Mr. Horst Köhler
Managing Director
International Monetary Fund
700 19th Street NW
Washington, D.C. 20431
U.S.A.
Dear Mr. Köhler:
I am pleased to inform you of the following.
2. In close consultation with representatives of civil society and foreign donors, the
Government of Madagascar has prepared an interim Poverty Reduction Strategy Paper (I-PRSP),
which was discussed by the IDA and IMF Executive Boards in the context of the HIPC initiative
decision point in December 2000. This paper outlines the main thrust of the government's
strategy to improve economic performance with the participation of the poor; to develop essential
basic services and extend the safety nets to the most vulnerable members of society; to put in
place an institutional framework conducive to economic growth and poverty reduction; and to
build capacities to improve governance. The policies and measures described in the attached
Memorandum are consistent with the interim PRSP, on which it is based.
3. Economic performance in 1999-2000 was satisfactory overall, despite the serious
destruction caused by cyclones in the first few months of 2000. The end-June performance
criteria were met, as were all the end-September benchmarks, but one.
4. The first review under the arrangement will be completed by end-October 2001. It will
cover economic and financial developments in the first half of 2001 and the outlook for the rest
of the year. The subsequent reviews will take place on a semiannual basis. The Government of
Madagascar will provide the Fund with any information it may require concerning the
implementation of the economic and financial program.
5. The Government of Madagascar believes that the policies described in the attached
Memorandum are sufficient to achieve the program targets, but is prepared at any point during
the program period to adopt such measures as may be deemed necessary to that end.
Memorandum of Economic and Financial Policies for
2001-03
I. Introduction
1. Since 1996, the Malagasy government has implemented a program of macroeconomic and
structural reforms to restore internal and external financial viability, to strengthen economic
growth, and to reduce poverty. The government strengthened the reform strategy in October 1996
by adopting a medium-term economic and financial program supported by the Fund through a
three-year arrangement under the Poverty Reduction and Growth Facility (PRGF). The second
annual arrangement covered the period July 1999 - November 2000. The Malagasy government's
adjustment effort is also supported by the World Bank and bilateral and multilateral development
partners.
2. The economic and financial program for 1999-2000 has been carried out with satisfactory
results. Key reforms have been implemented with determination and significant progress has
been made in restoring macroeconomic stability and creating a favorable environment for
sustained growth. Since 1996, GDP growth has steadily risen to reach 4.8 percent on
average in 1999-2000. Following an increase in prices of 14.4 percent in 1999, inflation,
as measured by the consumer price index (CPI), was reduced to 8.5 percent in 2000 on a
year-on-year basis (based on provisional estimates), owing to prudent financial policies. The
external current account deficit (including official transfers) rose from 5.4 percent of GDP
in 1999 to 7.5 percent of GDP in 2000, reflecting the rise in oil prices and a rapid increase
in imports of primary commodities and capital goods as a result of spending on reconstruction
after the damage caused by the cyclones; this more than offset the good performance of exports
(an increase of about 21 percent in SDR terms, largely due to a sharp expansion of free
trade zone exports). Because of significant inflows of private capital and foreign aid, and longer
payment terms for petroleum product imports, the central bank's foreign reserves rose in 1999
and 2000 from the equivalent of 7.1 weeks imports of goods and services at end-1998 to
9.2weeks by end-2000, thereby exceeding the program targets.
3. The fiscal situation has improved considerably since 1996 because of an increase in
revenues resulting from the substantial broadening of the tax base and a prudent expenditure
policy that favored the social sectors. Thus the revenue/GDP ratio rose from 8.7 percent in
1996 to 11.4 percent in 1999 and 12 percent in 2000, based on provisional data
(11.7 percent for the tax revenue/GDP ratio). The ratio for 2000 is 0.5 percentage
point of GDP below the program target because of the negative impact on customs revenues of
the appreciation of the Malagasy franc against the euro during the second half of the year, and the
larger than expected impact of the elimination of customs duties on products from Indian Ocean
Commission (IOC) member countries. In 2000, total expenditure was below program estimates,
owing to lower than-anticipated interest payments and some delays in the investment program.
