1.  Madagascar faces a major challenge in achieving high levels of sustainable economic growth and reducing poverty. Poverty is estimated to afflict 70 percent of the population (compared with some 45 percent in the early 1960s), and per capita income has declined in real terms by more than two-thirds since 1970. The country's physical and human infrastructure needs are daunting. To overcome these constraints, since 1994, the government has been implementing a broad-ranging strategy of structural adjustment and financial stabilization with the objective of creating an environment conducive to trigger a major increase in investment and savings.

2.  In the initial years, liberalization efforts focused on the exchange, trade, and price systems, as well as on key economic sectors, such as petroleum, food, transport, and telecommunications, and they were complemented by financial tightening and increased emphasis on the use of market-based policy instruments. Subsequently, in the course of 1996, the government adopted a three-year economic and financial program. The program targets a consolidation of the results achieved in macroeconomic and financial stabilization since 1994 and focuses on strengthening the regulatory environment and the public administration, while phasing out public sector involvement in commercial activities. Financial support by the International Monetary Fund (IMF), the World Bank, the African Development Bank (ADB), and other bilateral and multilateral donors and creditors, together with debt relief on Naples terms from Paris Club creditors in April 1997, have been instrumental in the implementation of the program.

3.  The government continued to pursue the above-noted medium-term strategy in 1998 and, in light of recent economic developments, it has updated the timetable for structural reforms and prepared a macroeconomic framework for the period 1999-2001, in collaboration with the staffs of the IMF and the World Bank. In support of its medium-term program, the government is seeking a second annual arrangement under the Enhanced Structural Adjustment Facility (ESAF) of the Fund, and a second Structural Adjustment Credit (SAC-II) from the World Bank.

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5.  Notwithstanding the reduction in the fiscal deficit (on a commitment basis and including grants) to 2.4 percent of GDP in 1997 (compared with an objective of 1.6 percent of GDP), it proved more difficult than anticipated to overcome institutional weaknesses in revenue administration and expenditure control. Nonetheless, the revenue objective (of increasing tax revenue by almost one percentage point to 9.4 percent of GDP) in 1997 was met, as the authorities took numerous measures, including: (i) the creation of a large taxpayer unit (CFPE) in April 1997; (ii) the broadening of the VAT tax base and strengthening of its administration; (iii) the implementation of a decree in November 1997 canceling all tax incentives that had been granted since the revocation of the investment code on August 13, 1996; (iv) the improvement in the payment mechanism of petroleum taxes; and (v) the creation of a domiciliation bureau to monitor special tax and customs regimes, in particular those applying in the export processing zone. Efforts at reinforcing expenditure control were less successful, with expenditure overruns resulting in the accumulation of new payments arrears. Nonetheless, on the whole, the government succeeded in reducing the stock of domestic arrears by close to 1 percent of GDP in 1997, as it began to implement a five-year program to eliminate the stock of domestic payments arrears, estimated at 2 percent of GDP at end-1996.

6.  With respect to structural reforms, the government made significant strides in deregulation and institutional strengthening of the financial sector during 1994-96, and by mid-1997, it focused its attention on civil service reform and privatization. A sweeping reform of the exchange and trade system, begun in May 1994, culminated in September 1996 in the removal of all remaining restrictions on payments and transfers for current international transactions. By end-1996, Madagascar had also eliminated all nontariff barriers on external trade, with the exception of the maintenance of a negative list of imports for health and security reasons, prior authorization for imports of flour (which was eliminated in 1997), and quality control for certain exports; it had also reduced its maximum tariff rate to 30 percent and abolished taxation of exports except for the export tax on vanilla, which was finally removed in mid-1997. Regarding vanilla marketing, the decree establishing the state-run Malagasy Vanilla Institute (IVAMA) was canceled. Key steps were taken to strengthen the financial system, including the establishment of central bank independence, enhanced prudential supervision of commercial banks, and the rehabilitation of the two state-owned banks experiencing financial difficulties. In the second half of 1997, the Malagasy government announced a list of 46 public enterprises to be privatized or liquidated (including key companies such as the petroleum company, national airline, and telecommunications company) and proceeded with technical preparations for the privatization of the two state-owned banks.

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8.  Real GDP growth of almost 4 percent in 1998 was led by a rise in investment, mainly in construction, as well as by sharp increases in export zone manufacturing and in commerce, telecommunications, and tourism services. Agricultural production was fairly good despite crop destruction in a few regions by the recent locust infestation. The moderate rise in inflation to 6.2 percent is explained by the broadening of the VAT base, temporary price hikes in anticipation of crop damage, strong domestic demand boosted by rising household incomes, and exchange rate pressures. Weaker-than-anticipated export growth, together with some weakness in private sector savings, left the external current account deficit (excluding official grants) unchanged at 7.9 percent of GDP. To stem exchange rate pressures, the central bank intervened in the interbank exchange market, and, in September 1998, raised its base rate from 9 to 10 percent. The deferment of balance of payments aid, however, caused a reduction of SDR 86 million in exchange reserves, bringing the total to SDR 121 million (2 months of imports of goods and nonfactor services).

9.  In the course of 1998, major fiscal reforms were initiated that aimed at strengthening, for the medium term, the government's capacity in revenue collection and expenditure monitoring and execution. Excluding the net cost of structural reforms and the repayment of domestic arrears, the underlying budget deficit (including grants and on a commitment basis) reached 4.6 percent of GDP, compared with a deficit of 2.4 percent in 1997. After including the cost of structural reforms and the reduction in domestic arrears, the overall budget deficit amounted to 6.3 percent of GDP in 1998, and it was financed mainly domestically. The insufficient rise in tax revenue was compounded by expenditure overruns.

10.  A set of strong revenue-raising measures was put in place, including the streamlining of the value-added taxation (introduced in the supplementary budget in August 1998), which closes certain loopholes, abolishes all exemptions from VAT (except for those based on international conventions), and significantly tightens tax collection procedures. In addition, increases in excise and petroleum taxes compensated for a reduction of import duties on investment goods from a range of 20-30 percent to 10-20 percent. The government also adopted an action plan to reorganize the tax department and to increase collection capacity through a more effective collaboration between the different tax collection units as well as the setting up of regional tax collection centers. Notwithstanding these measures, revenue reached only 9.7 percent of GDP, barely exceeding the 1997 level owing to: (i) the delays in eliminating ad hoc exemptions from VAT and from customs duties and the VAT exemptions granted under the old Investment Code; and (ii) weaknesses in tax and customs administration.

