Embed Size (px)
Citation preview
AFRICAN DEVELOPMENT FUND
MADAGASCAR
ECONOMIC MANAGEMENT REFORM SUPPORT PROGRAMME
(PARGE)
OSGE DEPARTMENT
March 2016
Translated document
P
ub
lic
Dis
clo
sure
Au
tho
rize
d
Pu
bli
c D
iscl
osu
re A
uth
ori
zed
TABLE OF CONTENTS
INFORMATION ON THE LOAN AND PARTIAL CREDIT GUARANTEE ......................................................iv
PROGRAME SUMMARY………………………………………………………………………………….……..v
I. INTRODUCTION……………………………………………………………………………………….1
II. COUNTRY CONTEXT .......................................................................................................................... 2 2.1 Political Situation and Governance Context ............................................................................. 2 2.2 Recent Socioeconomic and Budget Trends and Outlook ......................................................... 2 2.3 Competitiveness of the Economy ............................................................................................. 5 2.4 Public Finance Management..................................................................................................... 5 2.5 Inclusive Growth, Poverty Situation and Social Context ......................................................... 6
III. GOVERNMENT DEVELOPMENT PROGRAMME ............................................................................ 6 3.1. Government’s Overall Development Strategy and Medium-Term Reform Priorities .............. 6 3.2. Weaknesses and Challenges in Implementing the National Development Programme ........... 7 3.3. Consultation and Participation Process .................................................................................... 8
IV. BANK SUPPORT FOR THE GOVERNMENT STRATEGY ............................................................... 8 4.1 Linkage with the Bank Strategy ............................................................................................... 8 4.2 Compliance with General Budget Support Eligibility Criteria ................................................. 9 4.3 Compliance with ADF Partial Credit Guarantee (PCG) Eligibility Criteria ............................ 9 4.4 Collaboration and Coordination with Other Partners ............................................................... 9 4.5 Linkage with Other Bank Operations ..................................................................................... 10 4.6 Analytical Works Underpinning this Operation ..................................................................... 11
V. THE PROPOSED PROGRAMME ....................................................................................................... 11 5.1 Programme Goal and Objective.............................................................................................. 11 5.2. Programme Components ........................................................................................................ 12 5.3. Description of ADF Partial Credit Guarantee ........................................................................ 12
5.4. Policy Dialogue ...................................................................................................................... 17 5.5. Loan Conditions ..................................................................................................................... 18 5.6. Application of Good Practice Principles on Conditionality ................................................... 19 5.7. Financing Needs and Arrangements ....................................................................................... 19 5.8. Application of Bank Policy on Debt Accumulation ............................................................... 19
VI. PROGRAMME IMPLEMENTATION, MONITORING AND EVALUATION ................................. 20 6.1. Programme Beneficiaries ....................................................................................................... 20 6.2 Impact on Gender, Poor and Vulnerable Groups .................................................................... 20 6.3 Impact on the Environment and Climate Change ................................................................... 20 6.4. Implementation, Monitoring and Evaluation .......................................................................... 20 6.5 Financial Management and Disbursement .............................................................................. 21
VII. LEGAL INSTRUMENTS AND AUTHORITY ................................................................................... 22 7.1. Legal Instruments ................................................................................................................... 22 7.2. Conditions Associated with Bank Intervention ...................................................................... 22 7.3. Compliance with Bank Group Policies................................................................................... 22
VIII. RISK MANAGEMENT ........................................................................................................................ 22
IX. RECOMMENDATION ......................................................................................................................... 23
LIST OF TABLES
Table 1 Key Governance Indicators
Table 2 External Debt Sustainability Ratio - Indicators, 2025-2035 (in %)
Table 3 Doing Business 2015 and 2016 Indicators (rank)
Table 4 Linkage between NDP 2015-2019, CSP 2014 - 2016 and PARGE
Table 5 Lessons Learned from Previous Operations and Reflected in PARGE Design
Table 6 Revision of Central Government Expenditure in 2015
Table 7 Breakdown of Total Debt Contracted and Guaranteed by the State - CGS at end-2014
Table 8 Actions and Quantitative Targets prior to PARGE Presentation to the Board
