For more information, see Republic of Madagascar and the IMF

The following item is a Letter of Intent of the government of Madagascar, which describes the policies that Madagascar intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Madagascar, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
 
His Excellency
Mr. Tantely Andrianarivo
Prime Minister
Minister of Finance and Economy

Antananarivo, February 9, 2001

Mr. Horst Köhler
Managing Director
International Monetary Fund
700 19th Street NW
Washington, D.C. 20431
U.S.A.

Dear Mr. Köhler:

I am pleased to inform you of the following.

1. The attached Memorandum of Economic and Financial Policies (MEFP) describes the policies and measures that the Government of Madagascar intends to adopt and pursue in 2001-03. The main objective of our medium-term policies is to alleviate poverty in the context of sustained growth, strengthened institutional infrastructure, and good governance. To support these policies and reforms, the Government of Madagascar requests a new three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) in an amount equivalent to SDR 79.43 million, corresponding to 65 percent of Madagascar's quota in the International Monetary Fund and a first disbursement in an amount equivalent to SDR 11.347 million.

2. In close consultation with representatives of civil society and foreign donors, the Government of Madagascar has prepared an interim Poverty Reduction Strategy Paper (I-PRSP), which was discussed by the IDA and IMF Executive Boards in the context of the HIPC initiative decision point in December 2000. This paper outlines the main thrust of the government's strategy to improve economic performance with the participation of the poor; to develop essential basic services and extend the safety nets to the most vulnerable members of society; to put in place an institutional framework conducive to economic growth and poverty reduction; and to build capacities to improve governance. The policies and measures described in the attached Memorandum are consistent with the interim PRSP, on which it is based.

3. Economic performance in 1999-2000 was satisfactory overall, despite the serious destruction caused by cyclones in the first few months of 2000. The end-June performance criteria were met, as were all the end-September benchmarks, but one.

4. The first review under the arrangement will be completed by end-October 2001. It will cover economic and financial developments in the first half of 2001 and the outlook for the rest of the year. The subsequent reviews will take place on a semiannual basis. The Government of Madagascar will provide the Fund with any information it may require concerning the implementation of the economic and financial program.

5. The Government of Madagascar believes that the policies described in the attached Memorandum are sufficient to achieve the program targets, but is prepared at any point during the program period to adopt such measures as may be deemed necessary to that end.

Sincerely yours,

/s/


Tantely Andrianarivo
Prime Minister
 

Memorandum of Economic and Financial Policies for 2001-03

I. Introduction

1. Since 1996, the Malagasy government has implemented a program of macroeconomic and structural reforms to restore internal and external financial viability, to strengthen economic growth, and to reduce poverty. The government strengthened the reform strategy in October 1996 by adopting a medium-term economic and financial program supported by the Fund through a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF). The second annual arrangement covered the period July 1999 - November 2000. The Malagasy government's adjustment effort is also supported by the World Bank and bilateral and multilateral development partners.

2. The economic and financial program for 1999-2000 has been carried out with satisfactory results. Key reforms have been implemented with determination and significant progress has been made in restoring macroeconomic stability and creating a favorable environment for sustained growth. Since 1996, GDP growth has steadily risen to reach 4.8 percent on average in 1999-2000. Following an increase in prices of 14.4 percent in 1999, inflation, as measured by the consumer price index (CPI), was reduced to 8.5 percent in 2000 on a year-on-year basis (based on provisional estimates), owing to prudent financial policies. The external current account deficit (including official transfers) rose from 5.4 percent of GDP in 1999 to 7.5 percent of GDP in 2000, reflecting the rise in oil prices and a rapid increase in imports of primary commodities and capital goods as a result of spending on reconstruction after the damage caused by the cyclones; this more than offset the good performance of exports (an increase of about 21 percent in SDR terms, largely due to a sharp expansion of free trade zone exports). Because of significant inflows of private capital and foreign aid, and longer payment terms for petroleum product imports, the central bank's foreign reserves rose in 1999 and 2000 from the equivalent of 7.1 weeks imports of goods and services at end-1998 to 9.2weeks by end-2000, thereby exceeding the program targets.

3. The fiscal situation has improved considerably since 1996 because of an increase in revenues resulting from the substantial broadening of the tax base and a prudent expenditure policy that favored the social sectors. Thus the revenue/GDP ratio rose from 8.7 percent in 1996 to 11.4 percent in 1999 and 12 percent in 2000, based on provisional data (11.7 percent for the tax revenue/GDP ratio). The ratio for 2000 is 0.5 percentage point of GDP below the program target because of the negative impact on customs revenues of the appreciation of the Malagasy franc against the euro during the second half of the year, and the larger than expected impact of the elimination of customs duties on products from Indian Ocean Commission (IOC) member countries. In 2000, total expenditure was below program estimates, owing to lower than-anticipated interest payments and some delays in the investment program. The fiscal deficit (including grants, but excluding structural expenditure costs) amounted to 1.6 percent of GDP in 2000, slightly above the program targets. All the quantitative performance criteria for end-June 2000 and the quantitative benchmarks for end-September 2000 were met, except for tax revenue at end-September 2000 (see Table 1 attached). The indicative quantitative benchmarks for broad and reserve money for end-June and end-September 2000 were not met, partly because of the non sterilization of capital flows by the central bank, and partly because of lower privatization receipts that reduced net reimbursement of debt owed to the banking system by the government. Under the program, the banking sector was rehabilitated, an ambitious privatization program implemented, and civil service reform was initiated.

4. Despite this progress, the economic and financial situation in Madagascar remains fragile, with poverty affecting about 70 percent of the population. Although per capita GDP growth has been positive over the past three years, basic social indicators remain weak and the income level remains very low. Madagascar's economic and social development is still being hampered by an inadequate infrastructure and would benefit from a strengthening of institutional capacities.