The fiscal deficit (including grants, but excluding structural expenditure costs) amounted to
1.6 percent of GDP in 2000, slightly above the program targets. All the quantitative
performance criteria for end-June 2000 and the quantitative benchmarks for end-September 2000
were met, except for tax revenue at end-September 2000 (see Table 1 attached). The indicative
quantitative benchmarks for broad and reserve money for end-June and end-September 2000
were not met, partly because of the non sterilization of capital flows by the central bank, and
partly because of lower privatization receipts that reduced net reimbursement of debt owed to the
banking system by the government. Under the program, the banking sector was rehabilitated, an
ambitious privatization program implemented, and civil service reform was initiated.
4. Despite this progress, the economic and financial situation in Madagascar remains fragile,
with poverty affecting about 70 percent of the population. Although per capita GDP
growth has been positive over the past three years, basic social indicators remain weak and the
income level remains very low. Madagascar's economic and social development is still being
hampered by an inadequate infrastructure and would benefit from a strengthening of institutional
capacities.
5. Against this background, the government is determined to consolidate progress over the
next few years by deepening and completing its structural reform and social services
development program, by stepping up its fiscal consolidation efforts, and by improving
transparency and rigor in managing government finances and public institutions. This should
make the overall environment more favorable for private investment and lead to a high,
sustainable level of economic growth, and ultimately a significant reduction of poverty. Further
decentralization through the creation of six autonomous provinces and the establishment of their
institutional framework will bring government closer to the people and promote the participation
of the population. To define their program in a comprehensive manner, the authorities have
prepared an interim poverty reduction strategy paper (interim PRSP) with the participation of the
elected representatives, and civil society, and the assistance of foreign donors. The interim PRSP
presents the government's macroeconomic policy framework and the priority action plans in the
areas of social and institutional policy and structural reform to be implemented during the period
2001-03. In support of its medium-term program, the government requests a new three-year
arrangement under the Poverty Reduction and Growth Facility (PRGF), in addition to request for
assistance from the World Bank and other multilateral and bilateral donors. Madagascar reached
the decision point under the HIPC Initiative in December 2000. As a result, debt service in
2001-02 will be substantially reduced. The country has defined a program of reform measures,
endorsed by the international community, which should enable it to reach the completion point
under the enhanced HIPC Initiative in the second-half of 2002.
II. The Medium-Term Economic Policy Framework.
6. As indicated in the interim PRSP, the government's key aim is to strengthen economic
growth while improving the distribution of its benefits, in order to secure a permanent reduction
in poverty. To this end, the authorities intend (a) to promote strong, sustained, pro-poor
economic growth; (b) to implement effective action programs in the priority sectors of education,
health, water supply and basic infrastructure, including rural roads; and (c) to press ahead with
the institutional reforms already under way. The process of decentralization will be continued
with a gradual transfer of responsibilities and financial resources to the six recently created
autonomous provinces. This strategy aims at reaching or even surpassing the international target
of reducing poverty by one-half by 2015.
7. The government has established the following macroeconomic targets for the next three
years: (i) to raise the real GDP growth rate to an average range of 5.8-6.0 percent,
equivalent to an average annual increase in per capita real GDP of about 3 percent a year;
(ii) to contain inflation, as measured by the consumer price index, at about
3.5 percent on average in 2002-03; (iii) to increase the net foreign assets of the central
bank to the equivalent of at least four months of imports of goods and services by 2003; and (iv)
to limit the external current account deficit (including official transfers) to about 7 percent
of GDP on average during 2001-03.
8. To achieve these macroeconomic targets, the government is determined to implement fully
the measures envisaged in its economic and financial program. To consolidate growth, it is
committed to maintaining an investor-friendly environment in the sectors with high growth
potentials, such as tourism, fisheries, mining, manufacturing, and telecommunications, through
the improvement of the legal environment and basic infrastructure. Major steps will be taken to
implement a rural development action plan with the support of foreign donors and lenders, so as
to promote agriculture growth and contribute to income generation for small farmers. To raise
incomes of the poorest, steps will be taken to provide better access to infrastructure (roads,
transport, rural markets, communications, power, and drinking water), promote microfinance and
microenterprises, and develop labor-intensive public works projects. In this context, gross
domestic investment is projected to increase from 17 percent of GDP in 2000 to close to
20 percent of GDP in 2003, while domestic savings is to rise from 6.8 percent in
2000 to about 11 ½ percent of GDP in 2003.