Table 9 Financing Needs and Sources (in USD)
Table 10 Risks and Mitigation Measures
LIST OF GRAPHS /TEXT BOXES
Graph 1 Key Macroeconomic Indicators 2013- 2010
Graph 2 Tax Revenue (as % of GDP) in some African Countries, 2013 - 2012
Graph 3 Internally-financed Expenditure (average for the various periods)
Graph 4 Private and Public Investments (as % of GDP)
LIST OF FIGURES
Figure 1 : Description of the ADF PCG
LIST OF ANNEXES
Annex 1 Government’s Letter of Economic Policy
Annex 2 Matrix of PARGE Reforms
Annex 3 Note on Relations with the IMF
Annex 4 Key Macroeconomic Indicators 2013- 2010
Annex 5 Madagascar - National Accounts 2013-2016
Annex 6 Assessment of the Factors of Fragility and Sources of Resilience in Madagascar
Annex 7 Essential Characteristics of the ADF Partial Credit Guarantee
Annex 8 Map of Madagascar
i
CURRENCY EQUIVALENTS February 2016
Currency = Ariary (MGA) UA 1 = MGA 4427.51 EUR 1 = MGA 3502.25 USD 1 = MGA 3207.17
FISCAL YEAR 1 January – 31 December
WEIGHTS AND MEASURES
1 tonne = 2204 pounds (lbs) 1 kilogramme (kg) = 2.200 lbs 1 metre (m) = 3.28 feet (ft.) 1 millimetre (mm) = 0.03937 inch (") 1 kilometre (km) = 0.62 mile 1 hectare (ha) = 2.471 acres
ii
ACRONYMS AND ABBREVIATIONS
ADF African Development Fund
AfDB African Development Bank
AFL Amended Finance Law
AGOA African Growth and Opportunity Act
BCM Central Bank of Madagascar
CFRA Country Fiduciary Risk Assessment
CGS contracted and guaranteed by the State
CM Council of Ministers
CPIA Country Policy and Institutional Assessment
DDP Public Debt Department
DGD General Directorate of Customs
DGI General Directorate for Taxation
DSA Debt Sustainability Analysis
ECF Extended Credit Facility
EDBM Economic Development Board of Madagascar
EITI Extractive Industries Transparency Initiative
ERR Economic rate of return
FDI Foreign Direct Investment
GAP Governance Action Plan
GDP Gross domestic product
GoM Government of Madagascar
GSP General State Policy
HEE Top State Positions (Hauts Emplois de l’Etat)
HDI Human Development Index
I-CSP Interim Country Strategy Paper
IDA International Development Assistance
IFL Initial Finance Law
IMF International Monetary Fund
IP Implementation Plan
JICA Japan International Cooperation Agency
JIRAMA National Water and Electricity Distribution Company
KSI Key sector indicators
MAP Madagascar Action Plan
MDGs Millennium Development Goals
MFB Ministry of Finance and Budget
MGA Malagasy Ariary (local currency)
MGFO Madagascar Field Office (AfDB)
NACS National Anti-Corruption Strategy
NCDA Non-concessional debt accumulation
NDP National Development Policy
NPV Net Present Value
OLFL Organic Law on Finance Laws
PAGI Institutional Governance Support Project
PAP Priority Action Plan
PAPI Investment Promotion Support Project
PARGE Economic Management Reform Support Programme
PBO Programme-Based Operations
PBSO Programme-Based Support Operations
PCG Partial Credit Guarantee
PEFA Public Expenditure and Financial Assessment
PEP Presidential Emergency Plan
PFM Public finance management
PPP Public-Private Partnership
PRBSP Poverty Reduction Budget Support Programme
PBSO Programme-Based Support Operations
PURE Economic Recovery Emergency Programme
RCF Rapid Credit Facility
SADC Southern African Development Community
SDR Special Drawing Rights
SMP Staff Monitoring Program
TA Technical Annex
TFP Technical and Financial Partners
iii
TSF Transition Support Fund
UA Unit of Account
UNDP United Nations Development Program
USAID United States Agency for International Development
USD United States dollar
VAT Value-added tax
WB World Bank
iv
INFORMATION ON THE LOAN AND PARTIAL CREDIT GUARANTEE
Client Information
BENEFICIARY : Republic of Madagascar
SECTOR : Economic and financial governance
EXECUTING AGENCY : Ministry of Finance and Budget (MFB)
LOAN AMOUNT : UA 12.5 million
PARTIAL CREDIT GUARANTEE: USD 40 million
2015 Financing Plan for 2015-2016 Budget Support Operations
Source Amount (2015) Amount (2016)
ADF - ADF LOAN UA 12.5 million Undefined
ADF - PCG USD 40 million
World Bank USD 55 million Undefined
European Union EUR 13 million EUR 20 million
France (AFD) EUR 40 million Undefined
Key ADF Financial Information
* related to ADF loans
Timeframe – Main Milestones (projected)
Activities Dates
Appraisal November 2015
Negotiation March 2016
Approval March 2016
Effectiveness May 2016
Disbursement May 2016
Supervision June 2016
Completion report December 2016
Completion December 2017
Loan/Grant currency UA
Interest* type Not applicable
Interest rate margin* Not applicable
Commitment charge* 0.5% (5 basis points)
Other charges* 0.75% (service charge)
Maturity 40 years
Grace period 10 years
NPV (baseline scenario) Not applicable (NA)
ERR (baseline scenario) NA
v
PROGRAMME SUMMARY
General
overview of the
programme
Programme title: Economic Management Reform Support Programme (PARGE)
Geographic scope: Nationwide
General schedule: 18 months (July 2015 – December 2016)
Financing: UA 12.5 million (ADF loan) and USD 40 million ADF partial credit
guarantee
Operational instrument: General Budget Support and ADF Partial Credit Guarantee
Sector: Economic governance
Programme
outcomes
The implementation of reforms backed by PARGE and supported by other
development partners will help create the fiscal space needed to finance development
projects and programmes originating from the NDP. The following major outcomes
are expected from the programme: (i) increased tax revenue levels from 9.9% of GDP
in 2015 to 11.5% of GDP in 2016; (ii) reduction of non-productive spending, from
0.9% of GDP between 2013 and 2014 to 0.6% of GDP between 2015 and 2016; and
(iii) increased public and private investment rates from 3.9% and 11.6% of GDP,
respectively, in 2014 to approximately 5% and 13% of GDP in 2016
Alignment on
Bank priorities