5. Against this background, the government is determined to consolidate progress over the next few years by deepening and completing its structural reform and social services development program, by stepping up its fiscal consolidation efforts, and by improving transparency and rigor in managing government finances and public institutions. This should make the overall environment more favorable for private investment and lead to a high, sustainable level of economic growth, and ultimately a significant reduction of poverty. Further decentralization through the creation of six autonomous provinces and the establishment of their institutional framework will bring government closer to the people and promote the participation of the population. To define their program in a comprehensive manner, the authorities have prepared an interim poverty reduction strategy paper (interim PRSP) with the participation of the elected representatives, and civil society, and the assistance of foreign donors. The interim PRSP presents the government's macroeconomic policy framework and the priority action plans in the areas of social and institutional policy and structural reform to be implemented during the period 2001-03. In support of its medium-term program, the government requests a new three-year arrangement under the Poverty Reduction and Growth Facility (PRGF), in addition to request for assistance from the World Bank and other multilateral and bilateral donors. Madagascar reached the decision point under the HIPC Initiative in December 2000. As a result, debt service in 2001-02 will be substantially reduced. The country has defined a program of reform measures, endorsed by the international community, which should enable it to reach the completion point under the enhanced HIPC Initiative in the second-half of 2002.

II. The Medium-Term Economic Policy Framework.

6. As indicated in the interim PRSP, the government's key aim is to strengthen economic growth while improving the distribution of its benefits, in order to secure a permanent reduction in poverty. To this end, the authorities intend (a) to promote strong, sustained, pro-poor economic growth; (b) to implement effective action programs in the priority sectors of education, health, water supply and basic infrastructure, including rural roads; and (c) to press ahead with the institutional reforms already under way. The process of decentralization will be continued with a gradual transfer of responsibilities and financial resources to the six recently created autonomous provinces. This strategy aims at reaching or even surpassing the international target of reducing poverty by one-half by 2015.

7. The government has established the following macroeconomic targets for the next three years: (i) to raise the real GDP growth rate to an average range of 5.8-6.0 percent, equivalent to an average annual increase in per capita real GDP of about 3 percent a year; (ii) to contain inflation, as measured by the consumer price index, at about 3.5 percent on average in 2002-03; (iii) to increase the net foreign assets of the central bank to the equivalent of at least four months of imports of goods and services by 2003; and (iv) to limit the external current account deficit (including official transfers) to about 7 percent of GDP on average during 2001-03.

8. To achieve these macroeconomic targets, the government is determined to implement fully the measures envisaged in its economic and financial program. To consolidate growth, it is committed to maintaining an investor-friendly environment in the sectors with high growth potentials, such as tourism, fisheries, mining, manufacturing, and telecommunications, through the improvement of the legal environment and basic infrastructure. Major steps will be taken to implement a rural development action plan with the support of foreign donors and lenders, so as to promote agriculture growth and contribute to income generation for small farmers. To raise incomes of the poorest, steps will be taken to provide better access to infrastructure (roads, transport, rural markets, communications, power, and drinking water), promote microfinance and microenterprises, and develop labor-intensive public works projects. In this context, gross domestic investment is projected to increase from 17 percent of GDP in 2000 to close to 20 percent of GDP in 2003, while domestic savings is to rise from 6.8 percent in 2000 to about 11 ½  percent of GDP in 2003.

9. Fiscal consolidation will be sought through an increased effort to mobilize tax and nontax revenues, as well as through greater efficiency in the management of public spending. To improve revenues, the government will strengthen and modernize the customs and tax administrations and will continue its efforts to reduce tax fraud and increase its revenues from mining and fisheries royalties. The objective is to increase tax and nontax revenues (excluding privatization revenue and grants) by about 2 percentage points of GDP to 13.3 percent of GDP by 2003. In the area of budgetary management, government policy will focus on substantially improving the budget execution, the procedures for controlling and monitoring government spending, the treasury accounting procedures, and ex post auditing, so as to strengthen the transparency and efficiency of government spending and facilitate expenditure tracking. Current government expenditure will rise by the amount of resources released under the enhanced HIPC Initiative, with a significant rise in budgetary appropriations for health, education and other priority sectors. Wage policy will continue to be prudent, while providing government employees with adequate and competitive salaries. Additional recruitment will be undertaken in the priority sectors, especially the social sectors, supervisory agencies, government financial services, and the judiciary. Public investment spending is projected to rise from 8.7 percent of GDP in 2000 to 11.7 percent of GDP in 2003, with the implementation of new priority public works projects in areas such as rural development and transportation.

10. The monetary authorities will continue to pursue a prudent monetary policy, aimed principally at containing inflation. They will also continue to strengthen the solidity of the banking system and develop microfinance institutions.

11. At the regional level, the government is encouraging increased trade liberalization. In particular, by 2002 it will reduce the number of tariff rates from five to four and reduce the maximum customs duty to 25 percent within the framework of the Cross-Border Initiative/Regional Integration Facility Forum (CBI/RIFF), involving 14 countries of central and southern Africa, and the Common Market for Eastern and Southern Africa (COMESA).

12. The positive impact of these macroeconomic and structural policies on growth and poverty will be reinforced by specific policies and measures to help distribute equitably the benefits of growth to all segments of society, especially the poorest, as described in detail in the interim PRSP. The Malagasy authorities have therefore focused on priority areas such as education, health, water and sanitation, infrastructure and rural development, and institutional development and decentralization. Details of the poverty reduction targets and measures, including the matrix of actions to be taken, are presented in the interim PRSP. These policies and measures will be further developed in the final PRSP. The government will continue to increase budget allocations to the priority sectors listed above and ensure the proper use of HIPC Initiative debt relief.

