IMF team and the Malagasy authorities reached a staff-level agreement on the fourth review of Madagascar’s economic reform program under the Extended Credit Facility. This staff-level agreement is subject to IMF Management approval and consideration by the IMF Executive Board. Growth is expected to stabilize around 4.0 percent in 2023, with relatively high inflationary pressures. Recent cyclones have aggravated food insecurity. The authorities are committed to increasing fiscal transparency and strengthening governance. Further efforts to increase revenue, reduce fiscal risks, improve public financial management and strengthen social safety nets are needed.

A team from the International Monetary Fund (IMF) led by Frederic Lambert held discussions in Antananarivo during May 3 – 12, 2023 on the fourth review of the arrangement with Madagascar supported by the Extended Credit Facility (ECF) approved in March 2021.

At the end of the mission, Mr. Lambert issued the following statement:

“The IMF team and Malagasy authorities have reached a staff-level agreement on the fourth review of Madagascar’s economic program under the Extended Credit Facility. The agreement is subject to approval by the IMF Management and Executive Board, with Board consideration expected in June. The review’s completion would allow the disbursement of SDR 24.44 million (about US$32 million) to Madagascar to cover external and fiscal financing needs.

“The 40-month arrangement under the ECF is supporting Madagascar’s recovery from the pandemic and providing financing to preserve priority spending. Through capacity development and policy advice, the arrangement aims to assist the authorities with their efforts to strengthen economic stability and reduce poverty.

“Following a 5.7 percent rebound in 2021, the growth momentum is expected to slow to 4.0 percent in 2022 and 2023, in part due to weather-related disruptions, difficulties in the vanilla sector, and an uncertain world economic outlook. Inflation pressures continue to build up and the depreciation of the ariary relative to the U.S. dollar accelerated in 2022, despite interventions by the central bank (BFM). The domestic primary deficit reached 2.8 percent of GDP in 2022 (compared to 1.4 percent in the revised 2022 budget), mostly due to the non-payment of oil customs duties and taxes by oil distributors and lower domestic tax collection.

“Program performance over the second semester of 2022 has remained mixed and three out of five quantitative macroeconomic objectives were met. The floor on the central bank’s net foreign assets was missed by a small margin. The QPC on the domestic primary balance was breached by a wider margin at end-December because of low oil customs tax collection and despite the authorities’ efforts to contain spending. The balance should improve in 2023 following the conclusion of an agreement with oil distributors in late December 2022 on the settlement of cross liabilities with the government.

“Progress has continued on the authorities’ structural reform agenda. With IMF technical assistance, the authorities have finalized and published the public investment manual. The follow-up report by the Cour des Comptes on the implementation of recommendations following the audits on COVID spending was released on April 3rd, and the necessary changes to the public procurement legal framework to allow for the collection and publication of UBO information have been adopted. The authorities also finalized and submitted to Parliament a new draft of the revised mining code, in line with World Bank and IMF recommendations.

“To anchor economic stability and foster stronger, sustainable, and inclusive growth, the authorities aim to reduce fiscal risks, improve fiscal transparency and governance, strengthen social safety nets, and enhance the monetary policy framework. To that end, the authorities are committed to return to budget discipline to increase the necessary fiscal space to finance more growth-enhancing spending. They agreed to reconsider in the next budget law some distortionary tax measures introduced in the 2023 budget, such as the exit tax on exports of non-renewable minerals, and to reduce deadlines for settling tax disputes. The authorities will also seek to further improve the execution of social and investment spending, and respect budget annuality by systematically canceling unused credits at the end of each fiscal year, while better controlling state-owned enterprises’ management to reduce related fiscal risks.

“The turnaround of the public electricity and water utility JIRAMA remains a priority to reduce its cost for the budget and improve service provision. The authorities committed to strengthen monitoring and transparency of JIRAMA’s financial situation. They reiterated their determination to implement an automatic fuel price adjustment mechanism from the first quarter of 2024 along with enhanced social safety nets. The authorities continue the implementation of the anti-corruption strategy and will strengthen the legal framework to allow for adequate public oversight of public policies.

“In the context of high inflation, monetary policy must focus on price stability. The central bank continues its transition to a new monetary policy framework of interest rate targeting. The success of this transition requires a strengthening of BFM's communication in order to better anchor economic agents’ expectations, and a reaffirmation of its independence.

“ The mission was also an opportunity to discuss Madagascar’s request for access under the IMF’s new Resilience and Sustainability Facility and lay out the steps ahead. Background work to assess the impact of climate-related vulnerabilities started with the Climate Macroeconomic Assessment Program whose report was published in November 2022 and will continue in the coming months.

“The mission met with President Rajoelina, Prime Minister Ntsay, Minister of Economy and Finance Rindra Hasimbelo Rabarinirinarison, Minister of Energy and Hydrocarbons Soloniaina Rasamoelina Andriamanampisoa, Central Bank of Madagascar Governor Aivo Andrianarivelo, senior officials, development partners, and private sector representatives. The IMF team would like to thank the Malagasy authorities for their time, flexibility, and very constructive discussions.”