11.  In the second half of 1998, the government began to implement a comprehensive program of institutional reforms and changes in spending procedures, so as to improve, over the subsequent 18-24 months, transparency, accountability, and efficiency in budget execution and treasury cash management. Structural reform expenditures were related mainly to the upgrading of judicial services, the start of a program of wage decompression in the civil service, and the asset restructuring of the first of the two state-owned banks to be privatized (BFV).

12.  To facilitate budget financing and tap the growing interest of nonbanks in government instruments, in November 1998 the government increased flexibility in the treasury bill market by: (i) widening the access to auctions; (ii) allowing more flexibility in satisfying demand across different maturities; (iii) eliminating the required good-faith deposit while introducing a minimum guarantee in an amount of 5 percent of each submitted bid; (iv) reducing the minimum subscription to FMG 500 million; and (v) enhancing information dissemination on auction results.

13.  Significant efforts were made in the area of structural reforms. Technical preparations for civil service reform progressed, particularly: (i) the census of civil servants; (ii) the audits of pilot ministries (education, health, justice, public works, and the two financial ministries); and (iii) the studies for a review of the civil service statute. In the financial sector, one of the two public banks, BFV, was financially restructured and privatized. The BFV's nonperforming loans were lodged with a debt-workout unit (SOFIRE), which is charged with continuing the recovery effort. To minimize the cost to the government of the financial restructuring and to accelerate the recovery of nonperforming loans, the government instituted special chambers in the lower courts in May 1998 that offer fast-track procedures. In the agricultural sector, trade practices that restrict access to the vanilla sector and limit competition were eliminated. Further steps towards the liberalization of the petroleum, air transport, and telecommunication sectors were taken, including the adoption of regulatory frameworks that ensure competition. In December 1998, the petroleum company was offered for sale.

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15.  The government's strategy for 1999-2001 will emphasize reforms and initiatives aimed at improving Madagascar's growth potential as rapidly as possible while maintaining macroeconomic stability through financial consolidation and strengthened public sector management in general. Efforts will aim at: (i) accelerating civil service reform and privatization of public enterprises, as well as providing better infrastructure services; (ii) enhancing external and domestic competitiveness of the economy; (iii) improving income distribution; (iv) facilitating access of the poor to social services; (v) promoting good governance, in particular by emphasizing the rule of law and improving the efficiency and accountability of the public sector; and (vi) ensuring a secure environment conducive to the development of the country. In selecting policies that foster private sector development, the government will give priority to those that are protective of the natural environment and provide a level playing field for all economic agents. The government has begun to implement a detailed agenda of structural reforms for 1999-2000, which also constitutes the basis for the expected support from the international donor community during that period. Building upon this agenda, in the latter part of 2000, the government will extend its schedule of specific reforms through the medium term.

16.  Decisive implementation of this strategy during the period 1999-2001 should enable Madagascar to: (i) accelerate real GDP growth rates to exceed 6 percent over the medium term; (ii) bring inflation down to levels comparable with those of its trading partners; (iii) maintain a comfortable level of gross international reserves at the central bank, covering more than three months of imports of goods and services, while making progress toward reaching a viable external position.

17.  A boost for higher private savings and investment is expected to result from financial sector reform and efficiency gains through privatization, trade liberalization (including regional integration initiatives), and regulatory reforms. In the coming years, public sector saving is projected to be restrained by the high cost of structural reforms, as well as the urgent need to rebuild the education and health systems. Public investment also is envisaged to be higher than was assumed in the PFP for 1996-99 so as to accelerate the development of infrastructure that will facilitate private investment. Overall, investment should rise steadily to reach more than 16 percent of GDP by 2001, accompanied by an improvement in the level of national savings to 13 percent of GDP.

18.  The growth objectives of the revised program rely on a strong development of the secondary and tertiary sectors, in particular, mining, tourism, and export manufacturing, notably by fostering the creation of genuine geographic export processing zones. The agricultural growth potential will be tapped in tandem with the upgrading of physical infrastructure. In this regard, government policies will seek to ensure that broad-based rural development is promoted through appropriate investment in rural infrastructure and agricultural research and extension. While private investment is expected to be concentrated mainly in agriculture, industry, energy, mining and services such as tourism, the government will focus on developing basic infrastructure in the areas of basic health care, primary and secondary education, and roads.

Fiscal Policy, Public Finance Reform, and Decentralization

19.  Overall Strategy. In line with the objectives of the initial PFP, the medium-term strategy targets a lasting improvement in public finances. This will involve raising the level and quality of expenditure, while steadily and significantly increasing revenue. Dependence on foreign assistance should, therefore, be gradually reduced. The program thus relies on (i) continuing efforts at strengthening tax and customs administration, and improving the efficiency of the tax system, so as to obtain a 3 percentage point increase in the ratio of tax revenue to GDP over the program period; and (ii) enhancing the government's capacity to deliver public services. Achieving these goals will require civil service reform, prioritization of expenditure, improved budget management and control, and decentralization of government functions. The underlying government deficit (on a commitment basis and including grants but excluding the net cost of structural reforms) would be limited to 2.5 percent of GDP in 1999 and decline gradually to 1.2 percent by 2001. After taking into account the additional net cost of structural reforms, as well as the repayment schedule for domestic arrears, the overall fiscal deficit (on a cash basis and including grants), after reaching 6.3 percent of GDP in 1998, should decrease to 2.4 percent by 2001.