9. Fiscal consolidation will be sought through an increased effort to mobilize tax and nontax
revenues, as well as through greater efficiency in the management of public spending. To
improve revenues, the government will strengthen and modernize the customs and tax
administrations and will continue its efforts to reduce tax fraud and increase its revenues from
mining and fisheries royalties. The objective is to increase tax and nontax revenues (excluding
privatization revenue and grants) by about 2 percentage points of GDP to
13.3 percent of GDP by 2003. In the area of budgetary management, government policy
will focus on substantially improving the budget execution, the procedures for controlling and
monitoring government spending, the treasury accounting procedures, and ex post auditing, so as
to strengthen the transparency and efficiency of government spending and facilitate expenditure
tracking. Current government expenditure will rise by the amount of resources released under the
enhanced HIPC Initiative, with a significant rise in budgetary appropriations for health, education
and other priority sectors. Wage policy will continue to be prudent, while providing government
employees with adequate and competitive salaries. Additional recruitment will be undertaken in
the priority sectors, especially the social sectors, supervisory agencies, government financial
services, and the judiciary. Public investment spending is projected to rise from
8.7 percent of GDP in 2000 to 11.7 percent of GDP in 2003, with the
implementation of new priority public works projects in areas such as rural development and
transportation.
10. The monetary authorities will continue to pursue a prudent monetary policy, aimed
principally at containing inflation. They will also continue to strengthen the solidity of the
banking system and develop microfinance institutions.
11. At the regional level, the government is encouraging increased trade liberalization. In
particular, by 2002 it will reduce the number of tariff rates from five to four and reduce the
maximum customs duty to 25 percent within the framework of the Cross-Border
Initiative/Regional Integration Facility Forum (CBI/RIFF), involving 14 countries of central and
southern Africa, and the Common Market for Eastern and Southern Africa (COMESA).
12. The positive impact of these macroeconomic and structural policies on growth and
poverty will be reinforced by specific policies and measures to help distribute equitably the
benefits of growth to all segments of society, especially the poorest, as described in detail in the
interim PRSP. The Malagasy authorities have therefore focused on priority areas such as
education, health, water and sanitation, infrastructure and rural development, and institutional
development and decentralization. Details of the poverty reduction targets and measures,
including the matrix of actions to be taken, are presented in the interim PRSP. These policies and
measures will be further developed in the final PRSP. The government will continue to increase
budget allocations to the priority sectors listed above and ensure the proper use of HIPC
Initiative debt relief.
III. Program for 2001
13. Within the medium-term framework, the main macroeconomic objectives of the program
for 2001 to be supported by the PRGF arrangement are as follows: (i) to contain inflation, as
measured by the CPI, to an average of 5 percent; (ii) to limit the external current account
deficit (including official transfers) to 7.5 percent of GDP; and (iii) to ensure an additional
increase in the net foreign assets of the central bank, which should rise to 3 months of imports of
goods and nonfactor services. To achieve these objectives, the government will implement the
fiscal, monetary, structural, institutional and social measures described below.
A. Macroeconomic Framework
Fiscal policy
14. The improvement of fiscal management is a key element of the government program,
with the aim of improving revenue collection, as well as the efficiency, monitoring, and control
of expenditure. The budget for 2001 reflects the prioritization of spending described above and
should make it possible, owing to the expected proceeds from privatizations, to repay central
bank advances to the government, thus providing adequate room for expansion of private sector
credit so as to contribute to the attainment of the growth targets. The overall fiscal deficit (on a
commitment basis, including grants, but excluding the cost of structural reforms) is expected to
reach 4 percent of GDP, compared to 1.6 percent in 2000.1 This rise reflects the expansion of
investment expenditure from 8.7 percent of GDP in 2000 to 10.3 percent in 2001.
Additional spending for the priority sectors, financed with HIPC debt relief, is estimated at
1.1 percent of GDP, of which 0.7 percent for current outlays. The arrangement
performance criteria and benchmarks are presented in the attached Table 2. The attached
technical memorandum defines the variables subject to performance criteria and quantitative
benchmarks, as well as the adjustment mechanisms.
