Press Release No. 04/216

Press Release: IMF Approves In Principle Fifth Review Under Madagascar's PRGF Arrangement and Approves US$16.6 million Disbursement

October 18, 2004

IMF Approves In Principle Fifth Review Under Madagascar's PRGF Arrangement and Approves US$16.6 million Disbursement

The Executive Board of the International Monetary Fund (IMF) today completed in principle the fifth review of Madagascar's performance under an SDR 91.7 million (about US$135.1 million) Poverty Reduction and Growth Facility (PRGF) arrangement. This opens the way for release of a further SDR 11.3 million (about US$16.7 million), bringing total disbursements under the program to SDR 80.3 million (about US$118.4 million). This decision will become effective following the World Bank's review of Madagascar's annual progress report on the Poverty Reduction Strategy Paper, scheduled for October 21, 2004.

In completing the review, the Executive Board waived the nonobservance of four quantitative performance criteria and one structural performance criterion, taking into account the broad-based package of fiscal, monetary, and structural measures implemented since June 2004 to safeguard macroeconomic stability and contain inflation.

The Board further reviewed the annual progress report of Madagascar's Poverty Reduction Strategy Paper (PRSP) and concluded that it provides a sound basis for continued access to Fund concessional financial assistance and for reaching the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative.

A final decision on Madagascar's debt relief under the enhanced HIPC initiative is still pending action this week by the World Bank's Executive Board. A press release will be issued jointly with the World Bank following those deliberations.

Madagascar's three-year arrangement was approved on March 1, 2001 for an initial amount of SDR 79.4 million (about US $117.1 million) (see Press Release No. 01/7) and was extended on December 23, 2002 (see News Brief No. 02/133) until end-November 2004. On March 17, 2004 (see Press Release No. 04/53) the Board further extended the PRGF arrangement until March 1, 2005. and augmented it by SDR 12.2 million (about US$18.0 million).

Following the Executive Board's discussion of Madagascar, Rodrigo de Rato, Managing Director and Chair, stated:

"Madagascar's implementation of the program supported by the IMF's Poverty Reduction and Growth Facility has been broadly satisfactory. The adverse economic impact of exogenous shocks in 2004 was offset by appropriate fiscal and monetary policies. Madagascar's key challenges in the period ahead are to maintain macroeconomic stability, accelerate the implementation of structural reforms, and diversify the export base to boost exports and economic growth.

"The authorities remain committed to achieving their fiscal targets for 2004, while allowing for an increase in cyclone-related capital expenditures. The 2005 fiscal targets should help further to achieve the government's macroeconomic objectives. Vigorous implementation of measures aimed at improving domestic revenue mobilization, particularly at customs, and strengthening expenditure control will be crucial. In this context, the authorities remain committed not to renew the remaining tax exemptions granted in September 2003.

"The monetary program for the rest of 2004 is consistent with the objective of reducing inflation. The expansion of monetary policy instruments, combined with the development of the money market, should facilitate the conduct of monetary policy.

"Maintaining export competitiveness will be crucial to reach Madagascar's development goals and will require prudent macroeconomic policies, improved customs administration, and accelerated structural reforms. Key reforms would include steps to facilitate export diversification and reform public enterprises, including by putting the public electricity and water company under private management. Moreover, the exchange rate should continue to be market determined, following the introduction of a continuous interbank trading system in July 2004.

"The authorities have completed the first annual progress report on the Poverty Reduction Strategy Paper (PRSP) through a broad-based consultation process. The report provides a comprehensive and coherent framework for guiding the implementation of the government's poverty reduction strategy. However, limited capacity continues to jeopardize the government's ambitious reform program. The authorities are committed to seeking donor support for their capacity-building efforts.

"The government has made significant progress in implementing structural and social programs. As a result, Madagascar has reached the completion point under the enhanced HIPC Initiative. After the provision of enhanced HIPC assistance and additional bilateral assistance, Madagascar's debt is expected to fall to sustainable levels. Prudent borrowing, sound macroeconomic and debt management, and progress on structural reforms will provide Madagascar with the basis to maintain debt sustainability following its exit from the HIPC Initiative.

"A final decision on Madagascar's debt relief under the enhanced HIPC Initiative is still pending action this week by the World Bank's Executive Board," Mr. de Rato said.

The PRGF is the IMF's concessional facility for low income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year period on principal payments.