20.  Tax Policy. The ratio of tax revenue to GDP is expected to increase from 9.7 percent in 1998 to 13.3 percent by 2001. To this end, the government will modernize and simplify the tax system, take further steps to broaden the tax base, and strengthen tax and customs administration. Key tax policy measures will involve the rationalization of taxes on international trade, the modernization of direct taxes, and the strengthening of the audit of enterprises. In line with the regional initiatives in which Madagascar participates (CBI, IOC, COMESA), and in order to further open up the Malagasy economy, customs tariff rates will be limited to three non-zero rates (5, 15, and 25 percent) by the year 2000. In conjunction with this reform, the system of excise taxes will be streamlined. Strict control will be maintained over the granting of access to special tax and customs regimes, and more frequent auditing of enterprises benefiting from tax privileges will seek to reduce abuse. If evasion is detected, or if companies fail to comply with the terms and conditions of these regimes, their access to tax privileges will be revoked.

21.  Tax and Customs Administration. Further progress in this area is expected to substantially contribute to the targeted revenue increase, involving: (a)  further streamlining of the organizational structure and completing the computerization of all departments; (b) the use of a uniform taxpayer identification system for all taxes, duties, and levies; (c) strengthening the large taxpayer unit through appropriate budgetary allocations and training; (d) tightening the control by customs administration, improving the effectiveness of the pre-shipment inspection system, and requiring customs officers to collect, at a minimum, the import duties assessed by the preshipment inspection company without the power to negotiate these taxes downwards; (e) establishing an effective program for taxpayer control and census, including small taxpayers who will be subject to the new single tax (impôt synthétique) in 2000; and (f) better management of the tax and customs personnel to ensure quality recruitment and training, rigorous career-tracking, and performance-based pay.

22.  Public Expenditure. The government's expenditure policy will focus on improving the quality and sectoral allocation of public expenditure, with particular emphasis on education and health, as well as on the strengthening of management and control of budget execution. The reallocation of budget expenditure will involve redirecting more resources to essential government functions, such as primary health care and primary and secondary education services (including financing for programs targeting the poor, like the school lunch program); nonformal education (adult literacy and education programs, and preschool activities); administration of justice; maintenance of law and order; providing infrastructure; support for agricultural research and extension; monitoring of the implementation of a legal and regulatory framework facilitating the development of the formal private sector; and environmental protection. To the greatest extent possible, these programs will be combined with cost-recovery incentives. In accordance with these priorities, the government has begun to focus its public expenditure reviews on the primary and secondary education sectors, primary health care, and infrastructure services, the results of which provide the basis for specific expenditure decisions in the budgets for 1999-2001.

23.  The level of expenditure on goods and services will be gradually increased to improve working conditions and ensure the maintenance of the capital stock. Wage and employment policy in the civil service will be geared toward introducing a performance- and merit-based pay system, including through the awarding of bonuses and decompression of the wage scale. The organizational audits conducted in the pilot ministries and the planned decentralization of the civil service will guide the wage and employment policy with a view to creating a well-paid, highly motivated, and efficient civil service. Civil service pay adjustments and employment levels will be determined within the context of budget constraints.

24.  Regarding capital expenditure, the government will continue to use project selection criteria to ensure consistency between capital and recurrent costs on new projects. Recurrent investment expenditure will be transferred to the current budget. Investment projects should be programmed and budgeted inclusive of all taxes.

25.  Planning, execution, and monitoring of the budgetary process will be strengthened with respect to the transparency of public expenditure, the observance of rules of good governance, and the financial accountability of the public sector. To this end, the government will not make any commitments that are not included in the budget and approved by the National Assembly. The new public sector procurement procedures will be strictly followed to improve transparency and efficiency. Expenditure monitoring will also be facilitated by the introduction of a new uniform nomenclature for the budget and public accounting with the budget for 2000. Expenditure execution will be monitored monthly by the Budget and Finance Ministries. The pace of expenditure commitments will be adjusted to revenue performance, and any ministries or departments that commit expenditure in excess of their appropriation ceilings or that engage in extrabudgetary spending will be subject to sanctions and may be brought before the Financial and Budgetary Disciplinary Council (CODIF), established in late 1998. Furthermore, technical improvements are being made to reduce expenditure on electricity, telephones, and water. Consistent with this approach, quarterly reports on the preliminary budgetary outturn based on the current budget nomenclature, and including a complete list of loans guaranteed by the government, will be published. To complete this process, the final accounting bills (lois de règlements) will be prepared, adopted by the National Assembly, and published on a regular basis, as they were in 1993, 1994, and 1995.

26.  To protect the budget objectives, procedures governing the reallocation of budgetary appropriations and off-budget expenditure will be tightened: only the President, Prime Minister, and Minister(s) of Finance and the Budget will have discretionary spending authority in order to deal with emergencies and threats to national and external security. Any other budgetary reallocations will be made in accordance with the laws and regulations in force. The government will also issue new directives to ensure reporting on the activities of public institutions and the operations of annexed budgets. Financial management will be strengthened with the introduction of a new expenditure control system and improvements in treasury cash management in October 1999.

27.  Civil Service Reform. Equivalent to 1 percent of the population, the Malagasy civil service is not oversized, but it suffers from a number of organizational and regulatory weaknesses, as well as lack of motivation. The strategy for civil service reform adopted by the government in July 1997 will seek to improve civil service performance over a five-year period through: (i) stricter personnel management and a more rational organization; (ii) an incentive-based wage structure to increase employee accountability; and (iii) the enforcement of rules. After establishing an adequate database through a physical census, the payroll and personnel data systems will be integrated by mid-2000. Other elements of the reform include reviewing and streamlining management and organizational structures, and the introduction of a merit-based wage system. In January 1998, a high-level strategic committee (Technical Committee on Civil Service Reform) and an interministerial coordination committee were created to supervise the reform, focusing initially on the pilot ministries (Budget and Decentralization, Finance and Economy, Public Works, Education, Health, and Justice). The audit of key positions in these pilot ministries will be completed in 1999, and preparatory work on the new code of conduct and statutes for civil servants will be finalized in 2000. Before end-1999, the government will also adapt its medium-term agenda for civil service reform to take account of the envisaged gradual decentralization of the public administration.