15. In the area of government finances, the program aims at increasing the revenue/GDP
ratio from 12 percent in 2000 to 12.6 percent in 2001 (12.2 percent for tax
revenue). The government intends to increase revenues by further improving the efficiency of tax
and customs administrations, and by introducing new tax measures, notably in the mining
sector.
16. With respect to customs, the government will implement a series of measures designed to
improve administrative efficiency and increase revenue, including: (i) the computerization of all
existing customs offices and the introduction of the ASYCUDA computer system in two phases:
the 2.7 version in early 2001, and the "3 plus plus" version in the
second half of the year, which should help fight fraud more effectively; (ii) greater
efficiency in the possible use of import preshipment inspection firms; (iii) the allocation of more
human, physical, and organizational resources to customs offices; and (iv) the monitoring
and surveillance of special customs regimes (such as goods imported under temporary
admission).
17. In the area of domestic taxation, the government intends to continue its program to
modernize its management tools, in particular by: (i) increasing the human and physical
resources assigned to the tax services and computerizing an additional number of regional tax
centers; (ii) strengthening taxpayer compliance and the role of local communities in tax
assessment, and enhancing the collection of the unified tax for small taxpayers (impôt
synthétique); (iii) reducing of fraud in the form of sales without bills of lading; and
(iv) increasing the efficiency and the resources of the large-taxpayer unit, with systematic
recourse to data cross-checks between tax customs offices and intensified oversight of delinquent
taxpayers.
18. The government intends to take steps to increase revenue from mining royalties by: (i)
reducing the excise tax, together with a possible upward revision of the mining royalty based on
the value of the first transaction, with a view to improving the efficiency of mining revenue
collection; and (ii) strictly enforcing the procedures established in Decree 2000-170 for
monitoring mining product transactions and the collection of royalties. The allocation of tax
revenue between the central government and the provinces may also be reviewed.
19. Partially reflecting the use of resources released under the enhanced HIPC Initiative,
current expenditure is projected to rise from 9.4 percent of GDP in 2000 to
10.2 percent in 2001. Additionally, this level of current expenditure also reflects a
9 percent civil service pay increase, intended to offset the salary decline in real terms of
recent years. The spending program also reflects the recruitment of additional civil servants in
several sectors, including education, health, the judiciary, the expenditure supervision agencies
(especially the State Inspectorate General), the tax and customs offices, and the financial
management of government personnel. An amount equivalent to 0.2 percent of GDP has
also been allocated for the creation of new provincial institutions. Foreign-financed public
investments will increase significantly from 5.9 percent of GDP in 2000 to
6.3 percent in 2001. The domestic contribution to the public investment program will also
be sharply increased from 2.8 percent of GDP in 2000 to 4 percent in 2001. This
will permit the opening of sufficient budgetary lines to pay the value-added tax (VAT) and
customs duties due from the government on public investment projects, and to clear arrears on
these payments.
20. A subsidy for petroleum products of FMG 200 billion (0.7 percent of GDP)
is included in the 2001 program.2 The government will consult with Fund staff on how to
allocate the subsidy and on the measures to be adopted in the second half of 2001, with a view to
eliminating the subsidy by end-2001.
21. The funds released by the enhanced HIPC Initiative, equivalent to 1.1 percent of
GDP, will be allocated to specify activities in the key sectors of education, health, water supply,
highway maintenance and rural roads, institutional development, the social safety net, and the
monitoring of poverty. The breakdown of these outlays is presented in Table 15 of the
interim PRSP. In each of these areas, the government has prepared detailed programs, in
consultation with civil society and foreign donors. To ensure that these additional resources are
used efficiently and are adequately monitored, the government will submit a supplementary
budget law in the first half of 2001, which will include specific line items for the various priority
sectors. To facilitate expenditure monitoring, individual appropriations managers will be
responsible for the management of these line items. Semiannual budgetary execution and
physical implementation reports will also be submitted to interested parties (elected officials and
civil society) and external partners. Furthermore, the National Statistics Institute (INSTAT) will
conduct a household survey in 2001 to assess the impact of HIPC Initiative financed expenditures
on living standards.
