traceability.
- The approval of the budget law by Parliament should be sufficient to start the execution of spending or investment projects, without further authorization by the Council of Ministers or the Commitment Monitoring Bureau (BSE).
Monetary policy and financial stability
- Central bank guidance:
- The central bank should stand ready to raise its policy rates to keep inflation on a downward path.
- Continue to manage liquidity through open market operations and communicate more predictably and transparently about monetary policy and liquidity management to enhance credibility and accountability.
- Foreign exchange interventions should be limited to smoothing excess volatility and building external buffers, without resisting underlying market forces.
- Further develop the interbank market and strengthen the interest rate channel of monetary policy to support the new monetary policy operational framework.
- Financial sector:
- Safeguarding financial stability is crucial for the development of private credit markets.
Governance, structural reforms, and private sector confidence
- Governance priorities:
- Strengthen governance to deliver higher and more inclusive growth.
- Address lack of transparency and predictability, and the suspicion of state capture by private interests that undermine private sector confidence and public trust.
- Ensure legal stability, avoid retroactive regulations, enforce existing laws, provide effective protection of property rights and enforcement of contracts, ensure a level-playing field, and create effective grievance redress mechanisms.
- Anticorruption and governance support:
- Preparation of a new anticorruption strategy covering 2025-2030 is an opportunity to accelerate momentum.
- IMF will support the authorities’ efforts with a Governance Diagnostic Assessment to be finalized in 2025.
Social protection, inclusion, and climate resilience
- Social safety nets:
- Stronger social safety nets are essential to support resilience.
- Establish food banks to reduce food insecurity and support local food production.
- Expand the single social registry with clear eligibility criteria to improve social assistance targeting.
- More resources needed for education and health, with transparent and merit-based recruitment.
- Digitalization can boost financial inclusion and cash transfer programs.
- Climate finance and resilience:
- Building climate resilience should be a government priority.
- With support from the Resilience and Sustainability Facility and the World Bank Group-IMF Enhanced Cooperation Framework for Climate Action, Madagascar should develop a national climate finance strategy to attract climate related investments.
Next steps and closing
- Discussions on the first reviews of the ECF and RSF arrangements will continue virtually in the coming weeks.
- The IMF team thanked the Malagasy authorities and other counterparts for candid and productive discussions.
Source: Press Release No. 24/380, IMF staff statement concluding the mission, October 18, 2024.