28.  Decentralization and Autonomy of the Provinces. Decentralization will enable the government to improve the supply of services and the use of public resources at the local level. Currently, local governments account for about 7 percent of total public spending (0.7 percent of GDP), but raise only an insignificant share of government revenue (0.2 percent of GDP). Donor-funded expenditures at the local level represent approximately 2 percent of GDP, a small part of which is managed by the municipalities. The objective is to improve significantly local and regional resource mobilization, especially at the level of the autonomous provinces. Moreover, the management capacity and efficiency of expenditures made by municipalities and autonomous provinces is to be strengthened so that more public services can be delivered locally as is envisaged under the organic law on decentralization.

29.  To attain these objectives, the government will introduce legislation to (a) distribute powers and responsibilities among the central government, the autonomous provinces, regions, and communes; and (b) create a viable system of local government finances. In this regard, central government transfers to local governments will be improved through a transparent and predictable mechanism, based on accounting and data reporting rules. Some measures have already been taken in 1998 and 1999, including the reform of the property tax and the professional levy (taxe professionelle-TP). A single tax (impôt synthétique) for small taxpayers will be introduced in 2000 and should improve local resource mobilization. The fiscal potential of municipalities will also be reviewed to help the decentralized administrations and the central government with identifying suitable tax instruments. In addition, a training program will be conducted to help local governments fully assume their roles in both administrative and tax reforms. This training should develop human resources and management capacities at the national, regional, and local levels, in accordance with the new power sharing. Finally, a study will be needed to determine the set-up of the Special Solidarity Fund which, according to the Constitution, is to redress regional imbalances.

30.  The primary objective of monetary policy will be to maintain price stability. Accordingly, the central bank (BCM) will continue to rely on indirect monetary policy instruments to control the level of its domestic assets, while it will closely monitor developments in foreign assets and broad money. In steering banking sector liquidity, which has declined steadily since 1997, the challenge for the BCM will be to pave the way for a smooth transition from low credit activity to an expansion that supports economic recovery, without jeopardizing the declining trend in inflation. In managing liquidity, the BCM will increasingly supplement its deposit auctions with open market operations. Interest rates will remain flexible and market determined, and the BCM may use its key interest rates to signal a tightening of its monetary policy. To encourage longer-term financial saving, in April 1999 the Central Bank lowered the reserve requirement for time deposits from 20 percent to 5 percent (while increasing the requirement for sight deposits from 20 percent to 23 percent). Foreign exchange market intervention by the BCM will be limited to achieving the targets for gross international official reserves and smoothing out short-term fluctuations in the exchange rate.

31.  A number of reforms are under way that will strengthen financial markets through increased intermediation and the availability of a wider range of instruments. Since 1998, the share of nonbank domestic financing of the government has increased significantly. Treasury bills have become a more attractive savings instrument since the development of a secondary market and the reform of November 1998, which increased flexibility in the primary treasury bill market. Access to auctions is no longer restricted to mainly financial intermediaries; there is more flexibility in satisfying demand across different maturities; information dissemination on auction results was enhanced; the required good-faith deposit was reduced; and the minimum subscription was lowered. The new treasury cash management system will allow a better coordination of government domestic financing with monetary management. Also, participation by small shareholders in the privatization process will be facilitated through the warehousing fund (Fonds de Portage et de Privatisation), which will offer shares in privatized companies. Lastly, the prerequisites for the creation of a stock exchange, such as standardized accounting and the rules on disclosure, will be put in place in 2000.

32.  The financial restructuring and divestiture of the state from the rural development bank (BTM) will be concluded by September 1999. The full cost of the financial restructuring of the BTM, as well as the cost of the retrenchment program for its personnel, will be recorded in a transparent manner in the government budget of 1999. The list of delinquent debtors whom the bank has sued will be published when their obligations are transferred to the debt workout unit and updated lists will be published (also for the debtors whose obligations are held by SOFIRE) regularly. To ensure greater effectiveness in the recovery of the nonperforming loans extended by the two former state-owned banks, the government will consider legislative amendments and will take steps to strengthen the jurisdiction of the special courts.

33.  To protect the soundness of the banking system, the banking commission's control and audit function will be enhanced, as well as its surveillance and supervision capacity. In addition, the following measures will be introduced in 1999-2000: (i) the maximum exposure in terms of loans extended to a single or related borrower will be reduced gradually from 40 percent to 30 percent of a bank's capital by March 2001; (ii) solvency requirements will be kept in line with international standards; (iii) any mismatch between the maturities of assets and liabilities will be closely monitored; and (iv) a number of accounting procedures for commercial banks will be revised. All prudential regulations will continue to be strictly and uniformly enforced. Financial institutions, in particular credit unions and organizations involved in the emerging sector of microfinancing, will be subject to similar prudential regulations as banking institutions.

34.  As part of its financial sector reform, the government will start in 1999 with the modernization of the insurance sector. It will adopt a revised Insurance Code that fosters competition. On the basis of a financial and technical audit of the sector, two public insurance companies will be offered for privatization. In addition, an organizational, financial, and actuarial audit of the social security system (CNAPS) and the government pension system (Caisse de Retraites Civiles et Militaires - CRCM and Caisse de Prévoyance et de Retraite - CPR) will be conducted in 1999-2000 in preparation of subsequent reforms.

35.  Madagascar's statistical database remains weak, notably in the areas of national accounts, balance of payments, external debt, and monitoring of basic social indicators. Improvements in these areas will be needed to strengthen economic policy implementation; in particular earlier availability and improved quality of public expenditure data would permit the adoption of timely corrective measures in fiscal policy. It will be particularly important to improve data on public debt given the authorities' intention to request assistance under the HIPC initiative. To facilitate the formulation and monitoring of economic and financial policies, the government is making a determined effort to improve the quality and availability of macroeconomic and social data. In this regard, the new status of the national statistics institute (INSTAT) as a public industrial and commercial entity (EPIC) will enable it to discharge more effectively its responsibilities. A new consumer price index, combining traditional and modern indices, is being prepared, and revised national accounts for the period 1993-95 have been published. Statistics offices in the public administration will also work on improving the data on external debt and foreign trade, particularly with regard to the export processing zones.