22. In the area of expenditure management, the government's objective is to significantly
improve budget execution, the procedures for tracking and controlling government spending,
treasury accounting procedures, and ex post auditing. Regarding budgetary execution, the
government has studied a series of measures so as to correct the slow pace of expenditure
execution in the past, and to accelerate expenditure commitment in the course of the year. These
measures include: (i) the rapid release of budget allocations at the beginning of each year; (ii)
enhanced training for budget credit managers (gestionnaires de crédit); (iii) the
recruitment of additional staff for public procurement; (iv) increased recourse to the procedure of
delegation of budget authority (délégation de crédit); and (v)
strengthening of the system for payments orders execution and expenditure commitment control,
so as to speed up the procedures for verification of services rendered and for payments orders
(liquidation et ordonnancement). The government also intends to accelerate the payment
of duties and taxes on public investments.
23. To improve expenditure tracking and to ensure a flow of reliable data on the pace of
budget execution, the government will prepare a master computer plan in 2001 with the help of
foreign donors, and will put in place appropriate structures to be able to access rapidly and in full
all accounting data of the budget credit managers (gestionnaires de crédit),
payment order officers (sous ordonnateurs), and treasury accountants (comptables du
trésor). This will allow to establish in a timely manner periodical statements of
expenditure at the commitment, verification, payment order, and payment stages. For the
Ministries of Education and Health, the current expenditure tracking system will be enhanced,
through increased computerization. Regular reports on budget execution and physical
implementation for the Ministries of Education and Health will start to be prepared during the
course of 2001, with a view to their circulation in 2002.
24. To improve treasury accounting, a program to computerize all the main treasury offices
(trésorerie principales) is close to completion, which will enable a more rapid
consolidation of treasury operations in 2001. The preparation of opening and closing balances for
all main treasury offices for 1998-2000 will be accelerated. The Budget Execution Laws (lois
de règlement) for 1998 and 1999 will be submitted to the National Assembly in
2001, and the one for 2000 by end-June 2002.
25. Fiscal audit and control functions will be strengthened by (i) increasing the resources
allocated to the State Auditor General (Inspection Générale de l'Etat,
IGE) and the National Audit Court (Chambre des comptes); and (ii) updating the
mandates of these institutions. A study will be completed by end-April 2001 to identify reform
measures and prepare related action plans, especially for the IGE. Implementation of these action
plans will begin by end-September 2001.
26. The government also intends to reform the public procurement system based on a study
that will be completed by end-September 2001. The aim is to strengthen the supervisory
functions and procedures of the specialized central and regional procurement commissions
through the adoption of internationally accepted reference standards. The specific
recommendations will be submitted by end-September 2001, and their implementation will start
at end-2001.
27. The draft reform of the civil service has been submitted to the National Assembly and
will be examined during its next session; it enshrines the principle of merit-based pay, reduces
the number of special regimes, and introduces a code of ethics. A number of implementing
decrees will be adopted after the promulgation of the law.
Monetary policy
28. The 2001 monetary program will aim at achieving the program targets for inflation and
growth of net international reserves, while providing room for an adequate increase in credit to
the economy from commercial banks, estimated at around 18 percent, so as to facilitate
the attainment of the target for real GDP growth. This policy is consistent with a broad money
growth rate of about 9 percent and is in line with projected nominal GDP growth.
Government reimbursement of debt to the central bank will amount to 4 percent of the
beginning-of-period money stock. In pursuing its monetary policy, the central bank will continue
to make use of indirect instruments and will only intervene in the foreign exchange market to
achieve its target for net international reserves and to smooth exchange rate fluctuations. The
authorities will enforce rigorously the prudential regulations, which have been recently adapted
to conform with the Basel core principles. A continuous-time foreign exchange market will be
established during the course of 2001. The performance criteria and benchmarks for monetary
policy are presented in the attached Table 2. To the extent that the rate of inflation
continues to decline, the monetary authorities will stand ready to reduce their key interest rates.
The attached technical memorandum of understanding (TMU) defines the quantitative
performance criteria, benchmarks, and the adjustors in case the privatization revenue or external
financial assistance objectives are not achieved. The TMU also stipulates that the authorities will
consult Fund staff, should money growth or the level of net foreign assets significantly
exceed/fallshort of program levels.
External policy and regional integration
29. The external current account deficit (including grants) is projected to remain stable at
about 7.5 percent of GDP between 2000 and 2001 as higher imports of goods and services
arising from increased public and private investment are expected to be offset by an export
growth of 7.5 percent in SDR terms. The improvement in the financial and capital account
resulting from expected large capital inflows, including World Bank disbursements, should allow
the net foreign assets of the central bank to be raised to the equivalent of 12 weeks of imports of
goods and services.