PARGE is consistent with the Bank’s 2013-2022 Ten-Year Strategy (TYS) and the
2014-2016 Interim Country Strategy Paper (I-CSP). Under the I-CSP, PARGE
contributes towards the implementation of priority actions of Pillar I (“Strengthen
governance to ensure consolidation of the State”) and more specifically to the
following components of that pillar: “Strengthen budget management" and "Promote
private investment". Given the reforms supported by PARGE in the social sectors
and the promotion of investments in industry, programme outcomes will contribute
to the Bank’s “High 5” priorities”, especially: "Feed Africa”, “Industrialize Africa”
and “Improve the quality of life for the people of Africa”. Furthermore, PARGE is
consistent with: (i) two of the three pillars of the 2014-2018 Governance Action Plan
(GAP II), related to "Public sector and economic management" and the "Investment
and business climate"; and (ii) Pillar I on improving the business environment by
accelerating key structural reforms to promote private investment under the Bank’s
2013-2017 Private Sector Development Strategy. This program is aligned with the
Transition Countries’ Strategy entitled "Strategy for Addressing Fragility and
Building Resilience in Africa 2014-2019", especially Strategic Pillar 1 on "Building
State capacity and supporting effective institutions”, with a view to facilitating job
creation.
Needs
assessment and
rationale
Madagascar's post-crisis challenges have persisted into 2015 despite the return of
constitutional order. These include: (i) poor domestic revenue collection; and (ii) the
need to unlock the country’s economic potential to ensure inclusive and sustained
growth. Accordingly, it is imperative to build on the achievements of previous
programmes by broadening the fiscal space and extending a Partial Credit Guarantee
(PGC) to the country, with a view to freeing up additional resources to boost
economic recovery. The USD 40 million PCG will help to raise USD 55 million on
the national and international syndicated loan market, corresponding to part of the
2015 financing gap.
Harmonization
Development partners in Madagascar have revived the mechanism for coordinating
policy dialogue, and for aligning and harmonizing interventions. They coordinate
their activities through sector and thematic groups. The Bank actively participates in
this process within the Public Finance/Budget Support Group to ensure better
coordination of major economic and structural reforms with the World Bank, the
European Union, the International Monetary Fund and the French Development
Agency. PARGE reforms were previously discussed with the abovementioned
partners, and were selected based on the comparative advantages and value-added of
each institution to achieve harmonization, in accordance with the Paris Declaration
and the Busan principles on aid effectiveness.
Bank’s value-
added
PARGE is an innovative operation that could lend greater visibility to the Bank,
because it is the first budget support operation accompanied by a partial credit
guarantee from the ADF to support reforms. In addition to AfDB’s significant
regional experience garnered from its economic reform support operations in fragile
vi
States, as well as its holistic and integrated approach, which combines general budget
support with institutional support, this operation will enable Madagascar to access
financial markets, raise private funds, extend debt maturities and reduce borrowing
costs to finance the budget deficit. Without the PCG, Madagascar would be unlikely
to benefit from favourable financing conditions on the national and international
syndicated loan market and to meet the objectives of Government’s public investment
agenda.
Contribution to
gender equality
and women’s
empowerment
PARGE will have a favourable impact on gender in general and women’s
empowerment in particular, mainly through key structural reforms in social capacity-
building as well as public investments in education, health and social protection. The
authorities’ commitment to social spending floors is among the actions that will, in
the short term, help to deal with the social emergencies resulting from the crisis and
affecting the most disadvantaged groups, namely women and youths.
Policy dialogue
and associated
technical
assistance
Dialogue with the Malagasy authorities on programme economic reforms were
conducted transparently, in a consultative and participatory manner, with other
development partners within the framework of the "Budget Support/Public Finance”
Group. It focused on the following areas: (i) expansion of the fiscal space needed to
finance NDP programmes by improving public revenue collection, and streamlining
and controlling public spending; and (ii) promotion of economic recovery by
enhancing the efficiency of social spending and public investments as well as
promoting private investment.
This dialogue will be underpinned by analytical work on institutional support projects
(Institutional Governance Support Project – PAGI; Investment Promotion Support
Project – PAPI), namely: (i) preparation of the public finance management
modernization strategy; (ii) study on domestic revenue collection and an address
system for the city of Tuléar; (iii) study on dematerialisation of accounting operations
processing to improve the monitoring of public resource utilization; (iv) study on the
strategy and action plan for investment opportunities in the textile sector; and (v)
feasibility study on the establishment of a special economic zone.
vii
Results-based Logical Framework
Country and Programme Title: Economic Management Reform Support Programme (PARGE)
Programme goal: Contribute to robust, sustainable and inclusive economic growth through the strengthening of economic management.