36.  In order to attain quickly a rate of economic growth that meets Madagascar's development needs, the government will continue to seek technical assistance from the international community. The technical assistance provided by the IMF will focus on improving the operation of fiscal institutions, on bank supervision and regulation, and on the restructuring and modernization of the financial sector, including the foreign exchange market. In the fiscal area, particular attention will be paid to strengthening tax policy and tax and customs administration, with the latter also involving bilateral technical assistance. The IMF and the World Bank will also lend their technical support for putting in place instruments that will improve expenditure control and monitoring. Lastly, the World Bank will continue to provide assistance with respect to privatization, health, education, the financial sector, debt management, the social safety net, land reform, and the strengthening of the judicial system, and it will also support the government in the reform of the licensing system for certain activities (such as fishing and mining).

Legal Reform and Improvement of Judicial Services

37.  The security of legal transactions is a key component of good governance and is essential for the growth of private investment. To attain this objective, the government undertakes, inter alia, to adopt the following measures: (i) compilation, publication, and dissemination of laws and various codes by end-1999; (ii) introduction of additional reforms identified by the Business Law Reform Commission (CRDA); (iii) continued training of magistrates and court clerks at the ENMG (Ecole Nationale de la Magistrature et des Greffes), which is the only source of recruitment; (iv)  improved working conditions and professional support of magistrates, to increase their effectiveness by introducing a performance-related pay scheme to be applied to the whole judicial staff; (v) establishment by end-1999 of a functioning system for the arbitration of trade disputes through the application of the law of December 2, 1998 on arbitration; and (vi) efforts to reduce the costs and waiting periods in judicial proceedings. Concerning this latter measure, a study on the expeditiousness of legal proceedings is being conducted to find ways of reducing the constraints on the management of legal cases. A medium-term action plan will be prepared, based on the recommendations of this study, and the first phase will be fully implemented by end-1999. Without waiting for the conclusions of the study, however, the government undertakes to eliminate the sentencing fees that constitute a major financial obstacle to the effective enforcement of judgments.

38.  Limited access to land is another important hindrance to the growth of private investment in Madagascar. The government plans to adopt a more liberal land-use policy. In particular, the granting of long leases (bail emphytéotique) will be simplified through reforms aimed at facilitating and clarifying the applicable rules in a manual that will be based on preestablished, nondiscriminatory criteria. Moreover, to promote the use of long-term leases, the government will amend the tax system by end-1999 to allow payment of the registration fee by installments. Lastly, the government will quickly establish a pilot program for the allocation of land with high economic potential (located in five tourist and five industrial zones) on a competitive and transparent basis.

Simplification of Administrative Procedures

39.  To promote private sector development, the government has prepared an action plan aimed at improving administrative procedures. By end-1999, the government will: (i) simplify the administrative steps involved in establishing enterprises; (ii) eliminate bottlenecks to private participation in the tourism sector; and (iii) streamline the procedures for granting visas, work permits, and residency cards to foreign technical or managerial personnel offered employment in Madagascar.

Privatization

40.  The privatization program targets 136 companies over the period 1997-2002. A first phase, which will end no later than June 30, 2000, involves the privatization or liquidation of 46 enterprises, including enterprises in such key sectors as air transport (Air Madagascar), petroleum distribution (SOLIMA), railroads (RNCFM), airports (ADEMA), telecommunications (TELMA), sugar, and cotton. The government has resolved not to hold more than 32 percent of the capital of these enterprises, and its strategy for withdrawal from these sectors will be reinforced by the adoption of regulatory and institutional frameworks that promote competition. The list of enterprises to be privatized in a second phase will be published before the end of June 2000.

41.  To build and maintain public confidence in the privatization program, the government is committed to ensuring utmost transparency in the divestiture process. Therefore, the government will use clear competitive bidding procedures, as follows: (i) the intention to offer firms for full or partial private sector participation will be widely publicized; (ii) the prequalification criteria and the selection methodology will be clearly spelled out in the bidding conditions; and (iii) the results will be published at the conclusion of each sale, listing the terms of sale, the bids received, and the price at which the sale took place. Preservation of the assets of enterprises to be privatized is assured under a decree published in 1997 on precautionary and administrative measures. Progress reports will be prepared at least every quarter, containing also information on privatization receipts and expenses, and they will be published in the media for dissemination to the general public.

42.  The privatization process is accompanied by a set of social measures. In April 1999, the government issued general rules for calculating the compensation of laid-off workers, who will also benefit from a social reintegration program. To encourage participation in the privatization program by the public at large, a warehousing fund (FPP) is being created in 1999. In addition, to alleviate the potential geographic impact of the program, some of the privatization receipts will be deposited in a Social Fund in Support of Regional Development (FSADR) to finance specific local projects through existing mechanisms (e.g., FID, SECALINE, Microréalisations). The net proceeds of privatization, after deduction of costs and authorized transfers to the FPP and the FSADR, will be held in an earmarked Treasury account at the central bank. Deposits in this account will be used to cover future net costs of privatization and to repay domestic public debt.

Foreign Trade and Payments

43.  The government will continue to liberalize trade and investment, particularly in the context of the regional initiatives in which Madagascar participates. In this respect, Madagascar, as a member of the Indian Ocean Commission (IOC) and the Common Market for Eastern and Southern Africa (COMESA), will appoint a Committee for the Regional Dimension of Adjustment (CODRA) by end-1999 to ensure the compatibility of Madagascar's adjustment policies with regional cooperation objectives, particularly those of the Cross-Border Initiative (CBI).

44.  In accepting the obligations of Article VIII of the IMF Articles of Agreement in September 1996, the government removed all restrictions on trade and external current account transactions. Since the requirement to surrender export proceeds was abolished in December 1996, the only foreign exchange regulation affecting current transactions is the obligation to repatriate export earnings, which may be held in foreign currency accounts in Malagasy banks. With a view to increasing flexibility in trade financing while broadening banking services, the government in October 1997 authorized commercial banks to grant foreign currency loans for the financing of current transactions. The government will also liberalize capital flows in the coming years, when conditions are appropriate. Therefore, the government will take further steps to institutionally strengthen the banking sector, in particular to ensure an effective prudential supervision by the banking commission, and it will encourage the modernization of the financial system.

