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Republic of Madagascar and the IMF News Brief: IMF Completes Madagascar's Review Under the PRGF Arrangement Country's Policy Intentions Documents
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Madagascar—Letter
of Intent
Mr. Horst Köhler Dear Mr. Köhler, 1. In the context of the new arrangement under the Poverty Reduction and Growth Facility, approved by the IMF Executive Board on March 1, 2001, the government of Madagascar and Fund staff held the discussions for the first review under this arrangement during the period |
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A. Economic and Financial Developments in the First Part of the Year Economic activity, prices, and balance of payments 2. The principal sectors of the economy posted good performances over the first part of the year. In the primary sector, favorable climatic conditions enabled a significant increase in food crop production; in particular, rice production rose by about 7 percent. In the secondary sector, production increased significantly in the export processing zone (EPZ) (about 20 percent), as well as in the cement, tobacco, and food product sectors. Value added in the construction sector posted an increase estimated at about 13 percent, while in the transport, banking, and trade sectors, the increases are estimated at about 7 percent. On the basis of these results, real GDP growth in 2001 could reach around 6.7 percent, higher than initial projections. However, the possible deterioration in the international economic outlook, while not expected to have an impact on economic growth in 2001, could affect growth prospects for 2002. 3. Inflation continued to slow, due to a good harvest, an abundant supply of agricultural products, and the appreciation of the exchange rate. In the first eight months of the year, the consumer price index rose by 0.7 percent, bringing the increase in the index over the 12 months to end-August to 6.7 percent. The year-on-year inflation rate for 2001 should, therefore, amount to about 4.5 percent. 4. Over the first half of 2001, balance of payments developments were favorable: exports of traditional agricultural products (vanilla and cloves) and of the EPZ exceeded program projections; significant direct investments were also made in the EPZ, as well as in other sectors. Imports of construction equipment and inputs for EPZ enterprises increased significantly, but petroleum product imports were appreciably lower than programmed in value terms (by about 12 percent). Even though external financing and privatization receipts fell well below program projections, the net foreign assets of the banking system exceeded the program targets. Commercial banks and the central bank improved their net foreign assets by about SDR 25 million and SDR 35 million, respectively. The Malagasy franc appreciated during the first half of the year vis-à-vis the euro (7.9 percent appreciation between the average for 2000 and August), and, since May, it appreciated also vis-à-vis the U.S. dollar. Since the end of June, however, the Malagasy franc has remained stable vis-à-vis the euro. 5. The quantitative benchmarks for end-March 2001 and the quantitative and structural performance criteria for end-June 2001 under the arrangement were met, with the exception of the benchmark and performance criteria on tax revenue for end-March and end-June. The performance criteria for net foreign and domestic assets of the central bank, together with the criterion for domestic financing of the government, were met by a sizable margin. The ASYCUDA 2.7 customs computer software became operational before end-June in the three principal customs offices, consistent with the end-June structural performance criterion. In view of the measures adopted to improve revenue performance in the coming months, noted below, and the improved revenue performance between July and October, the government requests a waiver for the nonobservance of the end-June 2001 performance criterion for tax revenue. The government wishes also to request a modification of the performance criteria for end-December 2001, to reflect the new data on external financing and privatization revenue and tax revenue developments. Furthermore, the government requests additional interim assistance under the enhanced HIPC Initiative for covering parts of the debt service to the Fund for the period January 1-December 31, 2002. Money and credit 6. Over the first half of the year, broad money expanded by more than anticipated (16.8 percent at an annualized rate), associated with the marked increase in the net foreign assets of the banking system, which, in turn, reflected the growth of exports and foreign direct investment. The monetary expansion occurred mainly in quasi money (time deposits, savings deposits, and foreign currency deposits), which increased by 15 percent, while demand deposits and currency in circulation rose by only 5 percent. Credit to the economy from commercial banks was lower than expected on the basis of normal seasonal trends, reflecting the good liquidity position of the private sector; however, central bank credit to the economy rose sharply in connection with the financing of the petroleum imports of the state petroleum marketing company, SO LIMA. These credits are being repaid, since the company's operations are to be wound up by end-October. During the first half of the year, commercial banks were highly liquid and invested significantly in treasury bills, especially in the second quarter; this enabled the treasury to repay fully central bank statutory advances at