RESULTS CHAIN
PERFORMANCE INDICATORS MEANS
OF
VERIFI-
CATION
RISKS/
MITIGATION
MEASURES
Indicators
(including ISCs)
Baseline
Situation Target
IMP
AC
T
Accelerated, inclusive and
sustainable growth
GDP growth rate (%) 3.3% (2014) 4.4% (2017) MFB/IMF/
UNDP
Human Development Index (HDI)
0.498 [2013] 0.550 [2017]
OU
TC
OM
ES
Outcome 1: The fiscal space needed to support economic
recovery is strengthened
Tax revenue (% of GDP) 9.9% of GDP (2014)
10.8% of GDP (2016)
MFB/IMF/
Ministry of Health
Risk related to political uncertainty: Conflicts
between the Executive and
the Legislature could undermine reform
implementation.
Mitigation measure: This risk is mitigated by the
municipal elections of July 2015, which led to the
formation of the Senate and
other institutions. The new Government’s donor-backed
commitment to spare no effort
in ensuring national reconciliation through
inclusive political and social
dialogue is a significant mitigation factor.
Risk related to the human
capacity to implement reforms: Human capacity in
Government department
remains limited. This could
slow down reform
implementation under this
programme Mitigation measures: This
risk is mitigated by various
technical assistance projects being undertaken by
development partners.
Implementation of the programme’s major reforms
is technically supported by
PAGI and PAPI, currently ongoing.
Fiduciary risk: The audit
environment and the public finance management systems
in Madagascar present a
fiduciary risk level deemed to be high overall.
Mitigation measures:
Mitigation measures specific to each public finance
management domain are
proposed in Technical Annex 2.
Risk related to vulnerability
to external shocks: This risk stems from external shocks
pertaining mainly to: (i) low
growth in the Euro area; (ii) cyclones, floods and drought;
and (iii) the slowdown of the
Chinese economy in 2015-2016.
Mitigation measures: This external risk could be
mitigated by several factors
including: (i) development
Non-productive expenditure1 (% of GDP)
0.9% of GDP from 2013 to 2014
0.6% of GDP from 2015 to 2016
Outcome 2: Inclusive
economic recovery is promoted
Public/private investment rate (% of GDP)
3.9% / 11.6% of GDP (2014)
5% / 13% of GDP (2016)
OU
TP
UT
S
COMPONENT I - EXPANSION OF THE FISCAL SPACE
Improvement of Tax Revenue Collection
Preparation, adoption and
operationalization of a five-
year tax strategy, 2015-2019
Minimum level of tax revenue
collected from the beginning of
the year
MGA 2,547
billion (end-
December 2014)
MGA 3,500 billion by end-2016
MFB/DGI
Broadening of the tax base
Number of taxpayers for all
categories of taxes
184,822 taxpayers
end-2014
245,000 taxpayers by end-
2016
Number of large- and medium-
sized enterprises liable to
corporate income tax
575 enterprises
subject to income
tax end-2014
617 enterprises subject to income tax by end-2016
Establishment and
operationalization of a
mechanism to combat
customs fraud
Ex poste Control Procedures Manual
No manual in 2014
Ex poste Control
Procedures Manual
adopted in 2015
MFB/DGD Corporate Control Charter No charter in
2014
Corporate Control Charter
adopted in 2015
Number of spot tax audits 67 spot tax audits
conducted in 2014
At least 70 tax audits
conducted in 2016
Rationalization of public expenditure
Consolidation of the payroll
of civil servants in public administration
Salary expenditure on fictitious
job positions identified in the payroll of senior civil servants
MGA 3.5 billion
in 2015
Zero salary expenditure on
fictitious job positions
identified in the payroll of senior civil servants in
2016
MFB
Preparation, adoption and
operationalization of a 2016 - 2018 medium-term debt
management strategy
2016 – 2018 medium-term debt management strategy
No strategy in 2014
2016-2018 medium-term
debt management strategy prepared and adopted by
the CM in 2015
Adoption of the decree setting up the technical debt
committee
Decree setting up the technical
debt committee
No committee in
2014
Technical Debt Committee set up by decree of the CM
in 2015
Gradual reduction of oil subsidies and transfers to
State-owned companies
Ceiling for subsidies and effective direct transfer
payments
MGA 381 billion
in December 2015
MGA 325 billion by end-
2016
Gap between the calculated benchmark price (CBP) and the
current pump price (CPP).