III. Program for 2001

13. Within the medium-term framework, the main macroeconomic objectives of the program for 2001 to be supported by the PRGF arrangement are as follows: (i) to contain inflation, as measured by the CPI, to an average of 5 percent; (ii) to limit the external current account deficit (including official transfers) to 7.5 percent of GDP; and (iii) to ensure an additional increase in the net foreign assets of the central bank, which should rise to 3 months of imports of goods and nonfactor services. To achieve these objectives, the government will implement the fiscal, monetary, structural, institutional and social measures described below.

A. Macroeconomic Framework

Fiscal policy

14. The improvement of fiscal management is a key element of the government program, with the aim of improving revenue collection, as well as the efficiency, monitoring, and control of expenditure. The budget for 2001 reflects the prioritization of spending described above and should make it possible, owing to the expected proceeds from privatizations, to repay central bank advances to the government, thus providing adequate room for expansion of private sector credit so as to contribute to the attainment of the growth targets. The overall fiscal deficit (on a commitment basis, including grants, but excluding the cost of structural reforms) is expected to reach 4 percent of GDP, compared to 1.6 percent in 2000.1 This rise reflects the expansion of investment expenditure from 8.7 percent of GDP in 2000 to 10.3 percent in 2001. Additional spending for the priority sectors, financed with HIPC debt relief, is estimated at 1.1 percent of GDP, of which 0.7 percent for current outlays. The arrangement performance criteria and benchmarks are presented in the attached Table 2. The attached technical memorandum defines the variables subject to performance criteria and quantitative benchmarks, as well as the adjustment mechanisms.

15. In the area of government finances, the program aims at increasing the revenue/GDP ratio from 12 percent in 2000 to 12.6 percent in 2001 (12.2 percent for tax revenue). The government intends to increase revenues by further improving the efficiency of tax and customs administrations, and by introducing new tax measures, notably in the mining sector.

16. With respect to customs, the government will implement a series of measures designed to improve administrative efficiency and increase revenue, including: (i) the computerization of all existing customs offices and the introduction of the ASYCUDA computer system in two phases: the 2.7 version in early 2001, and the "3 plus plus" version in the second half of the year, which should help fight fraud more effectively; (ii) greater efficiency in the possible use of import preshipment inspection firms; (iii) the allocation of more human, physical, and organizational resources to customs offices; and (iv) the monitoring and surveillance of special customs regimes (such as goods imported under temporary admission).

17. In the area of domestic taxation, the government intends to continue its program to modernize its management tools, in particular by: (i) increasing the human and physical resources assigned to the tax services and computerizing an additional number of regional tax centers; (ii) strengthening taxpayer compliance and the role of local communities in tax assessment, and enhancing the collection of the unified tax for small taxpayers (impôt synthétique); (iii) reducing of fraud in the form of sales without bills of lading; and (iv) increasing the efficiency and the resources of the large-taxpayer unit, with systematic recourse to data cross-checks between tax customs offices and intensified oversight of delinquent taxpayers.

18. The government intends to take steps to increase revenue from mining royalties by: (i) reducing the excise tax, together with a possible upward revision of the mining royalty based on the value of the first transaction, with a view to improving the efficiency of mining revenue collection; and (ii) strictly enforcing the procedures established in Decree 2000-170 for monitoring mining product transactions and the collection of royalties. The allocation of tax revenue between the central government and the provinces may also be reviewed.

19. Partially reflecting the use of resources released under the enhanced HIPC Initiative, current expenditure is projected to rise from 9.4 percent of GDP in 2000 to 10.2 percent in 2001. Additionally, this level of current expenditure also reflects a 9 percent civil service pay increase, intended to offset the salary decline in real terms of recent years. The spending program also reflects the recruitment of additional civil servants in several sectors, including education, health, the judiciary, the expenditure supervision agencies (especially the State Inspectorate General), the tax and customs offices, and the financial management of government personnel. An amount equivalent to 0.2 percent of GDP has also been allocated for the creation of new provincial institutions. Foreign-financed public investments will increase significantly from 5.9 percent of GDP in 2000 to 6.3 percent in 2001. The domestic contribution to the public investment program will also be sharply increased from 2.8 percent of GDP in 2000 to 4 percent in 2001. This will permit the opening of sufficient budgetary lines to pay the value-added tax (VAT) and customs duties due from the government on public investment projects, and to clear arrears on these payments.

20. A subsidy for petroleum products of FMG 200 billion (0.7 percent of GDP) is included in the 2001 program.2 The government will consult with Fund staff on how to allocate the subsidy and on the measures to be adopted in the second half of 2001, with a view to eliminating the subsidy by end-2001.

21. The funds released by the enhanced HIPC Initiative, equivalent to 1.1 percent of GDP, will be allocated to specify activities in the key sectors of education, health, water supply, highway maintenance and rural roads, institutional development, the social safety net, and the monitoring of poverty. The breakdown of these outlays is presented in Table 15 of the interim PRSP. In each of these areas, the government has prepared detailed programs, in consultation with civil society and foreign donors. To ensure that these additional resources are used efficiently and are adequately monitored, the government will submit a supplementary budget law in the first half of 2001, which will include specific line items for the various priority sectors. To facilitate expenditure monitoring, individual appropriations managers will be responsible for the management of these line items. Semiannual budgetary execution and physical implementation reports will also be submitted to interested parties (elected officials and civil society) and external partners. Furthermore, the National Statistics Institute (INSTAT) will conduct a household survey in 2001 to assess the impact of HIPC Initiative financed expenditures on living standards.

22. In the area of expenditure management, the government's objective is to significantly improve budget execution, the procedures for tracking and controlling government spending, treasury accounting procedures, and ex post auditing. Regarding budgetary execution, the government has studied a series of measures so as to correct the slow pace of expenditure execution in the past, and to accelerate expenditure commitment in the course of the year. These measures include: (i) the rapid release of budget allocations at the beginning of each year; (ii) enhanced training for budget credit managers (gestionnaires de crédit); (iii) the recruitment of additional staff for public procurement; (iv) increased recourse to the procedure of delegation of budget authority (délégation de crédit); and (v) strengthening of the system for payments orders execution and expenditure commitment control, so as to speed up the procedures for verification of services rendered and for payments orders (liquidation et ordonnancement). The government also intends to accelerate the payment of duties and taxes on public investments.

