Press Release No. 08/158

Press Release: IMF Executive Board Completes Fourth Review Under PRGF Arrangement with Madagascar, Increases Financial Assistance to Mitigate Impact of External Shocks, and Approves US$35.3 Million Disbursement

July 2, 2008

The Executive Board of the International Monetary Fund (IMF) has completed the fourth review of Madagascar's economic performance under a three-year Poverty Reduction Growth Facility (PRGF) arrangement and augmented access under the arrangement. To help the country cope with rising food and oil prices, as well as the impact of severe cyclones earlier this year, the Board agreed to augment the SDR 54.99 million (about US$89.8 million) arrangement by SDR 18.33 million (about US$29.9 million).

The completion of the fourth review enables Madagascar to draw an amount equivalent to SDR 21.606 million (about US$35.3 million), bringing total disbursements under the PRGF arrangement to SDR 53.03 million (about US$86.6 million), including part of the augmentation.

In completing the review, the Board also granted waivers for the nonobservance of two structural performance criteria. These structural criteria are related to the inspection of goods leaving ports, and the elimination of the duty free zone regime for new enterprises.

The three-year PRGF arrangement was originally approved on July 21, 2006 (see Press Release No. 06/163).

Following the Executive Board's discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, said:

"The Malagasy authorities are to be commended for the progress achieved in implementing their PRGF-supported program, despite the combined shocks from higher world energy and food prices, and the recent cyclones. Economic growth has remained strong while inflation has declined and budget performance stayed on track. The authorities have put in place several targeted measures to help alleviate the impact of the current shocks on the poor and the Fund has approved an increase in its financial assistance to Madagascar to help with the higher food import bill. In order not to discourage a medium-term supply response, the rice export ban should be lifted as soon as feasible.

"The recent improvement in tax revenue performance is highly welcome. Efforts should continue to make further progress in tax and customs administration, and to reform budgetary financial control aimed at improving budget execution. These measures will allow for an increased allocation of budgetary resources to priority sectors.

"The authorities' continued commitment to gear monetary and exchange rate policy toward lowering inflation while reducing the excessive volatility of the exchange rate is welcome. The central bank should continue to build up its foreign exchange reserves while keeping monetary policy adequately tight to minimize the second-round inflationary effects of the increases in world food and fuel prices.

"A longer-term strategy for the reform of the electricity sector is needed to make the national public utility company self sustaining on an operational basis, and to provide an environment that would be compatible with achieving a higher pace of economic growth over the medium term.

"The Malagasy authorities' failure to report a multiple currency practice and a related exchange restriction gave rise to noncomplying disbursements in connection with the second and third reviews under the PRGF arrangement. The authorities took prompt corrective actions, including issuing a circular to the banks, and remain committed to the objectives of the program. Accordingly, the Executive Board decided to grant waivers for the nonobservance of those two continuous performance criteria," Mr. Portugal said.

The PRGF is the IMF's concessional facility for low-income countries. 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.