Press Release No. 04/53

Press Release: IMF Completes Fourth Review of Madagascar's PRGF-Supported Program, Approves an Augmentation of Access under the PRGF Arrangement, and a Disbursement of US$34.7 Million

March 17, 2004

The Executive Board of the International Monetary Fund (IMF) today completed the fourth review of Madagascar's performance under an SDR 79.4 million (about US$117.1 million) Poverty Reduction and Growth Facility (PRGF) arrangement.

Given the expected impact arising from cyclones that hit Madagascar in early March 2004, the Executive Board approved the Malagasy authorities' request to augment the access under the current PRGF of the equivalent of SDR 12.2 million (about US$18.0 million). This additional amount is to be disbursed in full, together with the completion of the review.

The completion of the review and the additional amount will enable the release of SDR 23.6 million (about US$34.7 million), which would bring total disbursements under the program to SDR 69.0 million (about US$101.6 million).

The Executive Board also approved the extension of the PRGF arrangement until March 1, 2005, with a rephasing of disbursements for July 2004 and February 2005 and an SDR 0.609 million (about US$0.90 million) disbursement as additional interim assistance under the enhanced HIPC Initiative for Madagascar for the period March 19, 2004-June 30, 2004.

Madagascar's three-year program was approved on March 1, 2001 (see Press Release No. 01/7), and was extended on December 23, 2002 (see News Brief No. 02/133) until end-November 2004 from end-February 2004.

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.

Following the Executive Board's discussion of Madagascar, Anne Krueger, Acting Managing Director and Acting Chair, stated:

"The Executive Board expressed its deep sympathy to the people of Madagascar for the dislocation and loss of life they have suffered from the recent cyclones. The cyclones are expected to have a significant adverse impact on the economy. However, the authorities remain committed to achieving their macroeconomic objectives and structural reforms with the assistance of the international community. The Fund is helping to cushion the balance of payments impact of the cyclones by augmenting Madagascar's access to Poverty Reduction and Growth Facility (PRGF) resources under the current program.

"Madagascar's economy rebounded in 2003 following the 2002 slump, and prospects for 2004 are for continued strong economic growth and low inflation. The implementation of the program supported by the Poverty Reduction and Growth Facility was satisfactory in the first half of 2003. However, fiscal slippages emerged in the second half of the year. The key challenges for the authorities in the period ahead will be to restore fiscal discipline, improve governance, strengthen the business climate to encourage private investment, and continue with structural reforms to boost exports and economic growth.

"The budget for 2004 allows for a modest growth in current expenditure, keeps the investment budget in line with the absorptive capacity of the economy and foreign financing, and aims at an ambitious tax revenue objective. To achieve these objectives, the authorities are taking measures to enhance expenditure control, remove administrative bottlenecks to reduce investment delays, improve the tax system, and expand the tax base. The authorities have appropriately decided not to renew the exemptions granted in the August 2003 tax and tariff relief law when they expire in September 2005, and to avoid such exemptions in the future.

"A key objective of the authorities' program is to improve the private sector's access to credit. The amendment of the Property Act in 2003 allows foreign investors to own land, which, combined with an improved land registry system, should facilitate the use of land as collateral for bank loans. The ongoing modernization of the judicial system is also essential to reduce banking risks.

"Following the expiry of the World Trade Organization's Agreement on Textiles and Clothing by end-2004, Madagascar may face increased competition in export markets. To meet these challenges, the authorities intend to persevere with prudent macroeconomic policies while accelerating structural reforms to improve the efficiency of the cotton sector, maintain low production costs, increase the output and quality of the vanilla crop, and diversify exports.

"The authorities are implementing a plan to privatize and rehabilitate the telecom, cotton, sugar, and utility companies in order to increase economic efficiency, private investment, and economic growth. Steadfast implementation of these reforms will contribute to raising incomes and reducing poverty in rural areas.

"The Poverty Reduction Strategy Paper adopted in July 2003 provides a comprehensive and coherent framework for guiding the implementation of the Malagasy authorities' poverty reduction strategy. The authorities should now decisively implement the strategy and the remaining HIPC Initiative completion point triggers, so that Madagascar can benefit from additional debt relief as soon as possible," Ms. Krueger said.