Press Release No. <a name="P16_75"></a>04/140

The following statement was released in Antananarivo on July 6, 2004 by an International Monetary Fund (IMF) staff mission:

"The IMF supports Madagascar's economic policies and reforms under the Poverty Reduction and Growth Facility (PRGF) arrangement approved in March 2001 for an amount of SDR 79 million (about FMG 1.2 trillion). The fourth review under the PRGF arrangement was completed by the IMF Executive Board on March 17, 2004. An IMF mission visited Madagascar from June 21 to July 6, 2004, to initiate discussions with the Malagasy authorities on the fifth review under the program and to assess economic performance and the strategies to be implemented to cope with the recent sharp swings in the foreign exchange markets. The mission also met with private sector representative, trade unions, and donors.

"The first half of 2004 was dominated by the sharp depreciation of the Malagasy franc. As a result, combined with the impact of Cyclones Elita and Gafilo and rising world oil prices, inflationary pressures have increased substantially since the beginning of 2004, and inflation reached 9.3 percent (year-on-year) in May 2004. Despite the impact of these two cyclones, real GDP growth is expected to remain buoyant in 2004, at a rate close to the program rate (5.3 percent, compared to 6 percent), thanks mainly to the good performance of the export processing zone (EPZs), construction, and a rebound in the agricultural sector.

"However, the pursuit of economic growth and the maintenance of the recently observed competitiveness gain, as well as any increase in Madagascar's growth potential, would be jeopardized if inflation is not rapidly brought under control. Controlling inflation is also vital to the success of the poverty reduction strategy put in place under the PRSP, because the poorest people are also those most vulnerable to inflation.

"In the months ahead, it is thus essential that inflation be contained, with a view to bringing it down to 5 percent in 2005, consistent with the poverty reduction strategy paper (PRSP). It is also important to reduce the considerable volatility in the foreign exchange market, in order to make economic activity more stable. To this end, the authorities have already begun to implement a set of policy measures, including the imposition of VAT on non-capital goods, reducing the current expenditure of the government, raising the reserve requirement ratio and the central bank's base rate, as well as structural measures to improve the money and foreign exchange markets. "These measures have started to produce results, as evidenced by the recent stabilization of the foreign exchange market. In addition, some structural reforms aimed at encouraging the opening of the economy and stronger competition, especially the liberalization of the transportation sector, are helping to hold price increases down.

"The mission welcomes the authorities' commitment to pursue its ambitious economic reform program, with a view to producing strong and noninflationary growth. This commitment represents a significant step toward completion of the fifth review of the PRGF program. An IMF follow-up mission will travel to Antananarivo next month to assess the most recent fiscal, monetary, and structural performances and, depending on the outcome, the fifth review will be submitted to the IMF Executive Board.

"The mission also reviewed the key measures and reforms adopted by the authorities in order to reach the completion point under the Initiative for Heavily Indebted Poor Countries (HIPC). Further progress in securing debt relief under the HIPC, in particular submission of the first annual report on poverty reduction strategy paper (PRSP) implementation in July 2004, and a good performance under the PRGF program, will make it possible to present the completion point to the IMF and World Bank Boards."