MGA -269 in
June 2015 Zero in December 2015
COMPONENT II - PROMOTION OF ECONOMIC RECOVERY
Improvement of public expenditure quality
Preparation and adoption of a
manual on the selection criteria for projects included
in the PIP
Manual on the selection criteria
for public investment projects
No manual in
2014
Manual prepared and
adopted by the CM in
2016
Increased spending financed with domestic resources in
the priority social sectors (education, health and
nutrition)
Minimum limit on social
spending financed with
domestic resources
(commitment basis)
MGA 43.1 billion
of domestic
funding
committed as of
end-December
2014
Minimum commitment of
MGA 73 billion by end-
December 2016
MFB/DPCB
1 This relates to transfers to State-owned companies and the reform of oil subsidies.
viii
Increased internal resources
to public investment
programmes (PIP) in FL 2016
Minimum limit on public
investments (PIP) financed with
domestic resources (commitment basis)
MGA 92 billion
of PIP
commitments funded with
internal resources
as of end-September 2015
Minimum level of PIP
commitments financed
with internal resources
amounting to MGA 420
billion by end-December
2016
partner support through a collaborative approach that
focuses on development plan
benefits and medium-term needs; (ii) significant efforts
in sourcing for budget
resources to ensure a minimum threshold for public
services; (iii) better
rationalization of expenditure in favour of the poorest and
public infrastructure to ensure the protection of sensitive
areas; and (iv) continued
stabilization of the macroeconomic framework
with maintenance of
exchange rate flexibility and improved domestic revenue
collection.
Investment Promotion
Operationalization of the Arrears Clearance Plan
Agreement to be renewed on
clearance of VAT refund
arrears (oil and mining)
Agreement existing in 2014
Agreement renewed and
signed in late 2015 on at least 95% of the arrears by
end-October 2015
MFB / DDP / EDBM
Implementation rate of annual
clearance commitments
75.9%
performance of 2014
commitments as
of end-December 2014
95% performance of 2016
clearance commitments for 2016
Opening of an escrow
account at the Central Bank
for VAT credit refunds
An escrow account for VAT credit refunds
No escrow account in 2015
An escrow account is
opened at the Central Bank in 2016 for VAT
credit refunds
Adoption of the bill on PPPs
by the Council of Ministers and transmission thereof to
Parliament
PPP bill No law in 2014
Bill adopted by the CM
and transmitted to
Parliament in 2015
Development of a PPP policy and procedures
manual
PPP policy and manual No policy and
manual (2014)
PPP manual and policy developed and adopted by
CM in 2016
Programme Activities: Financing
Implementation of agreed reforms, quarterly performance reports and Bank’s supervision reports UA 12.5 million ADF loan, USD 40 million Partial Credit Guarantee.
1
I. INTRODUCTION
1.1. Management hereby submits to the Board of Directors for approval, the following
proposal and recommendation to grant a loan of UA 12.5 million and extend a Partial Credit
Guarantee (PGC) of USD 40 million to the Republic of Madagascar to finance the Economic
Governance Reform Support Programme (PARGE). This new reform programme follows the
Emergency Economic Recovery Programme (PURE), which was a budget support operation in response
to the impact of the long political crisis of 2009-2013. PURE’s objective was to strengthen the State’s
capacity to provide priority basic social services. Despite the mixed performance, PURE helped to attain
a number of positive results, including: (i) preparation of a plan in 2014 for the clearance of domestic
arrears and signature of agreements between creditors and the Ministry of Finance and Budget; (ii)
calculation of arrears for extra-budgetary expenditure during the 2009-2013 crisis; and (iii) preparation
in 2014 of a priority action plan for the General Directorate of Taxation (DGI) and the General
Directorate of Customs (DGC) to improve tax revenue.
1.2. Reforms under the new PARGE programme are aimed at building on PURE’s
achievements, focusing on the effective operationalization of previous reforms and supporting new
reforms during implementation of the 2015-2019 National Development Plan (NDP), which still faces
enormous challenges, especially: (i) domestic revenue collection and the reduction of unproductive
expenditures required to generate resources to finance investments for economic recovery; and (ii)
economic recovery through structural investments that yield sustained, lasting and inclusive growth.
1.3. In addition to the UA 12.5 million ADF loan, the Government of Madagascar (GoM)
requested for an ADF Partial Credit Guarantee (PCG) of USD 40 million to enable it raise USD
55 million on the national and international syndicated loan market. As with the UA 12.5 million
ADF loan, the USD 55 million to be raised from the markets will be used to support priority reform
efforts defined in PARGE. The ADF’s PCG instrument will partially guarantee the bonds issued to
secure the GoM’s non-concessional debt of USD 55 million. It will essentially help to: (i) extend the
maturities of future loans to 7 years with a two-year grace period; (ii) reduce the effective cost of
borrowing; and (iii) support long-term resource mobilization on international and domestic financial
markets.