the end of June. Central bank financing for the treasury was resumed in July-August, owing to the heightened pace of government expenditures and a slowdown in treasury bill subscriptions by the banks. Interest rates on treasury bills declined significantly over the January-June period, from 11 percent to 7 percent for four-week bills and from 13.7 to 9.3 percent for 24-week bills; meanwhile, in June, the central bank reduced its discount rate from 12 percent to 10.5 percent, and commercial banks also lowered their lending and deposit rates; the discount rate was reduced further to 9 percent effective October 16. Public finances 7. The key developments in public finance over the first half of 2001 were as follows: (I) a much quicker pace of expenditure commitment than in 2000, although somewhat below the projected levels, due to the rapid release of budget allocations at the beginning of the year, coupled with intensified training of budget credit managers; and (ii) tax revenue growth that fell short of the targets (notwithstanding good performance in income taxes), owing particularly to a significant shortfall in customs revenues. Excise tax receipts also remained below expectations, and the suspension of collection of the unified tax for small taxpayers (import synthétique), pending a simplification of assessment procedures that will become operational in early 2002, contributed to the shortfall. Overall, tax revenues totaled FMG 1,536 billion, compared with the program projection of FMG 1,672 billion, a difference equivalent to 0.5 percent of GDP, entirely attributable to the shortfall in customs revenue of FMG 154 billion. Unexpected factors such as lower petroleum consumption and the appreciation of exchange rate explain about half of the customs revenue shortfall. Specifically, (i) FMG 55 billion of the shortfall is attributable to lower petroleum tax receipts, reflecting a decline in consumption of some 4.5 percent in terms of volume-resulting from the increase in domestic prices in the second half of 2000 and lower fuel oil consumption for electricity generation due to increased hydroelectrical generation-and the fall in import prices in 2001; (ii) an additional FMG 33 billion shortfall is attributable to the appreciation of the Malagasy franc during the first half of the year. The rest of the shortfall can be attributed to increasing imports of lightly taxed capital goods and raw materials, and to the reduction in revenues from consumer goods imports caused by the tariff cut from 30 percent to 25 percent on a large number of products, in the context of the Cross-Border Initiative. The commitment of capital expenditures, while above that of the year 2000, was below the programmed level. As a result, the budget deficit on a commitment basis for the first half of the year was smaller than projected. 8. In July, a decree authorizing additional budgetary credits for the use of resources originating from the HIPC Initiative was adopted. This decree allocates additional funds for education, justice, budgetary control agencies, water supply, public works, and poverty monitoring, in accordance with allocation criteria agreed on at the decision point under the HIPC Initiative; a second decree related to HIPC Initiative funding for the health sector was adopted in August. 9. With regard to program financing, in the first semester external budgetary financing (grants and loans) and privatization receipts were lower than programmed. The former amounted to FMG 383 billion (1.3 percent of GDP), down from the projected FMG 507 billion (1.7 percent of GDP), mainly on account of the nondisbursement of the second tranche of the World Bank's second structural adjustment credit (SAC II). Privatization receipts amounted to FMG 21 billion, compared with the programmed FMG 316 billion, as the sale of SOLIMA's storage facilities was not finalized until September and payments for the sale of the service stations (partly connected with this operation) had not, for the most part, taken place. Despite these shortfalls, the reduction of domestic bank financing was only FMG 45 billion below the program target, because the cash deficit was smaller than projected. 10. The strengthening envisaged in the domestic tax and customs administrations is under way. The ASYCUDA 2.7 system has become operational before end-April in the three principal customs offices, and in Mahajanga in May; the training of the staff has been conducted in different phases. Delivery and installation of ASYCUDA 2.7 software in the Antsiranana and Toliary offices are scheduled for October. Certain additional modules of the ASYCUDA 2.7 software must still be introduced, most notably: accounting, the issuance of tax payment receipts (which is still manual), the verification of ships' manifests, and the management of temporary admission systems; this is important to improve efficiency of customs administration. The entry into operation of ASYCUDA 2.7, in conjunction with the generalized application of the tax identification number for all customs operations, has made it possible to intensify, beginning in June, the exchange of information between the Directorate General of Taxes (DGI) and customs, and to carry out large-scale audit operations focusing on taxpayers whose income tax returns are inconsistent with their customs transactions. The number of such audits will be stepped up in the coming months. In addition, the DGI is preparing a value added tax (VAT) deferral payment procedure for the EPZ enterprises, making it possible for the VAT on imports normally payable at customs to be deferred until the date of these enterprises' next VAT declarations, leading to an offset with VAT credits and thus easing enterprises' cash costs. Finally, taxation of the mining of precious stones will be reviewed before the end of the year, with a view to reducing excise duties and increasing the royalty, thus enhancing transparency in transactions. 