Agriculture and Livestock

45.  The government's agricultural policy aims at improving rural output growth and living standards, as well as alleviating rural poverty. The government will continue to liberalize and privatize productive activities in order to concentrate more fully on its essential public service responsibilities, particularly the definition of policies and strategies, regulation, monitoring, coordination, evaluation of implemented programs, and the provision of basic services to the rural population (production infrastructures, information, education, communications, and, on a limited, transitional basis, research and extension programs). The government will privatize SIRAMA, SIRANALA, and HASYMA in 1999, thus breaking up the current sugar and cotton monopolies. It will also relinquish its remaining interests in rice mills, livestock farms, and flour mills. Rice and other essential food imports will no longer be exempt from customs duties, and imports of rice and fertilizer under bilateral arrangements (involving grants) will be sold by public tender to the highest bidder. In addition, the liquidation of IVAMA will be completed by end-1999.

46.  The agricultural and rural strategy will be supported by a Rural Development Action Plan (PADR) for 1999-2002. The Plan seeks to: (i) redefine and improve the efficiency of institutions and all parties involved in the implementation of agricultural policy; (ii) identify key infrastructure components and other investments to be directly or indirectly undertaken by the government; and (iii) redefine and/or clarify the roles and responsibilities of all parties involved in rural development.

47.  The Plan will assign responsibilities between user associations and government agencies concerning the management and maintenance of all rural infrastructure, such as irrigation systems and rural track networks (enhancing the professional capacities of producers by making them increasingly responsible for the preservation of basic infrastructure components). The government will develop a regulatory framework appropriate for farmer associations. To promote the development of substantial agricultural growth, the government will continue to fund agricultural research and extension programs; privatize the veterinary profession; remove all constraints to the development of an input supply system by the private sector; and implement priority programs on land titling, the rehabilitation of irrigation systems and rural tracks, and the development of rural credit.

48.  The locust invasion continues to pose a serious threat to the agricultural sector. The government's anti-locust program is concentrated in the high-risk areas and geared to protecting the sources of income of the affected communities. Areas of priority action have been identified, and these activities will be carried out with consideration for keeping the secondary environmental effects and health risks to a minimum. In addition, the government is in the process of developing long-term strategies based on effective surveillance and early-warning systems.

Fishing

49.  The government's new policy is based on concerted development of the various kinds of fishing (traditional, artisanal, and industrial), aimed at optimizing the economic and social benefits for Madagascar while ensuring the sustainable growth of this sector. To rationalize the use of fishing resources, the government, in consultation with the World Bank and other donors: (i) doubled license fees in 1999; (ii) froze the number of fishing licenses at the 1998 level; and (iii) is studying measures to encourage diversification and the efficient use of resources. The government is also conducting a study aimed, among other things, at defining new mechanisms of granting and revoking shrimping licenses on a competitive, transparent, and nondiscretionary basis, and will begin phasing in the new system during the 2000 season.

50.  The Fisheries and Aquaculture Development Fund (FDHA) should be managed transparently and in collaboration with all participants in the fisheries sector. FDHA resources will represent no more than 20 percent of receipts from licenses and other sources of fisheries revenue. On the expenditure side, at least 80 percent of FDHA resources will be used as counterpart funds in projects cofinanced by donors and lenders. The Ministry of Fisheries and Fishing Resources is implementing a fisheries control and surveillance program in concert with all of the parties concerned.

51.  The government believes that the mining sector is crucial to Madagascar's development strategy. It has already submitted to the National Assembly a new Mining Code defining the sector's legal and environmental framework while promoting increased transparency in the granting of permits. For mining projects in Madagascar costing more than $200 million, the government will establish a special tax regime by law that mirrors best international practices. This law will prohibit negotiations on a case-by-case basis. The government is committed to expediting the processing of applications for mining permits while applying transparent and nondiscretionary procedures. The government will limit its participation in studies and promotional activities, and has redefined the role of the semi-public agency OMNIS, which will no longer be involved in production and marketing activities.

52.  In 1999, the government will strengthen the environmental affairs office within the Ministry in charge of Mining to interface between operators, the relevant administration, and all offices responsible for the environment at the national level. The government undertakes not to introduce new barriers to investment in the mining sector and will ensure that the costs of environmental impact studies are financed by investors, as envisaged in the decree on establishing compatibility between investment and the environment (MECIE), which is being revised.

Petroleum

53.  The liberalization of the petroleum sector will be completed in 1999 with the adoption of an enabling legal and regulatory framework and the privatization of the public enterprise, SOLIMA. The new legal and regulatory framework contains clauses on the creation of a regulatory body (OMH), the introduction of a "free access system," the granting of licenses to operators, prices, taxation, technical standards relating to petroleum installations and operations, and product specifications. The privatization includes the sale of the Toamasina refinery along with its storage facilities, on condition that no protection against imports nor other incentives will be granted by the government.

Electricity

54.  he government has also opened the electricity sector up to private investors, through the adoption of a law reforming the sector. This law defines a new organization of the sector aimed at encouraging competition, introduces a system for the granting of concessions or licenses, establishes rules for use of the interconnected system so that electricity can be supplied at least cost, defines the principles governing the rate system, and establishes an autonomous regulatory agency. This law will be supplemented by implementing decrees to be promulgated by end-July 1999.

55.  The government will issue the request for bids for the privatization of the public enterprise JIRAMA before June 2001. In preparation for this, it will implement the privatization strategy for JIRAMA developed in collaboration with the donors and following a well-defined phased plan. The preparation of this privatization includes, notably, before September 1999: (i) the adoption of the decree including JIRAMA on the list of enterprises to be privatized; (ii) official publication by the government of the declaration of sectoral policy; (iii) the establishment of the regulatory authority. Otherwise, the privatization process of JIRAMA by the privatization committee ought to proceed according to the terms of the current privatization law: (i) the recruiting of the technical body to formulate the privatization strategy in October 1999; (ii) adoption of the privatization strategy at the latest by March 2000; (iii) the recruitment of an investment bank to implement the privatization in March-April 2000; and (iv) the request for prequalification tenders at the latest in October 2000.