1.4. The development objective of the PARGE reform programme is to collaborate with the
other development partners in creating enabling conditions for inclusive, robust and lasting
growth by strengthening economic management. The operational objectives of this programme are
to: (i) improve fiscal receipt mobilization; (ii) streamline public expenditure; (iii) improve public
expenditure efficiency; and (iv) promote investments. The ADF loan is a single-tranche disbursement
operation, although reform implementation covers the 2015-2016 period. The structural and priority
reforms identified under this programme are the result of continuous dialogue initiated in July 2015
between GoM and development partners, especially the Bank, the World Bank (WB), the International
Monetary Fund (IMF), the European Union (EU), the Japanese International Cooperation Agency
(JICA), the French Development Agency (AFD), and the United States Agency for International
Development (USAID). This cooperation will continue within the framework of the “Budget
Support/Public Finance” Group, during the programme implementation phase. Presentation of the
programme to the AfDB Board is subject to prior implementation of a number of reforms as well as
quantitative objectives identified in agreement with the authorities and development partners, some of
which were attained in 2015.
2
II. COUNTRY CONTEXT
2.1 Political Situation and Governance Context
2.1.1. Although constitutional order returned to Madagascar in 2014, the political situation is
characterized by a degree of turbulence that undermines national development efforts. The year
2014 was decisive in resolving the political crisis that has rocked Madagascar since 2009: a new
President of the Republic was elected, a new National Assembly was established and a new Government
appointed, thus enabling the country to regain its place within the family of nations. Major political
events in 2015 include the return of former President Marc Ravalomanana to Madagascar and
relaunching of the national reconciliation process, spurred on by the major religious leaders. This
initiative, as well as the release of some political prisoners, boosted efforts to build peace and
consolidate social cohesion. However, political stability remains fragile: in May 2015, Members of
Parliament passed a motion of impeachment against the President of the Republic, which was
subsequently overturned by the Constitutional Court. The municipal elections held in July 2015 attested
to the confidence placed in the ruling party, which won more than half of the municipalities.
2.1.2. In the area of governance, the crisis has had an impact on the country’s key governance
indicators. According to the Transparency International
Corruption Perception Index, Madagascar moved up from
127th position in 2013 to the 123rd position in 2015 (out of
167 countries). Under the 2015 Mo-Ibrahim Index,
Madagascar ranked 29th out of 54 African countries
compared to 9th position in 2009, thereby placing the country
among the African countries that suffered a sharp decline in
governance. All governance indicators from the World
Bank’s "Worldwide Governance Indicators" database
deteriorated between 2008 and 2014 (Graph 1). Madagascar
regained its membership of the Extractive Industries
Transparency Initiative (EITI) in 2015. This has contributed
to enhancing governance within the sector. To promote good
governance, GoM demonstrated its commitment to fight corruption through implementation of the
National Anti-Corruption Strategy (SNLCC) 2015-2025, which was launched publicly in September
2015 by the President of the Republic.
2.2 Recent Socioeconomic and
Budget Trends and Outlook
Recent Trends
2.2.1 After deteriorating during the
transition (2009-2013), the economy
showed signs of recovery in 2014. The
growth rate was estimated at 3.3% in 2014,
compared to 2.3% in 2013 (Table 1).
Recovery was mainly driven by the mining
sector, which grew at 26%, thanks to the
boom in nickel exports that surged by 38%
in 2014 relative to 2013. The tertiary sector
slightly improved by 2.1% in 2014, after
relative stagnation in 2013, following a
3.1% growth in public investments (public works/construction) and moderate recovery in the tourism
Graph 1: Governance Indicators (Percentile
ranking; high value = positive)
Source: Worldwide Governance Indicators, World Bank
Table 1: Selected Economic and Financial Indicators 2013- 2016 (as % of GDP)
2013 2014 2015p 2016p
Real GDP growth (%) 2.3 3.3 3.2 4.3
Inflation, CPI (end of period) (as %) 6.3 6.0 7.9 7.2
Private sector credit 11.7 12.6 12.8 13.1 Total revenue, including grants 10.9 12.4 12.4 13.0
Tax revenue 9.3 9.9 9.9 10.7
Non-tax revenue 0.3 0.2 0.4 0.2 Grants 1.3 2.3 2.1 2.1
Total expenditure and lending minus repayments 14.9 14.7 16.9 16.2
Current expenditure 11.8 10.8 12.1 11.0 Wages and salaries 5.7 5.6 5.8 5.6
Interest payments 0.7 0.6 0.9 0.9
Capital expenditure 3.1 3.9 4.8 5.2 Primary balance -3.3 -1.7 -3.6 -2.3
Budget balance (commitment basis) -4.0 -2.3 -4.5 -3.2
Arrears variation -2.2 0.7 0.8 0.6 Overall balance (cash basis) -2.0 -2.4 -5.3 -3.8
Gross reserves (in months of imports) 2.2 2.5 2.7 2.8
External debt 22.8 23.7 30.7 31.5
Domestic debt 11.1 11.4 10.0 8.7
Current account balance -5.6 -0.2 -1.8 -1.8
Source: IMF Report No. 15/325 of November 2015
0
10
20
30
40
50
60
Control of
corruption
Govt.
Effectiveness
Regulatory
Quality
Rule of Law Political
Stability
2008 2014
3
sector (Annex 5). The primary sector experienced very moderate recovery, contributing less to growth
than other sectors, due to the adverse effects of the severe locust invasion in 2013. Inflation stabilized
around 6% in 2014 despite a series of revisions (3 increases) in pump prices during the year.