30. As noted earlier, the government is determined to continue simplifying its import tax
regime under the CBI/RIFF and to introduce gradually a common external tariff within
COMESA. In 2001, and with a view to completely eliminating the 30 percent tariff rate in
2002, 75 percent of products subject to this tariff will be shifted to the 25 percent
rate.
31. Following the adoption of the new Fund-supported program, the government will seek a
concessional rescheduling from its Paris Club creditors covering the period 2001-03, taking into
account that it reached the decision point under the enhanced HIPC Initiative in
December 2000. The government will also seek to normalize relations with all other
bilateral creditors on the basis of rescheduling terms at least equivalent to those of the Paris Club.
Regarding debt management, the authorities are installing a new integrated computer system
(SYGADE) with the support of foreign donors. They will pursue a prudent external debt policy
and will refrain from contracting or guaranteeing any new external debt on nonconcessional
terms, except for commercial loans of less than one year and for rescheduling arrangements.
B. Structural and Institutional Reforms
32. In addition to the above-mentioned structural measures in the area of tax and customs
administration, budgetary procedures, and the civil service, the government is determined to
promote private sector development by pursuing its privatization program, reforming and
modernizing the regulatory framework, and strengthening the legal system. The privatization
program for 2001 includes privatizing Air Madagascar, the national airline; selling off the
government's holdings in the telecom company (TELMA); and privatizing some large companies
in the sugar (SIRAMA), cotton (HASYMA), retail distribution (SOMACODIS) and shipbuilding
(SECREN) sectors. A large number of liquidations currently underway will be completed.
33. In the legislative and judicial areas, as mentioned in the interim PRSP, the government
intends to implement a comprehensive set of priority measures, including: (i) increasing
the number of judges and providing them with enhanced training; (ii) decentralizing the
courts and increasing their resources; (iii) improving safety in the rural areas; (iv) promoting
access to land ownership; (v) adopting legal procedures to make the judicial system more
accessible and its procedures speedier; (vi) updating business law; and (vii) making the new
arbitration system operational. A bill on large-scale mining investment will be submitted to the
National Assembly in 2001.
34. The key institutions of the autonomous provinces (provincial councils elected on
December 3, 2000, governors, and governors' councils) are expected to start functioning in the
first half of 2001. The transfer of functions to the autonomous provinces will take place gradually
under transfer agreements (conventions de transfert). This process will mainly cover the
areas of education, health, rural development, and road maintenance, while the arrangements
already in place will be strengthened. A local government public finance system will be put in
place, in parallel with the gradual development of the administrative capacities of the
decentralized authorities (provinces, regions, municipalities). The unified tax for small taxpayers
(taxe synthétique), the licensing fees, and the real estate tax will be the key
components of the tax base of the provincial and local governments. To define the basic
framework for central and decentralized government finances, the government will submit to the
National Assembly in the second half of 2001 a draft organic law on the framework of
government finances, which will also define the resources of the decentralized authorities.
C. Social Policies and Poverty Reduction
35. The measures described above are intended to create a favorable environment for
economic growth and should lead to an increase in employment and an improvement in the living
standard of the population. To improve basic social indicators and help reduce poverty, these
measures will be supplemented by specific actions in the areas of health, education, access to
drinking water, and basic infrastructures as described in the interim PRSP and the final PRSP
planned for mid-2001. The following specific measures are planned in the area of education (i)
the recruitment of a large number of qualified teachers, to be assigned on a priority basis to rural
primary schools; (ii) the construction of a substantial number of schools and the creation of
additional classes: (iii) the direct transfer of increased budgetary resources to schools for the
acquisition of basic teaching equipment and essential school supplies; and (iv) specific measures
to significantly reduce the repetition rate.
36. In health, the action plan will focus on: (i) increasing allocations to basic health centers,
especially in the most isolated areas; (ii) creating additional basic health centers and hiring
medical staff; (iii) expanding the network of hospitals with surgical facilities; and
(iv) introducing a family planning system and a national AIDS policy.
