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Press Release: IMF Executive Board Approves US$80.8 Million PRGF Arrangement for the Republic of Madagascar and Activation of the Trade Integration Mechanism
July 24, 2006
The Executive Board of the International Monetary Fund (IMF) has approved a three-year, SDR 55.0 million (about US$80.8 million) arrangement under the Poverty Reduction and Growth Facility (PRGF) for the Republic of Madagascar to support the government's economic program for 2006-2008. The first disbursement under the arrangement will amount to SDR 7.9 million (about US$11.5 million).
The Executive Board also noted the authorities' intention to activate the Trade Integration Mechanism (TIM) in light of the possible impact on Madagascar from the end of textile quotas of the Agreement on Textiles and Clothing of the World Trade Organization in 2005 and the implementation of the U.S. African Growth and Opportunities Act (AGOA) in 2007. Should the impact of these measures be greater than anticipated, the TIM's deviation feature would allow an augmentation of the PRGF by up to 10 percent of quota, or SDR 12.2 million (about US$17.9 million).1
Following the Executive Board's discussion on July 21, 2006, of Madagascar's IMF-supported economic program, Ms. Anne O. Krueger, First Deputy Managing Director and Acting Chair, said:
"The Malagasy authorities are to be commended for their commitment to reform and for taking strong measures to accelerate the country's economic development. The new three year arrangement under the Poverty Reduction and Growth Facility and the activation of the Trade Integration Mechanism (TIM) will assist them in making progress toward achieving the Millennium Development Goals (MDGs) by supporting sustained private-sector led growth, promoting fiscal consolidation, strengthening the financial sector and reducing the country's vulnerability to exogenous shocks.
"Increasing domestic resource mobilization and improving public financial management will be essential for fiscal consolidation. The modernization of tax administration, including elimination of ad hoc custom duty exemptions, will be of paramount importance to minimize revenue leakages. To keep spending in line with projected resource flows and avoid a recurrence of spending overruns, the authorities will carry out an analytical audit of the expenditure commitment process and put in place monthly ministerial expenditure commitment plans.
"The monetary stance will need to remain sufficiently tight throughout the remainder of 2006 to prevent a spillover of energy-related price increases into general inflation. Monetary policy implementation will be strengthened through the development of indirect instruments. Madagascar's exchange rate regime is broadly appropriate, particularly given the economy's vulnerability to exogenous shocks.
"Madagascar's debt situation is sustainable, reflecting debt relief under the Multilateral Debt Relief Initiative. In view of the country's vulnerability to shocks and the financing required in order to make progress towards achieving the MDGs, continued prudent borrowing—in the form of concessional loans, and preferably, grants—will be needed. Progress in export diversification will also be necessary, notably through further trade liberalization. At the same time, the activation of the TIM should enable Madagascar to better weather balance-of-payments shocks that could result from the termination of trade preferences.
"The measures being undertaken to address the financial and structural problems facing the national public utility company are welcome. They should increase the reliability of electricity production, reduce its cost, and thereby improve the business environment. The development of the second generation poverty reduction strategy—the Madagascar Action Plan—will be instrumental in prioritizing key reforms for the period ahead," Ms. Krueger said.
The PRGF is the IMF's concessional facility for low-income countries. It is intended that 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 5½-year grace period on principal payments.
Background
Madagascar is one of the poorest countries in sub-Saharan Africa, ranking 146 out of 177 on the United Nations Human Development Index. Economic development has been hampered by such factors as low domestic savings, poor social and economic infrastructure, uneven application of government regulations, and most recently, power outages owing to a financial crisis at the national public utility company (JIRAMA).
The country has one of the lowest tax revenue-to-GDP ratios in the world (10.1 percent in 2005). This impedes the authorities' ability to finance critical development expenditure and mobilize donor assistance. These problems, combined with persistent weaknesses in PFM, exacerbate an already tenuous fiscal situation.
Madagascar's economy is vulnerable to exogenous shocks, such as intermittent cyclones and drought, volatility in key commodity prices (notably for oil and vanilla), the termination of the WTO's Agreement of Textiles and Clothing (ATC) in early 2005, and the expected termination in 2007 of the third party provision under the U.S.'s AGOA.