23. To improve expenditure tracking and to ensure a flow of reliable data on the pace of budget execution, the government will prepare a master computer plan in 2001 with the help of foreign donors, and will put in place appropriate structures to be able to access rapidly and in full all accounting data of the budget credit managers (gestionnaires de crédit), payment order officers (sous ordonnateurs), and treasury accountants (comptables du trésor). This will allow to establish in a timely manner periodical statements of expenditure at the commitment, verification, payment order, and payment stages. For the Ministries of Education and Health, the current expenditure tracking system will be enhanced, through increased computerization. Regular reports on budget execution and physical implementation for the Ministries of Education and Health will start to be prepared during the course of 2001, with a view to their circulation in 2002.

24. To improve treasury accounting, a program to computerize all the main treasury offices (trésorerie principales) is close to completion, which will enable a more rapid consolidation of treasury operations in 2001. The preparation of opening and closing balances for all main treasury offices for 1998-2000 will be accelerated. The Budget Execution Laws (lois de règlement) for 1998 and 1999 will be submitted to the National Assembly in 2001, and the one for 2000 by end-June 2002.

25. Fiscal audit and control functions will be strengthened by (i) increasing the resources allocated to the State Auditor General (Inspection Générale de l'Etat, IGE) and the National Audit Court (Chambre des comptes); and (ii) updating the mandates of these institutions. A study will be completed by end-April 2001 to identify reform measures and prepare related action plans, especially for the IGE. Implementation of these action plans will begin by end-September 2001.

26. The government also intends to reform the public procurement system based on a study that will be completed by end-September 2001. The aim is to strengthen the supervisory functions and procedures of the specialized central and regional procurement commissions through the adoption of internationally accepted reference standards. The specific recommendations will be submitted by end-September 2001, and their implementation will start at end-2001.

27. The draft reform of the civil service has been submitted to the National Assembly and will be examined during its next session; it enshrines the principle of merit-based pay, reduces the number of special regimes, and introduces a code of ethics. A number of implementing decrees will be adopted after the promulgation of the law.

Monetary policy

28. The 2001 monetary program will aim at achieving the program targets for inflation and growth of net international reserves, while providing room for an adequate increase in credit to the economy from commercial banks, estimated at around 18 percent, so as to facilitate the attainment of the target for real GDP growth. This policy is consistent with a broad money growth rate of about 9 percent and is in line with projected nominal GDP growth. Government reimbursement of debt to the central bank will amount to 4 percent of the beginning-of-period money stock. In pursuing its monetary policy, the central bank will continue to make use of indirect instruments and will only intervene in the foreign exchange market to achieve its target for net international reserves and to smooth exchange rate fluctuations. The authorities will enforce rigorously the prudential regulations, which have been recently adapted to conform with the Basel core principles. A continuous-time foreign exchange market will be established during the course of 2001. The performance criteria and benchmarks for monetary policy are presented in the attached Table 2. To the extent that the rate of inflation continues to decline, the monetary authorities will stand ready to reduce their key interest rates. The attached technical memorandum of understanding (TMU) defines the quantitative performance criteria, benchmarks, and the adjustors in case the privatization revenue or external financial assistance objectives are not achieved. The TMU also stipulates that the authorities will consult Fund staff, should money growth or the level of net foreign assets significantly exceed/fallshort of program levels.

External policy and regional integration

29. The external current account deficit (including grants) is projected to remain stable at about 7.5 percent of GDP between 2000 and 2001 as higher imports of goods and services arising from increased public and private investment are expected to be offset by an export growth of 7.5 percent in SDR terms. The improvement in the financial and capital account resulting from expected large capital inflows, including World Bank disbursements, should allow the net foreign assets of the central bank to be raised to the equivalent of 12 weeks of imports of goods and services.

30. As noted earlier, the government is determined to continue simplifying its import tax regime under the CBI/RIFF and to introduce gradually a common external tariff within COMESA. In 2001, and with a view to completely eliminating the 30 percent tariff rate in 2002, 75 percent of products subject to this tariff will be shifted to the 25 percent rate.

31. Following the adoption of the new Fund-supported program, the government will seek a concessional rescheduling from its Paris Club creditors covering the period 2001-03, taking into account that it reached the decision point under the enhanced HIPC Initiative in December 2000. The government will also seek to normalize relations with all other bilateral creditors on the basis of rescheduling terms at least equivalent to those of the Paris Club. Regarding debt management, the authorities are installing a new integrated computer system (SYGADE) with the support of foreign donors. They will pursue a prudent external debt policy and will refrain from contracting or guaranteeing any new external debt on nonconcessional terms, except for commercial loans of less than one year and for rescheduling arrangements.

B. Structural and Institutional Reforms

32. In addition to the above-mentioned structural measures in the area of tax and customs administration, budgetary procedures, and the civil service, the government is determined to promote private sector development by pursuing its privatization program, reforming and modernizing the regulatory framework, and strengthening the legal system. The privatization program for 2001 includes privatizing Air Madagascar, the national airline; selling off the government's holdings in the telecom company (TELMA); and privatizing some large companies in the sugar (SIRAMA), cotton (HASYMA), retail distribution (SOMACODIS) and shipbuilding (SECREN) sectors. A large number of liquidations currently underway will be completed.