11. As regards customs administration, additional efforts and resources are necessary to strengthen the monitoring of operations in secondary ports (other than Toamasina), where the volume of imports has increased of late. Additionally, customs administration will endeavor to accelerate clearance operations for the EPZ enterprises in order to help them meet their extremely tight shipping deadlines. In allocating these resources, customs will place increased reliance on risk analysis, and will study the feasibility of intensified recourse sampling methods of inspection and control. Customs administration will also consult with Fund staff regarding improvement of the control systems and procedures. 12. In the area of treasury accounting, progress has been made in computerization of treasury offices and with the preparation of opening and closing balances and budget execution laws (loi de règlement). Thus, (i) the computerization of the 13 principal treasury offices has been either completely or partially carried out, and for the 9 remaining offices, computer equipment has been put in place during October (together with additional equipment for the first 13); (ii) for the 22 principal treasury offices, balance sheets for 1993-98 have been prepared and will be validated before the end of the year; (iii) the draft 1998 Budget Execution Law has been transmitted to the Audit Court (Chambre de Comptes); and (iv) the draft Budget Execution Law for 1999 is being prepared on the basis of monthly operations and will be submitted to the Audit Court at the beginning of 2002. With respect to the monitoring of budgetary execution, budgetary execution reports for the Ministries of Basic Education and Health, covering the first and second quarters of 2001, were prepared on schedule. To improve expenditure tracking, and in line with the conditions for reaching the completion point under the enhanced HIPC Initiative, the government will accelerate the program for strengthening the agencies responsible for budgetary execution and tracking (payment order officers and provincial budget directorates); to that end, the installation of an efficient computerized system is envisaged, with donor assistance, which will permit the rapid production of expenditure data at the various stages of implementation (commitment, verification, payment order, and payment). The computerized information systems of the treasury and the directorate of expenditure commitment control (CDE) will be reorganized, with a view to integrate available data better. This system will facilitate, inter alia, the tracking of poverty alleviation expenditure. 13. The study on the reform of the public finance inspection and control agencies and institutions was finalized at the end of April and submitted to the Council of Government at the beginning of May; key recommendations are being implemented. In particular, the funding for the State Inspectorate General (IGE) and the CDE has been increased, recruitment competitions have been organized for the IGE and CDE, and additional magistrates have been recruited for the Audit Court. The functions of the chairman of the central procurement committee have been separated from that of the director general of the CDE. The report also recommended a review of the legal and regulatory statutes governing the mission of each supervisory agency and the preparation of procedural manuals. B. Outlook for the Rest of the Year Public finances 14. Over the remainder of the year, the government expects an increase in tax receipts, especially at customs, owing to enhanced controls, a possible rebound of petroleum product consumption, and the expected stability of the exchange rate. As a result of the intensified audits, the original program target set for taxes collected by the DGI is expected to be met, notwithstanding the anticipated FMG 68 billion shortfall (0.2 percent of GDP) due to the suspension of collection of the unified tax for small taxpayers. As regards customs revenues, it is expected that the shortfall from program projections can be limited to FMG 125 billion (0.4 percent of GDP) through a series of measures, most notably the strengthening of import controls at secondary ports and intensified control of customs warehouses and transit regimes. Thus, total government revenues could amount to the equivalent of 11.9 percent of GDP, compared with the 12.6 percent originally programmed. On the expenditure side, the pace of commitments gathered momentum as of June. As regards external budgetary financing, in the fourth quarter of the year disbursements are expected to reach the equivalent of US$60 million (SDR 46 million). External budgetary support for the year as a whole is expected to total SDR 93 million (2.7 percent of GDP), compared with the SDR 113 million originally projected (3.2 percent of GDP). Privatization receipts are expected to amount to about FMG 200 billion (0.7 percent of GDP), down from the projected FMG 532 billion (1.8 percent of GDP), since the receipts from the privatization of the telephone company, TELMA, the cotton company, HASYMA, and the sugar company, SIRAMA, are now expected in 2002. Overall, the shortfall on external financing and privatization receipts could therefore amount to FMG 495 billion, which would be partially offset by the FMG 160 billion savings on debt service cost. As a result, and also taking into account an expected shortfall in nonbank domestic financing, bank financing to the government is expected to increase by about FMG 260 billion, instead of decline by FMG 198 billion, as originally programmed. The modified quantitative performance criteria for end-December 2001 and the quantitative benchmarks for end-March 2002 are presented in Table 1. 