Telecommunications

56.  The government will actively pursue the liberalization of the sector, as set forth in the January 1997 Telecommunications Act. OMERT, the independent regulatory authority set up in 1997, was strengthened in the course of 1998. In particular, the government will avoid conflicts of interest by ensuring that no member of OMERT or of the supervisory ministry may at the same time be on the board of, or hold a position of responsibility in, one of the telecommunications companies, including TELMA.

57.  In the context of this liberalization policy, licenses have been granted to four cellular telephone service providers in recent years. The interconnection regulations took effect in October 1998. Further liberalization efforts focus on issuing a license to a second operator for the entire national territory. Invitations to bid will be issued no later than at end-2000.

Transportation

58.  Recognizing that an efficient transportation sector is essential for the development of all economic activities, the government plans to adopt policies that will make it possible to: (i) rehabilitate, on a priority basis, the transportation network with direct impact on the development of economic activities, tourism, and rural areas; (ii) restore balance in intermodal distribution, by encouraging alternative means of transport; (iii) maintain unrestricted pricing; (iv) relinquish its involvement in direct transportation activities, while developing human resource management capacities for those functions that will remain under government control; and (v) introduce organization and management mechanisms in support of the transportation infrastructure, while increasing the capacity to mobilize local resources. To this end, a phased action plan for each subsector will be proposed by the government, taking into account the needs of all concerned, including making any institutional or regulatory changes that may prove necessary.

59.  Road transport. In 1999, the government will: (i) determine the road fees of the Road Maintenance Fund; (ii) agree with the World Bank on overall funding for road maintenance (in a sector policy letter) and on mechanisms to ensure an appropriate, automatic, and regular flow of funds to the Road Fund account; (iii) institute a sound road maintenance system that allows for the allocation of sufficient resources and involves regular reviews, as well as annual reviews of the state of road maintenance; (iv) adopt all the implementing decrees of the Road Act; (v) reorganize and strengthen the responsible ministry's capacity to manage the roads; and (vi) establish the new legal framework for managing public works. In addition, the government will prepare a road safety program and an economic analysis on the least-cost construction of priority roads, as well as define procedures for private sector involvement in the management of these activities.

60.  Air transport. This sector was liberalized through measures imbedded in four decrees published in April 1999. The government will: (i) continue efforts to increase competition on both domestic and international routes, particularly by liberalizing international charter services; (ii) establish the sector's regulatory body, Madagascar Civil Aviation; (iii) privatize Air Madagascar; and (iv) grant concessions for groups of primary and secondary airports.

61.  Maritime transport. With a view to increasing the productivity of the country's port facilities, the government will: (i) open up to private firms the management of secondary ports, excluding the docks and the harbor master's office (primarily the ports for ocean-going vessels of Mahajanga, Antsiranana, and Toliara); (ii) prepare an action plan for institutional reform of the Toamasina Port Operating Company (SEPT), in particular with regard to the privatization of lading operations; (iii) liquidate the coastal transport firm (CMN) and privatize the shipping firm (SMTM); (iv) adopt a plan to promote coastal and river navigation, if these have a comparative advantage over road transport; (v) launch a pilot investment program for river navigation with new management structures involving operators; and (vi) clarify the institutional arrangements for management of the Pangalanes Canal.

62.  Rail transport. Government actions consist of: (i) transferring RNCFM assets to a property management company to be established for this purpose; (ii) continuing the process for granting concessions until the creation of a concessionary company for the northern network TCE-MLA-TA; (iii) privatizing related activities, that is, the ballast factory (SCM), the Andasibe Industrial Lumber Complex (CIBA), and the operation of the southern network; (iv) continuing to prepare the RNCFM financial restructuring plan (accounting corrections, financial account auditing, and debt processing) and the social plan; and (v) rehabilitating the rail infrastructure, in accordance with the priority investment program to be established.

Environment

63.  Madagascar's ecosystem is characterized by unique diversity in both climatic and biological terms. The current biodiversity is under great pressure, primarily because of rapid population growth and extreme poverty. The government will pursue its national environmental policy, reaffirmed in the "National Environmental Act" and the recent establishment of the National Council for the Environment (CNE). Such a policy is designed to stem the degradation of natural resources, primarily by reconciling human behavior with the environment, ensuring that the environmental policy is an integral component of national growth and development objectives. To implement this national policy, an Environmental Action Plan (PAE), being implemented over a 15-year period in three five-year phases, was prepared and introduced. The second five-year phase began in July 1997.

64.  Major actions envisaged relate to: (i)  land policy, with the recent adoption of regulations on "Relative Land Security," aimed at improving land tenure security in rural areas, and the launching of a national participatory process to formulate and adopt in 1999-2000 a new Land Code based on the new Constitution; (ii) preparation of a protected areas code (COAP) by June 1999; (iii) formulation and implementation of an energy policy based on the rational use of forestry resources and on the promotion of nonforestry energy sources; (iv) adoption by June 1999 of a decree restructuring the MECIE, which should clarify the respective roles of the Ministry of Environment, the National Environmental Office (ONE), the sectoral ministries, and executing agencies (AGEX), pursuant to the National Environmental Act and its amendments, and the definition of mechanisms for calculating contributions to cover environmental assessment costs; (v) revision by September 1999 of the decree creating the National Forestry Fund (FFN), taking account of the audit of the forestry fund completed in March 1999, to establish mechanisms to help decentralize its regional operations while ensuring that its financing is an integral part of the budget.

Research

65.  To promote the development of growth potential in various sectors of the economy, the government will rely on applied research and support needed investments in agricultural, industrial, technological, environmental, and pharmaceutical research. Particular attention will be given to entomological research (locusts and insects), research on varietal improvements of plant (rice, coffee, vanilla, legumes) and animal (cattle and pigs) resources, as well as research on the production of vaccines.

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66.  The Government will restructure its expenditures with a view to promoting growth and enabling the least privileged groups to participate in the country's development. Therefore, investment projects in the social sector (basic health care, primary and secondary education, and literacy) and the strengthening of public security will be priorities.