33. In the legislative and judicial areas, as mentioned in the interim PRSP, the government intends to implement a comprehensive set of priority measures, including: (i) increasing the number of judges and providing them with enhanced training; (ii) decentralizing the courts and increasing their resources; (iii) improving safety in the rural areas; (iv) promoting access to land ownership; (v) adopting legal procedures to make the judicial system more accessible and its procedures speedier; (vi) updating business law; and (vii) making the new arbitration system operational. A bill on large-scale mining investment will be submitted to the National Assembly in 2001.

34. The key institutions of the autonomous provinces (provincial councils elected on December 3, 2000, governors, and governors' councils) are expected to start functioning in the first half of 2001. The transfer of functions to the autonomous provinces will take place gradually under transfer agreements (conventions de transfert). This process will mainly cover the areas of education, health, rural development, and road maintenance, while the arrangements already in place will be strengthened. A local government public finance system will be put in place, in parallel with the gradual development of the administrative capacities of the decentralized authorities (provinces, regions, municipalities). The unified tax for small taxpayers (taxe synthétique), the licensing fees, and the real estate tax will be the key components of the tax base of the provincial and local governments. To define the basic framework for central and decentralized government finances, the government will submit to the National Assembly in the second half of 2001 a draft organic law on the framework of government finances, which will also define the resources of the decentralized authorities.

C. Social Policies and Poverty Reduction

35. The measures described above are intended to create a favorable environment for economic growth and should lead to an increase in employment and an improvement in the living standard of the population. To improve basic social indicators and help reduce poverty, these measures will be supplemented by specific actions in the areas of health, education, access to drinking water, and basic infrastructures as described in the interim PRSP and the final PRSP planned for mid-2001. The following specific measures are planned in the area of education (i) the recruitment of a large number of qualified teachers, to be assigned on a priority basis to rural primary schools; (ii) the construction of a substantial number of schools and the creation of additional classes: (iii) the direct transfer of increased budgetary resources to schools for the acquisition of basic teaching equipment and essential school supplies; and (iv) specific measures to significantly reduce the repetition rate.

36. In health, the action plan will focus on: (i) increasing allocations to basic health centers, especially in the most isolated areas; (ii) creating additional basic health centers and hiring medical staff; (iii) expanding the network of hospitals with surgical facilities; and (iv) introducing a family planning system and a national AIDS policy.

IV. Program Monitoring and Review

37. The Fund will undertake semiannual reviews to assess the economic and financial developments and compliance with the quantitative and structural benchmarks and performance criteria. To ensure adequate program monitoring, the government will continue to improve the quality, scope, and delivery of data in the context of the General Data Dissemination System. The government and Fund staff will hold further consultations with a view to improving the economic statistics.

Table 1. Madagascar: Quantitative Performance Criteria and Benchmarks Under
the Second Annual PRGF Arrangement (2000)

(In billions of Malagasy francs, unless otherwise indicated)

  1999 
Stock
Dec. 
20001,2
  March
  June
September
Bench-
mark  
Bench-
mark  
Adj. 
Act.
Perf.
Crit.
Perf.
Crit.
Adj.
Act.
Bench-
mark 
Bench-
mark  
Adj. 
Act.

I. Quantitative benchmarks and performance criteria2          
   Ceiling on external arrears
      (in millions of SDRs)3
0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
   Floor on net foreign assets (NFA) of
      the central bank4,5,6,7
864.4 134.5 323.6 117.3 -120.6 -534.1 -126.3 -80.3 -260.3 190.4
   Ceiling on domestic financing of the
      government6,8
99.3 0.4 -182.9 -70.3 168.6 156.1 82.0 374.1 132.3 -76.2
   Ceiling on net domestic assets
       (NDA) of the central bank6,7,9
1,404.0 -189.6 -378.7 -211.2 -88.2 325.3 -77.7 -56.6 123.4 -156.1
   Ceiling on nonconcessional external
      public borrowing10,11
0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
   Floor on tax revenue 2,580.1 605.9 640.0 658.9 1,450.2 1,450.2 1,456.0 2,299.2 2,299.2 2,103.1
                     
II. Indicative limits                    
   Minimum petroleum tax payments
       to the treasury
340.0 49.0 49.0 50.8 173.0 173.0 207.0 298.0 298.0 270.0
   Ceiling on reserve money 2,322.0 -54.0 -54.0 -175.3 -238.4 -238.4 -175.0 -180.9 -180.9 44
   Ceiling on broad money (including
      foreign currency deposits) (M3)5
4,972.5 -19.6 -19.6 -136.5 -169.2 -169.2 11.3 187.2 187.2 313.9
                     
III. Memorandum items:1                    
   Disbursement of balance of
      payments support (in millions
      of SDRs)12
-32.1 -32.1 -9.4 -3.9 7.2 -22.6 9.7 9.7 11.0
   Balance of payments grants and loans
      (in millions of SDRs)
      0.0 37.4 37.1 0.0 55.3 55.3 45.8
   Cash debt service (in millions
      of SDRs)
      -9.4 41.3 29.9 22.6 45.6 45.6 34.8
   Privatization proceeds 105.6 12.2 12.2 9.2 366.5 366.5 11.0 366.5 366.5 10.6