To address these challenges, the authorities requested a new three-year arrangement under the PRGF to support their economic program for 2006-08. The goals of the program are to sustain economic growth, promote fiscal consolidation, and alleviate poverty, while reducing vulnerability to shocks. Access requested is an amount equivalent to SDR 55.0 million (45 percent of quota), reflecting the strength of the program and the balance of payments need. Seven disbursements would be phased uniformly following Executive Board reviews over the three-year period under the program.
The authorities also requested activation of the TIM to help the country deal with expected shocks in the textile sector such as those from the ATC and AGOA terminations. Should the impact of these shocks during the arrangement be worse than anticipated, the authorities would like to reserve the possibility of augmenting access of up to 10 percent of quota under TIM's deviation feature.
The authorities' response to past Fund policy advice has been mixed. As the 2005 ex-post assessment (EPA) noted, this is principally because there have been persistent weaknesses in public financial management (PFM) and limited institutional capacity. Since 2005, the country has benefited from Fund technical assistance in the areas of revenue administration, PFM, and a Financial Sector Assessment Program (FSAP). In addition, the central bank has benefited from a Safeguards Assessment. The authorities, who intend to seek additional technical assistance, have incorporated the main recommendations in each of these areas into their economic program. Additionally, political stability has been restored, following the 2001 political crisis. Presidential elections are scheduled for December 2006 and parliamentary, regional, and municipal elections for 2007.
Program Summary
For 2006, the authorities have set realistic, though ambitious, macroeconomic objectives. Real GDP is targeted to grow at 4.7 percent, average inflation to hold at 11.2 percent in spite of the recent price shocks, and official reserves to remain at the equivalent to 2.9 months of imports of goods and services. The goal is to promote fiscal consolidation while aligning expenditure with Madagascar's Poverty Reduction Strategy Paper objectives. Despite the shortfalls in revenue and budgetary assistance in the first half of the year, the authorities intend to achieve an overall deficit (on a cash basis, excluding grants) equivalent to 10.8 percent of GDP, consistent with their macroeconomic objectives. To do so, they have had to reduce domestically financed spending across the board by the equivalent of about 1.7 percent of GDP. However, thanks to the resources freed up by the Multilateral Debt Relief Initiative (equivalent to 0.6 percent of GDP), the authorities were able to reduce the planned cuts in priority sector spending (see Press Release No. 05/286 for background on the MDRI). A supplementary budget with these changes was submitted to Parliament in mid July. The overall fiscal deficit will be fully financed by grants and highly concessional loans from development partners. Achieving the program's objectives for 2006 will require a concerted effort on revenue mobilization, PFM, monetary and exchange rate management, and reform of JIRAMA.
