Public Information Notice No. 01/124

Public Information Notice: IMF Concludes 2001 Article IV Consultation with Madagascar

December 13, 2001

On December 5, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Madagascar.¹

Background

Macroeconomic performance in the first part of 2001 was favorable, with the real GDP growth rate for the full year expected to reach 6.7 percent, higher than initial projected, on the strength of agricultural production, construction and trade, and activity in the export processing zone. Inflation abated, and in the first nine months of the year the increase in the consumer price index was limited to 1.8 percent, as prices of staple goods fell. Because of the strength of the export performance, in 2001 the external current account deficit is expected to be lower than targeted by 1 ½ percentage points of GDP. Exports are projected to grow by 14 percent in SDR terms, with a 25 percent increase of manufactured exports of the export processing zone, mainly clothing; this reflected also sharply higher exports to the United States in response to the US Africa Growth and Opportunity Act. In the first nine months of the year the accumulation of gross international reserves exceeded the program objective. Money growth, at an annualized 14 percent rate, was higher than projected reflecting an increase in money demand from the business sector. In the first half of the year, the overall fiscal deficit, on a commitment basis , was lower than programmed, despite a shortfall in revenue, as capital expenditure was lower than expected. Efforts are underway to strengthen customs administration, with the introduction of new computer software in all the principal customs offices, while cross-checks of tax returns have been intensified between customs and the domestic tax directorate. The budgetary resources stemming from the debt relief under the enhanced Initiative for Highly Indebted Poor Countries (HIPC), amounting to about 1 percent of GDP, are being committed to the key social sectors and infrastructure as established at the time the decision point was reached, in December 2000.

Madagascar has made further progress in structural reforms in 2001, with the emphasis on strengthening budgetary management, treasury accounting, and public finance auditing, and on widening the privatization process. This has allowed to speed up the process of committing budgetary resources, in particular to the social sectors. The privatization of the last components of the state petroleum company was finalized in September, while the tenders for the sale of the state telecommunication company was launched in July, with the selection of the winner scheduled for December. The preparation of the sale of the state cotton and sugar companies is well advanced.

Executive Board Assessment

Executive Directors observed that, since the time of the last Article IV consultation, economic performance has been favorable in many areas: economic growth has accelerated and the economy has become more diversified, inflation has abated sharply, the external account deficit has been lower than programmed, and the level of official international reserves has increased. Exports recorded a strong performance in the first part of 2001, and prospects for the year as a whole remain favorable, despite the global economic slowdown. With regard to public finances, results for the first half of 2001 were mixed: the overall fiscal deficit was lower than programmed, but the revenue target was missed.

Directors welcomed the strong performance of the external sector and the ability of the country to attract foreign investment-particularly in the export processing zone (EPZ), where investment and exports were spurred by the U.S. African Growth and Opportunity Act. They noted that, while this reflects Madagascar's strong competitive position, it also underscores the importance of increased access by developing countries to markets in industrialized countries. In order to maintain Madagascar's attractiveness to foreign investors, they stressed that further efforts are needed to streamline administrative regulations, improve the basic infrastructure, and press ahead with the progressive simplification and liberalization of the external trade regime. They considered these efforts to be all the more necessary in light of the projected adverse impact of the global slowdown on EPZ exports and tourism in 2002.

Directors expressed concern that weak revenue performance in 2001 may be impacting adversely on social and capital spending. They welcomed the actions underway to strengthen tax administration, emphasizing, in particular, the importance of implementing the customs reforms in a timely manner and of reinforcing domestic taxpayers' compliance. Directors noted that a shortfall in privatization revenue in 2001 has increased the need for domestic financing during the year, but that this situation should be reversed in 2002, when the sale of several public enterprises is expected to be completed.

On the spending side, Directors commended the authorities for allocating the resources released under the HIPC Initiative to the social sectors, as envisaged at the decision point in December 2000, and for committing them expeditiously. They welcomed the progress in strengthening budgetary execution reporting and treasury accounting, but noted that a significant overhaul of the budget expenditure monitoring system is still needed to broaden coverage and improve timeliness. They also welcomed the progress in auditing the 1998 and 1999 budget laws and the measures underway to strengthen the public auditing agencies, and noted that it was important that these efforts continue in the period ahead to further enhance transparency in budgetary management.

Directors commended the authorities for taking further steps to strengthen the soundness of the financial system, including limiting insider lending, requiring banks to install permanent internal audit systems, limiting bank participation in non-banking activities, and reducing lending concentration ratios. They also welcomed the adoption of regulations and supervision standards for credit unions and microfinance institutions.

With regard to the privatization of public enterprises, Directors welcomed the imminent sale of the telecommunications company, and urged the authorities to make sure that the cotton and sugar companies are sold in 2002 as planned. Directors expected that privatization would stimulate investment in these sectors, which would contribute significantly to the diversification of the economy and to overall growth. They also encouraged the government to persevere with the public enterprise reforms being implemented in the airline and electricity sectors. Directors considered that, to continue to attract needed investment, it was essential that the ongoing reform of the regulatory framework and judiciary system be vigorously pursued.

Directors noted that poverty remains one of the most daunting challenges facing the country. They welcomed the wide consultation process underway to prepare the Poverty Reduction Strategy Paper, and stressed that this document should include a costing of priority action programs and mechanisms for continuous monitoring of progress in the fight against poverty. Meanwhile, they encouraged the authorities to speed up the execution of poverty reduction expenditures, including the distribution of generic drugs and improvements in rural infrastructure. Directors urged the authorities to make every effort to ensure that Madagascar reaches the HIPC completion point by end-2002 as envisaged.

The statistical database is adequate for Article IV consultations and program monitoring. Nevertheless, Directors noted that statistical weaknesses remain in terms of data quality, coverage, and timeliness, and endorsed the efforts of the authorities, with the assistance of the international community, to resolve these weaknesses.