1Cumulative change since the beginning of each year.
2The benchmarks for September 2000 are indicative.
3Excludes all debt service outstanding that is subject to rescheduling. During the program period, the government will not accumulate any new arrears.
4Net foreign assets of the Central Bank of Madagascar (BCM) are defined as gross reserves minus all foreign liabilities of the BCM, both long and short term, including use of Fund credit.
5This amount should be valued at the exchange rates that were set for the purposes of this program.
6The floor on NFA of the central bank will be adjusted upward, and the ceilings on NDA of the central bank and on domestic financing of the government will be reduced, by the amount of any excess disbursements of external financial assistance relative to the cumulative timetable indicated in III. In case of a shortfall in external financial assistance at end-June and end-September 2000, the floor on NFA of the central bank will be reduced by a maximum amount of SDR 20 million, and the ceilings on NDA of the central bank and on net domestic financing of the government will be raised on a cumulative basis by the same maximum amount.
7NFA and NDA of the central bank will be adjusted for any deviation from programmed amounts of privatization receipts from abroad, net of privatization-related outlays. In case of a shortfall in net privatization receipts, the downward adjustment of the NFA (and the upward adjustment of the NDA) at end-June and end-September 2000 will be capped at the equivalent of SDR 40 million.
8The ceiling on domestic financing of the government will be adjusted for deviations from programmed privatization-related outlays; the ceiling is defined to exclude the impact of foreign currency adjustments on bank financing of government.
9NDA of the central bank are defined to exclude the foreign currency adjustment.
10Excluding normal import-related credits.
11Defined as debt with concessionality level of less than 35 percent, calculated using the 10-year average of the OECD's commercial interest reference rate (CIRR)-based discount rate for loans of a maturity greater than 15 years, and the 6-month average CIRR-based discount rates for maturities below 15 years.
12Defined as nonproject funding in the form of loans and grants minus external debt service on a cash basis.

Table 2. Madagascar: Quantitative Performance Criteria and Benchmarks for the first year under the 2001-2003 PRGF arrangement
(In billions of Malagasy francs, unless otherwise indicated)
  20011
        March
Bench-
mark
  June
Perfomance
Criteria
  September
Bench-
mark
  December
Perfomance
Criteria

I. Quantitative benchmarks and performance
      criteria
               
   Ceiling on external arrears
      (in millions of SDRs)2
 

0.0

 

0.0

 

0.0

 

0.0

   Floor on net foreign assets (NFA) of the
      central bank3,4,5,6
 

239.1

 

202.6

 

208.5

 

631.0

   Ceiling on net domestic assets (NDA) of
      the central bank5,6,8
 

-93.7

 

-333.0

 

6.8

 

-349.0

   Ceiling on domestic financing of the
      government5,7,11
 

101.2

 

140.6

 

506.7

 

382.2

   Ceiling on contracting or guaranteeing of
      external debt on nonconcessional terms9,10
 

0.0

 

0.0

 

0.0

 

0.0

   Floor on tax revenue  

736.5

 

1,672.1

 

2,572.9

 

3,596.3

                 
II. Indicative limits                
   Ceiling on reserve money  

141.9

 

-134.0

 

211.8

 

279.8

   Ceiling on broad money (including foreign
      currency deposits) (M3)
 

95.6

 

-163.3

 

328.0

 

515.1

                 
III. Memorandum items:1                
   Budget support grants and loans
      (in millions of SDRs)
 

23.7

 

59.7

 

72.3

 

113.8

   Cash debt service (in millions of SDRs)  

8.1

 

18.5

 

26.9

 

50.8

   Privatization proceeds  

142.0

 

315.9

 

390.9

 

532.5


1Cumulative change since the beginning of each year.
2Excludes all debt service outstanding that is subject to rescheduling. During the program period, the government will not accumulate any new arrears.
3Net foreign assets of the Central Bank of Madagascar (BCM) are defined as gross reserves minus all foreign liabilities of the BCM, both long and short term, including use of Fund credit.
4This amount will be valued at the exchange rates that were set for the purposes of this program.
5The floor on NFA of the central bank will be adjusted upward, and the ceilings on NDA of the central bank and on domestic financing of the government will be reduced, by the amount of any excess disbursements of balance of payments assistance relative to the cumulative timetable indicated in III. In case of a shortfall in balance of payments assistance, the floor on NFA of the central bank will be reduced by the amount of the shortfall, up to a maximum of SDR 25 million at end March 2001, and SDR 30 million at end June, September and December 2001, and the ceilings on NDA of the central bank and on net domestic financing of the government will be raised on a cumulative basis by the same amount.
6NFA and NDA of the central bank will be adjusted for any deviation from programmed amounts of privatization receipts from abroad, net of privatization-related outlays. In case of a shortfall in net privatization receipts, the downward adjustment of the NFA (and the upward adjustment of the NDA) will be capped at the equivalent of SDR 40 million.
7The ceiling on domestic financing of the government will be adjusted for deviations from programmed privatization-related outlays; the ceiling is defined to exclude the impact of foreign currency adjustments on bank financing of government.
8NDA of the central bank are defined to exclude the foreign currency adjustment.
9Excluding normal import-related credits.
10Defined as debt with concessionality level of less than 35 percent, calculated using the 10-year average of the OECD's commercial interest reference rate (CIRR)-based discount rate for loans of a maturity greater than 15 years, and the 6-month average CIRR-based discount rates for maturities below 15 years.
11Defined as excluding the assumption by the government of debt of the state petroleum company SOLIMA toward the BCM at the time of the final closing of SOLIMA operations.

Table 3: Performance Criteria and Structural Benchmarks
Under the Annual Program for 2001

Supported by the Poverty Reduction and Growth Facility (PRGF)


  1. The following structural performance criteria will be used to monitor the 2001 annual program;

    1. The new "ASYCUDA 2.7" customs computer system will become operational by June 30, 2001 at the three main customs offices;
    2. The adoption by the Council of Ministers by end-2001 of a bill to revise upwards the mining royalty based on the value of the first transaction, and lower the excise tax;
    3. The treasury computer system, designed to centralize each month the accounts of the 22 main treasury offices, will be operational by end-November 2001.

  2. The following structural benchmarks will be used to monitor the 2001 annual program:

    1. A study on the improvement in the operations of the State Inspector General (IGE) will be completed no later than end-June 2001, and implemented during the second half of the year;
    2. The separation of the functions of the Chairman of the Central Procurement Committee (Commission Centrale des Marchés) and the Director General of Expenditure Commitment Control will become effective by June 30, 2001;
    3. In the Directorate General of Customs, the "ASYCUDA 3 plus plus" system will be installed in the three most important offices by end-September 2001 and in four others by end-December 2001.