| Madagascar: Selected Economic and Financial Indicators, 2004-11 | ||||||||
| 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | |
| Est. | Prog. | Projections | ||||||
| (Percent change, unless otherwise indicated) | ||||||||
National income and prices |
||||||||
Nominal GDP growth |
20.3 | 23.8 | 16.8 | 16.0 | 13.2 | 11.5 | 11.0 | 11.0 |
Real GDP growth |
5.3 | 4.6 | 4.7 | 5.6 | 5.6 | 5.6 | 5.6 | 5.6 |
GDP deflator |
14.3 | 18.3 | 11.5 | 9.9 | 7.2 | 5.6 | 5.1 | 5.1 |
Consumer price index (period average) |
13.9 | 18.4 | 11.2 | 9.6 | 7.0 | 5.5 | 5.0 | 5.0 |
Consumer price index (end of period) |
27.3 | 11.4 | 11.3 | 8.0 | 6.0 | 5.0 | 5.0 | 5.0 |
External sector |
||||||||
Export, f.o.b |
0.1 | -15.3 | 1.7 | 7.5 | 6.6 | 6.4 | 6.5 | 6.6 |
Imports, c.i.f. |
20.7 | -0.7 | 0.5 | 8.4 | 5.6 | 6.1 | 5.6 | 5.9 |
Export volume |
5.6 | 13.4 | -1.6 | 4.1 | 5.2 | 6.2 | 6.2 | 6.5 |
Import volume |
7.4 | -11.6 | -9.7 | 6.6 | 6.6 | 6.1 | 6.2 | 6.3 |
Terms of trade (deterioration -) |
-15.7 | -33.5 | -7.1 | 1.5 | 2.3 | 0.2 | 0.8 | 0.4 |
Public finance |
||||||||
Revenue (excluding grants) |
40.6 | 12.3 | 24.8 | 18.2 | 18.0 | 16.0 | 15.3 | 14.3 |
Total expenditure |
54.6 | 4.9 | 20.1 | 11.9 | 11.8 | 12.9 | 13.0 | 12.6 |
Current expenditure |
33.6 | 7.7 | 10.0 | 16.4 | 15.8 | 14.5 | 14.4 | 14.3 |
Investment expenditure and net lending |
84.2 | 2.0 | 30.9 | 7.9 | 7.8 | 11.3 | 11.6 | 10.6 |
Money and credit 1 |
||||||||
Broad money |
23.8 | 3.1 | 15.6 | 16.0 | 13.2 | 11.5 | 11.3 | 11.3 |
Net foreign assets |
23.3 | 1.9 | 22.8 | 8.8 | 5.9 | 4.7 | 5.0 | 5.1 |
Net domestic assets |
0.6 | 1.2 | -7.2 | 6.6 | 7.1 | 6.9 | 6.4 | 6.2 |
Credit to government |
-12.3 | -5.3 | -16.8 | -1.0 | -0.6 | -1.0 | -0.8 | -1.1 |
Credit to the private sector 2 |
36.9 | 22.4 | 24.5 | 24.3 | 22.5 | 19.0 | 18.5 | 17.0 |
Velocity of money (M3; average) |
3.9 | 4.6 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 |
TB weighted-average auction rates |
||||||||
(in percent; end of period) |
17.4 | 18.6 | ... | ... | ... | ... | ... | ... |
(Percent of GDP) | ||||||||
Public finance |
||||||||
Total revenue (excluding grants) |
12.0 | 10.9 | 11.7 | 11.9 | 12.4 | 12.9 | 13.4 | 13.8 |
Of which: tax revenue |
10.9 | 10.1 | 11.0 | 11.5 | 12.0 | 12.5 | 13.0 | 13.4 |
Total grants |
8.2 | 5.7 | 49.5 | 4.2 | 3.9 | 3.9 | 3.8 | 3.7 |
Current expenditure |
12.6 | 11.0 | 10.4 | 10.4 | 10.7 | 11.0 | 11.3 | 11.6 |
Capital expenditure |
12.5 | 10.3 | 11.5 | 10.7 | 10.2 | 10.2 | 10.2 | 10.2 |
Total expenditure |
25.1 | 21.2 | 21.9 | 21.2 | 20.9 | 21.1 | 21.5 | 21.8 |
Domestic balance |
-2.3 | -2.2 | -0.9 | -1.3 | -1.2 | -1.1 | -1.1 | -1.1 |
Overall balance (cash basis, incl. grants) |
-5.7 | -4.3 | 38.7 | -5.1 | -4.6 | -4.4 | -4.3 | -4.3 |
Overall balance (cash basis, excl. grants) |
-13.9 | -10.1 | -10.8 | -9.3 | -8.5 | -8.3 | -8.1 | -8.0 |
Domestic financing |