IV. Program Monitoring and Review
37. The Fund will undertake semiannual reviews to assess the economic and financial
developments and compliance with the quantitative and structural benchmarks and performance
criteria. To ensure adequate program monitoring, the government will continue to improve the
quality, scope, and delivery of data in the context of the General Data Dissemination System. The
government and Fund staff will hold further consultations with a view to improving the
economic statistics.
1. This technical memorandum defines the variables used to establish the quantitative
performance criteria and benchmarks for the program, how they are calculated, and any
adjustments deemed necessary. It also explains the monitoring variables, that is, external
financed assistance and direct investment flows connected with the privatization of public
enterprises. Unless otherwise indicated, in the case of stock, variables are expressed in
cumulative variations from December 31, 2000 and, in the case of flows, as cumulative flows
from January 1, 2001. The criteria at end-March and end-September 2001 are benchmarks; those
at end-June and end-December 2001 are performance criteria.
2. This variable is expressed in terms of the stock of arrears. There will be no net
accumulation of new arrears, meaning that there should be nil variation over the period
considered.4 External
payments arrears are defined as nonpayment in full of interest and principal obligations due to all
creditors, excluding arrears resulting from nonpayment of debt service for which rescheduling
negotiations are under way.
3. The nonaccumulation of nonconcessional debt contracted or guaranteed by the
government is a performance criterion to be observed at all times. Nonconcessional external debt
is defined as having a grant element of less than 35 percent. Under the program,
nonconcessional debt includes financial leasing and any other instrument giving rights to a
current financial liability, under a contractual arrangement by the government of Madagascar or
guaranteed by the government of Madagascar, but excludes debt contracted under rescheduling
agreements and normal import-related credits of less than one year. A definition of debt is
contained in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt,
adopted by the Executive Board, on August 24, 2000.
4. Calculation of the degree of concessionality of new external borrowing is based on the
10-year average of the OECD's commercial interest reference rate (CIRR) for loans with
maturities greater than 15 years and the six-month average CIRR for loans maturing in less than
15 years.
5. NFA are defined as the difference between gross international reserves and all foreign
liabilities of the Central Bank of Madagascar (BCM), including debt to the IMF and other short-
and long-term liabilities of the BCM. Gross international reserves are defined as liquid,
convertible claims of the BCM on nonresidents, excluding assets that are pledged, or
collateralized, or otherwise encumbered.
6. For purposes of calculating this criterion, NFA must be converted into Malagasy Francs
(FMG) at the end-of-period exchange rates for the reference period established in the program
(program exchange rate).
7. The BCM's NDA include net credit to the government, credit to enterprises and
individuals, claims on banks, liabilities to banks in the form of central bank deposit auctions
(appels d'offre négatifs), and the other items net, excluding the foreign exchange
adjustment item.
8. Foreign exchange deposits must be converted into FMG at the end-of-period program
exchange rate.
9. Net domestic financing requirements of the central government are defined as the sum of
(a) the variation in the stock of central government domestic debt to the banking and nonbanking
system; (b) domestic or foreign receipts from privatization operations as defined in Section IV-B,
paragraph 22 below; and (c) the variation in central government domestic or external
payments6 arrears.
Central government (CG) corresponds to the scope of operations of the Treasury as indicated in
the General Treasury Operations table (Opérations globales du Trésor, or
OGT) .
10. The variation in domestic payments arrears consists of the amount to be recommitted and
net payments delays (clearings, items in process of payment, expenditure committed but with no
payments order issued), as defined in the OGT.
11. Net bank claims consist of BCM and commercial bank claims on the CG, including
auctioned Treasury bills (BTAs), and other Treasury bills and liabilities, net of CG deposits with
the BCM and commercial banks, including foreign currency deposits.
12. Nonbank claims consist of BTAs and other Treasury bills (BTs) and bonds placed with
nonbank institutions and the public. The valuation of nonbank claims is based on the change in
outstanding conventional Treasury bills (maturities of 1 to 5 years), auctioned Treasury bills
(maturities of 1 month to 3 years), and outstanding domestic government loans.
13. Deposits and debt to the BCM in foreign exchange must be converted into FMG at the
end of period program exchange rate.
14. BTAs must be posted at their net value at time of issue.
15. Tax revenue includes that received by the Treasury, but also suspense items, including
those related to the public investment program.
