Press Release No. 03/99

Press Release: IMF Completes Third Review of Madagascar's PRGF-Supported Program, Approves US$15.9 Million Disbursement

June 30, 2003

The Executive Board of the International Monetary Fund (IMF) today completed the third review of Madagascar's performance under an SDR 79.4 million (about US$111.3 million) Poverty Reduction and Growth Facility (PRGF) arrangement, and approved a disbursement amounting to SDR 11.3 million (about US$15.9 million).

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. So far, Madagascar has drawn SDR 34.0 million (about US$47.7 million) under the PRGF arrangement.

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, First Deputy Managing Director and Acting Chair, stated:

"Implementation of the program supported by the Poverty Reduction and Growth Facility has been satisfactory. However, as a result of the political crisis, the authorities' macroeconomic objectives for 2002 were not fully achieved and poverty deepened. The challenge for the authorities in the period ahead is to stabilize the economy, strengthen the business climate to encourage private investment, and diversify the export base to strengthen exports and economic growth.

"The budget for 2003 seeks to boost revenue to permit a recovery of expenditure while containing the fiscal deficit. To this end, the authorities are addressing problems of inefficiency and corruption in public administration, especially in the customs and tax departments, and have established a committee to oversee the reform of customs and tax administration. The authorities also intend to curb the growth of the civil service wage bill and link salary increases to job performance. Further reforms are needed to remove weaknesses in budget preparation, expenditure control, and treasury operations, in order to strengthen the budgetary process and prevent the accumulation of arrears.

"The monetary program for 2003 is consistent with the aim of reducing inflation and achieving positive real interest rates. Structural impediments to bank lending need to be removed, particularly through the amendment of the Property Act in order to allow the use of land as collateral for bank loans. Efforts are underway to strengthen the legal and institutional framework for banking supervision and to establish an early warning system for bank fragility; and the legal framework for microfinance operations is also to be improved.

"It will be important to maintain export competitiveness in order to reduce external vulnerability and boost exports. Madagascar should avoid real exchange rate appreciation by implementing prudent macroeconomic policies and structural reforms aimed at maintaining low production costs, improving the efficiency of the cotton sector, and diversifying exports.

"The authorities are committed to the privatization and rehabilitation of public enterprises in order to increase economic efficiency, private investment, and economic growth. These reforms could play an important role in raising income and reducing poverty in rural areas.

"The authorities have completed a Poverty Reduction Strategy Paper through a broad-based consultative process. They would need to decisively implement the strategy, and should also give priority to completing all other actions serving as HIPC Initiative completion point triggers so that Madagascar can benefit from additional debt relief as soon as possible," Ms. Krueger stated.