-1.0 | 0.5 | -3.1 | 0.1 | 0.1 | 0.0 | 0.0 | 0.0 |
| (Percent of GDP, unless otherwise indicated) | ||||||||
Money and credit |
||||||||
Broad money (M3) |
25.9 | 21.6 | 21.3 | 21.3 | 21.3 | 21.3 | 21.4 | 21.4 |
Net foreign assets |
10.9 | 9.2 | 12.1 | 12.1 | 11.8 | 11.4 | 11.3 | 11.1 |
Net domestic assets |
14.9 | 12.3 | 9.2 | 9.2 | 9.4 | 9.8 | 10.0 | 10.2 |
Credit to government |
5.0 | 2.9 | -0.6 | -0.7 | -0.7 | -0.8 | -0.9 | -1.0 |
Credit to the private sector |
10.0 | 9.9 | 10.5 | 11.3 | 12.2 | 13.0 | 13.9 | 14.6 |
Savings and investment |
||||||||
Resource gap |
-15.1 | -14.1 | -13.7 | -13.5 | -13.2 | -13.0 | -12.7 | -12.5 |
Investment |
24.3 | 22.5 | 21.8 | 22.3 | 22.5 | 22.7 | 23.0 | 23.2 |
Government |
12.5 | 10.3 | 11.5 | 10.7 | 10.2 | 10.2 | 10.2 | 10.2 |
Nongovernment |
11.8 | 12.3 | 10.3 | 11.5 | 12.3 | 12.5 | 12.7 | 13.0 |
Gross domestic savings |
9.2 | 8.5 | 8.1 | 8.7 | 9.3 | 9.7 | 10.3 | 10.7 |
Gross national savings |
15.0 | 11.7 | 11.4 | 11.5 | 12.0 | 12.3 | 12.7 | 13.1 |
External sector and public debt |
||||||||
Export, f.o.b |
22.9 | 16.7 | 15.4 | 15.3 | 15.2 | 15.0 | 14.8 | 14.7 |
Imports, c.i.f. |
39.0 | 33.4 | 30.4 | 30.6 | 30.0 | 29.6 | 29.0 | 28.5 |
Current account balance (excluding grants) |
-13.1 | -12.1 | -11.6 | -11.4 | -11.1 | -11.0 | -10.8 | -10.6 |
Current account balance (including grants) |
-9.3 | -10.8 | -10.5 | -10.7 | -10.5 | -10.4 | -10.2 | -10.1 |
Public debt |
92.3 | 80.2 | 34.2 | 35.8 | 37.1 | 38.4 | 39.6 | 40.8 |
External |
80.0 | 69.7 | 25.6 | 28.8 | 31.1 | 33.2 | 35.0 | 36.8 |
Domestic |
12.4 | 10.4 | 8.5 | 7.0 | 6.0 | 5.2 | 4.6 | 3.9 |
Net present value (NPV) of external debt |
||||||||
NPV of debt-to-GDP ratio |
... | 35.8 | 14.5 | 16.4 | 17.9 | 19.3 | 20.6 | 21.7 |
NPV of debt-to-exports ratio |
... | 134.3 | 58.8 | 67.1 | 74.3 | 81.3 | 87.6 | 93.8 |
NPV of debt-to-revenue ratio |
... | 215.0 | 83.5 | 102.2 | 110.0 | 115.5 | 119.5 | 123.8 |
| (Units as indicated) | ||||||||
Gross official reserves (millions of SDRs) |
330.4 | 337.4 | 348.7 | 381.8 | 406.7 | 430.1 | 463.2 | 503.0 |
Months of imports of goods and nonfactor services |
2.8 | 2.9 | 2.9 | 3.0 | 3.0 | 3.0 | 3.0 | 3.1 |
Residual Financing Gap (millions SDR) |
0.0 | 0.0 | 9.2 | 48.9 | 42.7 | 32.4 | 12.5 | 8.4 |
Exchange rate: Ariary per SDR (period average) |
2,772.1 | 2,958.3 | ... | ... | ... | ... | ... | ... |
Exchange rate: Ariary per U.S. dollar (period average) |
1,871.8 | 2,005.5 | ... | ... | ... | ... | ... | ... |
GDP per capita (U.S. dollars) |
251 | 282 | 294 | 310 | 326 | 342 | 360 | 379 |
Nominal GDP (billions of ariary) |
8,156 | 10,095 | 11,795 | 13,687 | 15,495 | 17,282 | 19,182 | 21,297 |
Sources: Malagasy authorities and IMF staff estimates and projections. 1 Growth in percent of beginning of period money stock (M3). 2 Year-on-year growth. | ||||||||
1 The Republic of Madagascar joined the IMF on September 25, 1963. Its quota is SDR 122.2 million (about US$179.4 million), and its outstanding use of IMF resources totals SDR 11.4 (about US$16.7 million).
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