67.  To strengthen human resources, the government adopted in December 1997 the National Program for Improving Education and Training (PNAE II), aimed, in the 1998-2003 period, at achieving universal primary education as soon as possible, improving learning and teaching quality, gradually expanding and strengthening secondary education services, modernizing higher education, and delivering training sought by employers and employees to improve productivity and profitability.

68.  To that end, the government is committed to improving management of the education sector by delegating decisions and responsibilities to provinces, school districts, and schools. For primary and secondary education, it will ensure: (i) the assignment of a sufficient number of qualified teachers to rural primary schools, taking into account the results of the last census; (ii) the introduction of a budget item management system, under which teacher positions can be planned for each primary school; (iii) that the payment of wages to the teaching and administrative personnel of schools is conducted by offices that are in the vicinity; (iv) direct transfers of increased budgetary resources to educational institutions for the procurement of basic teaching materials and essential school supplies (e.g., chalk, paper, pencils, etc.). In higher education, the government will emphasize the administrative and financial autonomy of universities to enable them to recover a larger portion of the costs of teaching and university services. In vocational training, it will also promote the recovery of teaching costs.

69.  Public health expenditure per capita has begun to rise gradually in real terms. Budget appropriations for health districts will be distributed on the basis of specific criteria such as population and type and administrative performance of primary health facilities. Public spending will focus on cost-effective strategies, particularly in the areas of prevention (with special emphasis on communicable diseases such as malaria and leprosy), immunization coverage, access to essential drugs, and family planning methods (in particular, information campaigns targeting specific groups, with a view to increasing the demand for and use of modern methods of contraception). The government is also committed to strengthening the sector's management capacity, decentralizing decision-making to health districts, redeploying health personnel, rehabilitating existing health facilities, and developing private health services.

70.  The cost-recovery system was generalized in 1998 and is operational throughout the country. With drugs supplied by the Central Drug Procurement Office (SALAMA), in operation since 1996, the cost-recovery system has made essential drugs available and substantially increased visits to public health facilities. However, to ensure the viability of this new drug-supply system, the government will take steps by end-September 1999 to make SALAMA financially autonomous; in particular it will insist on the full and automatic pass-through of the proceeds from drug sales by all Basic Health Centers (CSB) and hospitals (CHD and CHU).

71.  The government plans to take supplementary measures to combat poverty, including: (i) rehabilitation of feeder roads to increase food security; (ii) promotion of the activities of associations and NGOs; (iii) promotion of the micro-credit system in both urban and rural areas, particularly for women; (iv) development of a national nutrition program focusing on mothers and children (SECALINE); and (v) continuation of the community microrealizations program (FID). Moreover, to boost employment, in carrying out public investment projects, priority will be given to the labor-intensive methods (i.e., HIMO system).

72.  The attainment of the development objectives requires that the protection of property and individuals be strengthened in accordance with the basic principles of substantive law, so as to create an environment conducive to development activities in both urban and rural areas. The government's new policy in this field emphasizes security at the neighborhood level (sécurité de proximité) and the measures envisaged to achieve these objectives are: (i) continue action to establish mobile units in all communes; (ii) strengthen the Civilian Protection Unit; and (iii) set up a national civilian protection system, initially in urban areas.

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73.  Madagascar's medium-term balance of payments projections have been updated in light of recent economic and financial developments and the policies to be pursued over the period 1999-2001. Madagascar will need exceptional external assistance in the medium term to achieve its growth objectives. The external current account deficit (excluding official transfers) is projected to narrow to 7.3 percent of GDP in 1999, reflecting strong export growth and a slowdown in the growth of imports. For 2000-2001, accelerating overall economic growth averaging 5.5 percent is projected to be driven to a large extent by rising merchandise and service exports and to require an increase in imports. As a result, the external current account deficit would decline gradually to 6.6 percent of GDP by 2001.

74.  After taking account of disbursements under existing commitments, of grants, and of the need to maintain an adequate level of international reserves, the financing gap is projected to total SDR 964.4 million from 1999 to 2001. This amount is expected to be met by debt relief, including a possible stock-of-debt reduction operation in 2001, ESAF resources, and drawings on expected commitments of balance of payments assistance from bilateral and multilateral sources. The residual gap in 1999, projected at SDR 97.6 million after current debt relief (SDR 40 million), will be fully covered by disbursements of balance of payments assistance from bilateral and multilateral donors and lenders.

75.  Madagascar's external debt outstanding, which was US$3,061.1 million (382.1 percent of exports of goods and nonfactor services) at end-1998, is projected at US$2,926.7 million (332.5 percent of exports of goods and nonfactor services) at end-1999 and US$3,166.3 million (or 301.8 percent of exports of goods and nonfactor services) at end-2001.¹ Debt relief is expected to lower the debt service ratio from 22.8 percent of exports of goods and nonfactor services at end-1998 to 20.2 percent on average during 1999-2001. The ratio of debt service to government revenue is projected to be reduced from 39.3 percent at end-1998 to 30.7 percent on average during 1999-2001.

76.  Madagascar's high debt burden significantly weakens its external position in the medium-to-long term. Even assuming that Madagascar obtains an eight-month extension of the flow rescheduling period, as well as a Naples terms stock-of-debt operation in 2000 and comparable debt relief from non-Paris Club bilateral creditors during 1999-2000, and that it borrows only on concessional terms, the ratio of its external debt outstanding in NPV terms to exports of goods and nonfactor services is expected to remain at 254.8 percent in 2001, although it will have declined from 343.5 percent in 1998.

77.  To implement its development strategy on a sound financial basis, Madagascar will continue to manage its external debt prudently and seek grants and concessional external financing. In that context, the government will neither contract nor guarantee any nonconcessional new external loans or, in particular, any loan with a maturity of less than a year, with the exception of short-term credit generally granted for imports and debt rescheduling or refinancing operations. All external loans contracted or guaranteed by the government will continue to be subject to the approval of the Parliament, and Madagascar will ensure that all debt service payments are made on a timely basis.

78.  Madagascar intends to maintain an exchange and trade system that is free of restrictions on payments and transfers for current international transactions.