MADAGASCAR

Technical Memorandum on Monitoring the 2001 Program Supported by the Arrangement under the Poverty Reduction and Growth Facility (PRGF)

1. This technical memorandum defines the variables used to establish the quantitative performance criteria and benchmarks for the program, how they are calculated, and any adjustments deemed necessary. It also explains the monitoring variables, that is, external financed assistance and direct investment flows connected with the privatization of public enterprises. Unless otherwise indicated, in the case of stock, variables are expressed in cumulative variations from December 31, 2000 and, in the case of flows, as cumulative flows from January 1, 2001. The criteria at end-March and end-September 2001 are benchmarks; those at end-June and end-December 2001 are performance criteria.

I. QUANTITATIVE CRITERIA3

A. Ceiling on External Payments Arrears

2. This variable is expressed in terms of the stock of arrears. There will be no net accumulation of new arrears, meaning that there should be nil variation over the period considered.4 External payments arrears are defined as nonpayment in full of interest and principal obligations due to all creditors, excluding arrears resulting from nonpayment of debt service for which rescheduling negotiations are under way.

B. Ceiling on Nonconcessional External Borrowing 5

Definition

3. The nonaccumulation of nonconcessional debt contracted or guaranteed by the government is a performance criterion to be observed at all times. Nonconcessional external debt is defined as having a grant element of less than 35 percent. Under the program, nonconcessional debt includes financial leasing and any other instrument giving rights to a current financial liability, under a contractual arrangement by the government of Madagascar or guaranteed by the government of Madagascar, but excludes debt contracted under rescheduling agreements and normal import-related credits of less than one year. A definition of debt is contained in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, adopted by the Executive Board, on August 24, 2000.

Calculation method

4. Calculation of the degree of concessionality of new external borrowing is based on the 10-year average of the OECD's commercial interest reference rate (CIRR) for loans with maturities greater than 15 years and the six-month average CIRR for loans maturing in less than 15 years.

C. Floor for Net Foreign Assets (NFA) of the Central Bank of Madagascar

Definition

5. NFA are defined as the difference between gross international reserves and all foreign liabilities of the Central Bank of Madagascar (BCM), including debt to the IMF and other short- and long-term liabilities of the BCM. Gross international reserves are defined as liquid, convertible claims of the BCM on nonresidents, excluding assets that are pledged, or collateralized, or otherwise encumbered.

Calculation method

6. For purposes of calculating this criterion, NFA must be converted into Malagasy Francs (FMG) at the end-of-period exchange rates for the reference period established in the program (program exchange rate).

D. Ceiling on Net Domestic Assets (NDA) of the Central Bank of Madagascar

Definition

7. The BCM's NDA include net credit to the government, credit to enterprises and individuals, claims on banks, liabilities to banks in the form of central bank deposit auctions (appels d'offre négatifs), and the other items net, excluding the foreign exchange adjustment item.

8. Foreign exchange deposits must be converted into FMG at the end-of-period program exchange rate.

E. Ceiling on the Net Domestic Financing Requirements
of the Central Government (CG)

Definition

9. Net domestic financing requirements of the central government are defined as the sum of (a) the variation in the stock of central government domestic debt to the banking and nonbanking system; (b) domestic or foreign receipts from privatization operations as defined in Section IV-B, paragraph 22 below; and (c) the variation in central government domestic or external payments6 arrears. Central government (CG) corresponds to the scope of operations of the Treasury as indicated in the General Treasury Operations table (Opérations globales du Trésor, or OGT) .

10. The variation in domestic payments arrears consists of the amount to be recommitted and net payments delays (clearings, items in process of payment, expenditure committed but with no payments order issued), as defined in the OGT.

11. Net bank claims consist of BCM and commercial bank claims on the CG, including auctioned Treasury bills (BTAs), and other Treasury bills and liabilities, net of CG deposits with the BCM and commercial banks, including foreign currency deposits.

12. Nonbank claims consist of BTAs and other Treasury bills (BTs) and bonds placed with nonbank institutions and the public. The valuation of nonbank claims is based on the change in outstanding conventional Treasury bills (maturities of 1 to 5 years), auctioned Treasury bills (maturities of 1 month to 3 years), and outstanding domestic government loans.

Calculation method

13. Deposits and debt to the BCM in foreign exchange must be converted into FMG at the end of period program exchange rate.

14. BTAs must be posted at their net value at time of issue.

F. Floor on Tax Revenue

15. Tax revenue includes that received by the Treasury, but also suspense items, including those related to the public investment program.

II. INIDICATIVE LIMITS OR CEILINGS

A. Ceiling on Reserve Money

Definition

16. Reserve money consists of notes and coins issued and sight deposits of commercial banks with the BCM (including both required and excess reserves).

17. Central bank deposit auctions (appels d'offres négatifs) are excluded from reserve money and are classified in NDA.

B. Ceiling on Broad Money

Definition

18. Broad money (M3) includes notes and coins in circulation, sight and time deposits with commercial banks, including foreign currency deposits of residents, and bonds issued by banks.

Calculation method

19. Foreign currency deposits must be converted into FMG at the end-of-period exchange rates for the reference period established in the program.

III. MONITORING VARIABLES AND: MEMORANDUM ITEMS

A. Projected Balance of Payments Assistance

Definition

20. External financial assistance is defined as loans and grants (nonproject) provided as structural adjustment financing and resulting in funds available to the Treasury.

Calculation method

21. Financial assistance in foreign exchange must be converted into FMG at the program exchange rate. Assistance in kind must be posted when the counterpart funds are deposited with the Treasury.

B. Projected Investment Flows Connected with the Privatization of Public Enterprises

Definition

22. The cost of privatization operations is included above the line in central government operations. Apart from covering reform-related costs, gross receipts from the privatization of public enterprises (PEs) will be used to reduce outstanding domestic debt.