2.2.2 The recovery which began in 2014, after the country emerged from international
isolation, failed to gain traction in 2015 due to the international situation and domestic shocks,
especially climate hazards. GDP growth estimates in 2015 were revised downwards to 3.2%,
compared to a projection of 4% at the beginning of the year. The drought that affected Southern
Madagascar significantly eroded agricultural production and increased social assistance needs. These
events curbed agricultural sector growth. Inflation increased slightly from 6% in 2014 to approximately
7.9% in December 2015, due to a poor crop season. The tourism sector was seriously affected by the
protracted strike in Air Madagascar that paralysed all domestic flights and led to the cancellation of
over 60% of hotel reservations.
2.2.3 On the external front, the current account deficit slightly deteriorated in 2015, after a
marked improvement in 2014. This deficit (including official transfers) contracted from 5.6% of GDP
in 2013 to 0.2% in 2014 (Table 1), due primarily to: (i) a rise in exports (from 18.4% of GDP in 2013
to 20.6% in 2014), especially nickel and cobalt, and the stabilisation of imports (from 31.7% of GDP in
2013 to 37.2% in 2014); and (ii) the fall in the international market price of fuel (Annex 4). The current
account deficit was financed through government borrowing and foreign direct investment (FDI),
although FDI declined from 5.2% of GDP in 2013 to 2.9% in 20142 (Annex 5). In 2015, the current
account deficit slightly expanded to 1.8% of GDP, relative to 2014, mainly due to the decline in budget
support and tourism revenue. The balance of payments surged from a deficit of 155.7 million special
drawing rights (SDRs) in 2013 to a surplus of SDR 16.6 million in 2014, before reverting to a slight
deficit of SDR 21.1 million in 2015. These improvements in the balance of payments led to a slight
increase in gross official reserves, yielding 2.5 and 2.7 months of import cover by 2014 and 2015
respectively, compared to 2.2 months in 2013.
2.2.4 Budget policy was fraught with difficult choices in 2014 due to poor performance in tax
revenue collection, whereas GoM had undertaken to increase spending in order to boost recovery.
Despite significant reform measures to improve taxation and customs services in 2014, supported by
the technical and financial partners (TFPs), tax revenue fell short of the projections made in the
Amended Finance Law of 2014 (AFL 2014), standing at 9.9 % of GDP compared to a projection of
11.1% of GDP. Total revenue (including grants) amounted to 12.4% of GDP in 2014 compared to 10.9%
of GDP in 2013, below 13.7% of GDP as projected in AFL 2014. Budget policy implementation in 2014
was undermined by poor performance in domestic resource mobilization, the late disbursement of
budget support, the obligation to clear domestic arrears3 and the unforeseen expenses of State-owned
companies. This situation led the Malagasy authorities to reduce spending to 14.7% of GDP relative to
projections of 16% of GDP at end-2014, especially public investment and social spending expenditures.
Thus, the overall deficit (commitment basis) in 2014 was contained at 2.3% of GDP in line with the
projections in AFL 2014.
2.2.5 Budget difficulties persisted in 2015, thus widening the budget deficit. The initial Finance
Law 2015 (IFL 2015) set a total revenue target (including grants) of 13.5% of GDP and tax revenue of
11.5 % of GDP. This ambitious target was compromised by implementation problems, thus
necessitating the adoption of an amended finance law at the end of 2015 to reduce total revenue to
12.4% of GDP and tax revenue to 9.9% of GDP, which is the same level in GDP terms relative to 2014.
The international situation and climate-related disasters led to a downward revision of the economic
growth and import forecasts, and this impacted on tax revenue. The situation was aggravated within
customs and taxation services by the institutional incapacity to collect revenue, as well as customs fraud
2 This decline in FDI stems mainly from the transition of certain major mining projects (which are the main purveyors of FDI) from the investment stage to the export stage. 3 At the end of 2013, domestic arrears, consisting primarily of VAT refunds and fuel subsidies, amounted to approximately 3.8% of GDP.
4
and the high number of uncontrolled tax exemptions. Budgetary pressures arising from fuel subsidies
(since 2010), State-owned companies (losses at JIRAMA, the national water and electricity distribution
company, and at Air Madagascar) as well as the financial imbalances of the public service pension fund
persisted, thus diverting resources originally intended for priority spending (Table 6). Hence, public
spending, initially budgeted at 15.7% of GDP mainly to support economic recovery, actually increased
to 16.9% of GDP, due to the aforementioned pressures from non-productive expenditure (Table 6).
Given this situation, budget cuts were made in domestically-funded social spending and public
investments, in an effort to safeguard macroeconomic stability by containing the budget deficit to 4.5%
of GDP (commitment basis).
