IMF Staff Reviews Progress of Madagascar's Economic Program

IMF News, February 15, 2019

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Published: February 15, 2019

Mission and context

Mission led by Marshall Mills, Mission Chief for Madagascar, visited Antananarivo on February 11-15, 2019.
Visit covered the fourth review of Madagascar’s economic reform program supported by the IMF’s Extended Credit Facility (ECF).[1]
End-of-mission statement: discussions “made good progress and are continuing, with a view to bringing the review to the Executive Board of the IMF for consideration in the coming weeks, as anticipated.”

Recent economic developments and outlook

Economic growth is expected to exceed 5 percent in 2018 and 2019, reflecting in particular higher private sector activity.
Growth drivers in 2018:
- Rebound in agricultural production.
- Private sector activity notably in construction, telecommunication and transport services.
External sector:
- Strengthened external position thanks to strong vanilla and mining exports despite higher oil prices.
Inflation:
- After peaking in late 2017, inflation fell steadily to around 6 percent at end-December.
Prospects for 2019:
- Growth again expected to exceed 5 percent.
- Continued stability bolstered by improving political stability and the authorities’ commitment to economic reforms.
Policy emphasis: “Sustained and inclusive growth remains critical to raising living standards for the population.”

Program implementation and fiscal developments

Overall assessment: The implementation of the ECF-supported program remained generally satisfactory through end-year, except for some weakness in revenue collection later in the year.
Performance and reforms:
- The Malagasy authorities met all of the program’s performance criteria for the first half of the year.
- Progress on key structural reforms, such as opening the first anti-corruption court in Antananarivo.
Second-half developments:
- Budget execution complicated by a shortfall in domestic revenue related to the electoral period.
- The small revenue shortfall came after previous impressive progress on revenue under the program.
- As a result, the overall primary balance deteriorated slightly despite spending discipline.
Central bank: Successfully accumulated foreign exchange reserves over the year, reaching record levels.
Structural reform pace: Progress continued but at slower pace than anticipated.
Energy sector fiscal risks:
- Delays in adjusting fuel pump prices led to significant, unfunded liabilities to distributors in a context of social pressures and high world oil prices.

Policy recommendations and priorities

Revenue mobilization:
- Plans to boost social and investment spending depend critically on continuing to raise tax revenue under the program.
- Key tax administration reforms recommended: stronger revenue accounting procedures and safeguarding revenue from losses due to tax expenditures and exemption regimes.
Spending and debt management:
- Strict prioritization of investment projects and maintaining robust debt sustainability are essential.
- Gradually reduce lower priority public spending—particularly subsidies in the fuel and electricity sectors—to boost pro-growth spending.
Fuel pricing and liabilities:
- Staff urged the authorities to adopt a fuel pricing mechanism that keeps prices in line with costs.
- Adopt a plan to eliminate the large existing liabilities to fuel distributors.
- Develop targeted social measures to protect the poor from the impact of future price adjustments.
Public utility JIRAMA:
- Continue bolstering the financial situation of JIRAMA by raising revenue, reducing costs, and improving governance.
Governance and anti-corruption:
- Continue strengthening governance and stepping up the fight against corruption.
- Adoption of the draft law on illicit asset recovery has become a priority to complete the legal framework to fight corruption.

Meetings and acknowledgements

Mission met with President Andry Rajoelina; Minister of Economy and Finance Richard Randriamandrato; Ministry of Energy, Water and Hydrocarbons Vonjy Andriamanga; Central Bank of Madagascar Governor Alain Rasolofondraibe; senior officials; and development partners.
“The mission would like to thank the Malagasy authorities for their strong cooperation and the constructive discussions.”

[1] The ECF is a lending arrangement that provides sustained program engagement over the medium to long term in case of protracted balance of payments problems.

Press Release No. 19/46 — IMF Staff Reviews Progress of Madagascar's Economic Program (February 15, 2019).