15. The increase in domestic bank financing in 2001 is expected to be reversed in 2002, as privatization receipts should permit a reduction in domestic bank financing, as against an increase envisaged for 2002 in the program. The preparation of the budget for 2002 is well underway, and discussions over its outline have taken place with Fund staff. More detailed discussion on the public finance framework for 2002 will take place in early 2002, in the context of the finalization of the 2002 program. We will stand ready to discuss corrective actions with the staff, should there be significant change in the privatization outlook for 2002. Balance of payments and currency 16. Taking into consideration the favorable trends in exports, especially as regards the EPZ, it is expected that the external current account deficit, excluding grants, will be limited to 7.2 percent of GDP in 2001, compared with the 8.6 percent programmed. Central bank net foreign assets could rise to SDR 60 million, compared with the program projection of SDR 75 million, despite significantly lower-than-programmed privatization receipts and external financing. The increase in the net foreign assets of the central bank, combined with the expansion of banking system credit to the government, will contribute to an increase in money supply of about 16 percent in 2001, in line with the increase in nominal GDP. 17. The compilation of balance of payments statistics is being strengthened along the lines recommended by a Fund technical assistance mission in June 2001. The following actions will be implemented before end-2001: (i) introduction of a more detailed monthly statistical reporting form on commercial banks' foreign operations; (ii) establishment of a quarterly survey on foreign direct investment; and (iii) establishment of a foreign trade data validation committee (composed of representatives of the central bank, the statistical institute (INSTAT), the Ministry of Finance's international directorate, and customs) that will meet quarterly to establish the quarterly data within 90 days of the end of the reference period. Validation of the data for 2000 has been effected in October. On the basis of the data from the ASYCUDA system, customs will provide INSTAT with quarterly foreign trade data within 30 days of the end of the reference period. 18. External debt management is being improved with the installation, in April 2001, of the SYGADE debt management system at the central bank, with technical assistance from UNCTAD. Central bank as well as treasury staff are presently being trained. One-third of the debt database has already been entered, with the remainder expected to be completed before end-September 2002. The government is pursuing contacts with non-Paris Club creditors with a view to obtaining reschedulings on terms comparable to those granted by the Paris Club at its March 2001 meeting (Cologne terms). Decentralization 19. After the installation in June of the governors in the six autonomous provinces and of the governors' councils, an interprovincial conference will establish the areas of provincial responsibility. A new organic law governing the public finances is being drafted and will be submitted to the National Assembly at the beginning of 2002; this law will define the fiscal relations between the central government and the autonomous provinces. Six administrative and financial tribunals will also be created that will be responsible for administrative and financial control in each of the autonomous provinces. Privatization process 20. The comprehensive privatization program under way is being pursued with determination. The call for bids for the sale of TELMA was launched in July; the successful bidder will be announced in mid-December, and the privatization should be completed in early 2002. In the cotton sector, the call for bids for HASYMA will be launched in November. In the sugar sector, a privatization strategy is being finalized, and a call for bids for SIRAMA should be launched in the course of 2002. As regards Air Madagascar, management was restructured in July and reforms are in progress, including, inter alia, cost reductions and network rationalization. The government is redefining, in consultation with the World Bank, the privatization strategy for this company, which should include, among others, the opening up of capital to new shareholders. Poverty reduction strategy paper (PRSP) 21. The full PRSP is being finalized. Regional seminars for discussion of the document with broadly based participation will be held in early November. After accounting for comments made during these seminars, a national seminar will be held in the second half of November to finalize the document, which will then be forwarded to the IMF and the World Bank following approval by the government. The paper will contain, in particular, the following: (i) an in-depth analysis of the relationship between policy measures and expected outcomes in terms of poverty reduction, and (ii) an estimate of the cost of the priority actions program and its integration into the macroeconomic framework. Sincerely yours, /s/ Prime Minister Minister of Economy and Finance |