IV. ADJUSTERS

A. Excess/Shortfall in External Financial Assistance

23. In the case of excess net external financing (external financial assistance less public debt service on a cash basis) over the amount programmed (i) the floor on the BCM's NFA will adjusted upward; (ii) the ceiling on the BCM's NDA will be adjusted downward (the adjustment will be converted into FMG at the exchange rate used in the operation); and (iii) the ceiling on the net domestic financing requirements of the central government (Section I-E) will be adjusted downward (the adjustment will be converted into FMG at the exchange rate used in the operation).

24. In the case of a shortfall in net external financing at end-March, end-June, end-September, and end-December 2001 against the programmed amount, the floors and ceilings will be adjusted by a maximum of SDR 25 million, SDR 30 million, SDR 30 million, and SDR 30 million, respectively, and as follows: (i) the floor on the BCM's NFA will be adjusted downward by the amount indicated above; (ii) the ceiling on the BCM's NDA will be adjusted upward by the same amount (the adjustment will be converted at the program exchange rate; and (iii) the ceiling on the central government's net domestic financing requirements (Section I-E) will be adjusted upward and capped at the above-mentioned maximum amount (the adjustment will be converted to FMG at the program exchange rate) .

B. Privatization-Related Transactions

25. Adjustments will be made for any deviation in (a) privatization receipts; and (b) current privatization-related expenditure. The floor on net foreign assets will be adjusted upward or downward by a maximum of SDR 40 million from the programmed floor if disbursed foreign resources from privatizations net of (b) are higher or lower than programmed. Similarly, the BCM's NDA will be adjusted downward or upward (at the average exchange rate of the pertinent quarter). The ceiling on domestic government financing will be adjusted to take account of any discrepancies between actual privatization-related expenditures and those programmed (upward adjustment if expenditure exceeds the amount programmed and downward, in the opposite case, up to the difference reported).

C. Program Exchange Rate

26. Amounts of external assistance and debt service denominated in SDRs will be converted to into FMG at the fixed exchanged rate of FMG 8500 = SDR 1, recorded on January 2, 2001; corresponding amounts denominated in US$ and Euros will be converted in FMGs at the exchange rate of 6,500 FMG = US$1 and 6,100 FMG = EUR 1, the exchange rate prevailing on January 2, 2001.

V. CONSULTATIONS WITH FUND STAFF ON THE PERFORMANCE CRITERION FOR NFA AND THE BROAD MONEY BENCHMARK

27. In case that demand for money is stronger than expected and the exchange rate appreciates, the central bank should intervene on the interbank foreign exchange market (MID) to offset this appreciation, taking into account programmed limits (floor/ceiling) on the accumulation of net foreign assets and the level of broad money. Given the program's target, if broad money growth since end-December 2000 exceeds 18 percent on an annual basis, and/or if the level of net foreign assets exceeds the programmed level by more than 5 percent of broad money at end-2000, the authorities will consult Fund staff on measures to be taken in the context of exchange market and monetary policy management.

VI. INFORMATION AND DATA TO BE SUPPLIED TO FUND STAFF

28. The Malagasy authorities will provide Fund staff with the following information and data according to the schedule provided, either directly (e-mail or facsimile) or through the Fund's resident mission.

A. The Central Bank of Madagascar will report the following statistics

29. Monthly:

  • market results of Treasury bill auctions, including the bid level, the bids accepted or rejected, and the level of interest rates;

  • data on the secondary Treasury bill market, including volumes of transactions and yields;

  • data on the recovery of doubtful and bad debt of privatized public banks;

  • information on monetary developments, as required by the Statistics Department of the Fund (STA);

  • monthly balances of the BCM and deposit money banks;

  • classification of commercial bank loans by economic sector;

  • money market operations and rates;

  • changes in bank liquidity (required reserves and free reserves);

  • the foreign exchange cash flow table, including foreign debt operations; and

  • table of interbank foreign exchange operations on the interbank foreign exchange market (MID);

30. Quarterly:

  • BCM statement of sources and uses of funds;

  • data on foreign trade (exports and imports).

B. The Ministry of Finance and Economy and the Ministry of the Budget and the Development of the Autonomous Provinces will report, as appropriate,
the following information:

31. Monthly:

  • OGT data on a cash and commitment basis and the related tables;

  • expenditure on structural reform;

  • central government revenue and expenditure, including short-term Treasury on-lending;

  • treasury liabilities (statutory advances and operations on the Treasury bill market);

  • central government capital expenditure;

  • external public debt operations (debt contracted and publicly guaranteed, settlement of external payments arrears, and operations of public enterprises) and debt service paid;

  • traditional, modern and combined Malagasy price indices; and

  • indicators of sectoral economic activity.

32. Moreover, information on important measures adopted by the government in the economic and social areas that would have an impact on program development, changes in legislation, including laws passed by the National Assembly and the new rules established by the Banking Supervision Commission (CBF), and any other pertinent legislation will be reported to Fund staff on a timely basis for consultation or information, as appropriate.


1The deficit, including the cost of structural reforms, on a cash basis, would rise from 4 percent of GDP in 2000 to 6.5 percent in 2001.
2 Part of these subsidy resources will be used to cover the losses of the state petroleum marketing company, SOLIMA (pending the completion of its privatization), as some international price increases were not fully passed through to consumers. The remainder of these resources will be used to subsidize gasoil and kerosene prices by an amount of 5 to 7 percent of the total cost.
3These criteria are performance criteria for end-June and end-December 2001 and benchmarks for end-March and end-September 2001.
4To be observed continuously.
5To be observed continuously.
6These external payments arrears are defined as the amount of gross payments arrears less arrears eligible for debt relief, that is, the amount of arrears that must eventually be settled in cash.

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