16. Reserve money consists of notes and coins issued and sight deposits of commercial
banks with the BCM (including both required and excess reserves).
17. Central bank deposit auctions (appels d'offres négatifs) are excluded from
reserve money and are classified in NDA.
18. Broad money (M3) includes notes and coins in circulation, sight and time deposits with
commercial banks, including foreign currency deposits of residents, and bonds issued by
banks.
19. Foreign currency deposits must be converted into FMG at the end-of-period exchange
rates for the reference period established in the program.
20. External financial assistance is defined as loans and grants (nonproject) provided as
structural adjustment financing and resulting in funds available to the Treasury.
21. Financial assistance in foreign exchange must be converted into FMG at the program
exchange rate. Assistance in kind must be posted when the counterpart funds are deposited with
the Treasury.
22. The cost of privatization operations is included above the line in central government
operations. Apart from covering reform-related costs, gross receipts from the privatization of
public enterprises (PEs) will be used to reduce outstanding domestic debt.
23. In the case of excess net external financing (external financial assistance less public debt
service on a cash basis) over the amount programmed (i) the floor on the BCM's NFA will
adjusted upward; (ii) the ceiling on the BCM's NDA will be adjusted downward (the adjustment
will be converted into FMG at the exchange rate used in the operation); and (iii) the ceiling on
the net domestic financing requirements of the central government
(Section I-E) will be adjusted downward (the adjustment will be converted into FMG at
the exchange rate used in the operation).
24. In the case of a shortfall in net external financing at end-March, end-June,
end-September, and end-December 2001 against the programmed amount, the floors and ceilings
will be adjusted by a maximum of SDR 25 million, SDR 30 million,
SDR 30 million, and SDR 30 million, respectively, and as follows:
(i) the floor on the BCM's NFA will be adjusted downward by the amount indicated above; (ii)
the ceiling on the BCM's NDA will be adjusted upward by the same amount (the adjustment will
be converted at the program exchange rate; and (iii) the ceiling on the central government's net
domestic financing requirements (Section I-E) will be adjusted upward and capped at the
above-mentioned maximum amount (the adjustment will be converted to FMG at the program
exchange rate) .
25. Adjustments will be made for any deviation in (a) privatization receipts; and
(b) current privatization-related expenditure. The floor on net foreign assets will be
adjusted upward or downward by a maximum of SDR 40 million from the
programmed floor if disbursed foreign resources from privatizations net of (b) are higher or
lower than programmed. Similarly, the BCM's NDA will be adjusted downward or upward (at
the average exchange rate of the pertinent quarter). The ceiling on domestic government
financing will be adjusted to take account of any discrepancies between actual
privatization-related expenditures and those programmed (upward adjustment if expenditure
exceeds the amount programmed and downward, in the opposite case, up to the difference
reported).
26. Amounts of external assistance and debt service denominated in SDRs will be converted
to into FMG at the fixed exchanged rate of FMG 8500 = SDR 1, recorded on January 2, 2001;
corresponding amounts denominated in US$ and Euros will be converted in FMGs at the
exchange rate of 6,500 FMG = US$1 and 6,100 FMG = EUR 1, the exchange rate prevailing on
January 2, 2001.
27. In case that demand for money is stronger than expected and the exchange rate
appreciates, the central bank should intervene on the interbank foreign exchange market (MID) to
offset this appreciation, taking into account programmed limits (floor/ceiling) on the
accumulation of net foreign assets and the level of broad money. Given the program's target, if
broad money growth since end-December 2000 exceeds 18 percent on an annual basis,
and/or if the level of net foreign assets exceeds the programmed level by more than
5 percent of broad money at end-2000, the authorities will consult Fund staff on measures
to be taken in the context of exchange market and monetary policy management.
28. The Malagasy authorities will provide Fund staff with the following information and data
according to the schedule provided, either directly (e-mail or facsimile) or through the Fund's
resident mission.
29. Monthly:
30. Quarterly:
31. Monthly:
32. Moreover, information on important measures adopted by the government in the
economic and social areas that would have an impact on program development, changes in
legislation, including laws passed by the National Assembly and the new rules established by the
Banking Supervision Commission (CBF), and any other pertinent legislation will be reported to
Fund staff on a timely basis for consultation or information, as appropriate.