2.2.6 According to the latest debt sustainability analysis (DSA), Madagascar's debt distress
risk went from low in 2014 to moderate by 2015, primarily due to a greater-than-expected
exchange rate depreciation. The outstanding total public debt rose from 33% of GDP in 2007 to 35.2%
and 40.6% of GDP in 2014 and 2015, respectively (Annex 4). The domestic debt rose from
approximately 7.3% of GDP in 2008 to 11.4% and 10% of GDP in 2014 and 2015, due to a reduction
in lending from development partners during the 2008-2013 crisis period (Table 1). The external debt
remained stable during the 2008-2014 period at 24% of GDP (Table 2). The DSA conducted by the WB
and the IMF in November 2015 showed that (Table 1) all ratios for the outstanding external debt and
external debt servicing are lower than their respective thresholds for the 20-year projection period
(2015-2035). The present value of the 2014 external debt (13% of GDP) should reach 20% by 2035,
which is far below the 30% threshold. This DSA
shows that Madagascar’s debt distress risk was
raised to "moderate" due to a sharp depreciation of
the nominal exchange rate in 2015. However,
according to the DSA, the overall debt contracted
and guaranteed by the State is sustainable,
although poor tax revenue collection is a major
source of vulnerability. This risk is expected to
increase over time, since interest payments (for
less concessional financing) will more rapidly
outgrow revenue collection. To ensure public debt sustainability and viability, the authorities undertook
to reduce, to the extent possible, the costs and risks associated with new State borrowing and guarantees.
The ADF’s PCG facilitates access to non-concessional resources for the financing of economic recovery
at favourable conditions (lower cost and longer maturity). A law governing public debt contracted or
guaranteed by the central government was adopted in 2014. It provides a clearer definition of the roles
and objectives of the State in new borrowings. In agreement with the IMF, new non-concessional
borrowing is capped at USD 200 million (commitment basis) up to end-December 2016.
Prospects
2.2.7 Madagascar’s growth prospects are favourable in 2016, subject to a firm commitment to
implement bold and urgent reforms. The real growth rate is expected to accelerate to 4.3% in 2016,
mainly driven by the revival of agricultural production, a recovery in textile exports, the revival of
tourism and increased investments in infrastructure. Inflation should be contained below 10% (7.2% by
end-December 2016). The current account deficit is expected to remain unchanged at 1.8% of GDP in
2015, due to the fall in world market prices of oil and rice (Table 1). The same applies to gross official
reserves estimated at 2.8 months of imports. Total revenue is estimated to rise to 13% of GDP in 2016.
Accordingly, the authorities intend to step up efforts to improve domestic revenue collection. Tax
revenue is estimated at 10.7% of GDP. Total expenditure control is also a priority for Malagasy
authorities, with said expenditure projected to decline to 16.2% of GDP in 2016, relative to 2015. Hence,
the projected budget deficit (commitment basis) is 3.2% of GDP. Budget deficit and current account
deficit levels do not compromise the viability and stability of the country’s macro-economic framework
in the medium term. For the most part, these macroeconomic prospects will depend on the scope, depth
Table 2: Ratio - External Debt Sustainability Indicators, 2015 - 2035 (in
%)
Threshold
Projections
2015 2016 2025 2035
PV of debt to GDP 30 18 19 22 20
Exports 100 51 50 57 47 Tax revenue 200 169 172 157 127
Debt service-to-
exports ratio
15 3 3 3 4
Debt service-to-
Tax revenue eatio
18 9 10 9 10
Source: Debt Sustainability Analysis of 4 November 2015 in IMF Report No. 15/325.
5
and pace of implementation of the 2015-2019 National Development Plan (NDP) and the Presidential
Emergency Plan (PUP) for 2015-2016, as well as on world economic trends.
2.3 Competitiveness of the Economy
2.3.1 Several constraints undermine attempts to accelerate growth and improve the
competitiveness of the Malagasy economy. The first major constraint to private sector dynamism is
the uncertainty that plagues the business environment. In WB’s Doing Business 2016, Madagascar is
ranked 164th out of 189 countries (Table 3). Recurrent political crises and a paucity of structural reforms
account for the decline of most of the country’s indicators
measured in this report. Another factor is the contraction of
FDI and export market shares. According to the 2015-2016
Global Competitiveness Report of the World Economic
Forum, the most problematic factors that undermine
improvement of the business environment in Madagascar
relate, among others, to political instability, access to
financing, corruption, limited infrastructure, insecurity,
high taxes, laws and regulations, and a poorly-trained labour
force. The second major constraint is the sharp decline in
public and private investments during the past decade.
Public investments declined because of domestic revenue
collection difficulties (§ 2.2.4) and the freezing of foreign aid during the political crisis. With regard to
private investments, the volume of bank credit to the economy remains low relative to comparable
countries, thus limiting private domestic investment (Annex 4), while FDI is constrained by the high
volatility generated by the political climate (Graph 4). Infrastructure shortage is the third major
constraint to private sector development and the acceleration of growth. In road transport, the density
of the national network is 9 km/km² in Madagascar, compared to an average of 35 km/km² in Sub-
Saharan Africa; roads in good condition accounted for only 10% of the entire road network in 2013
(according to the NDP). Hence, the infrastructure sector in Madagascar in general requires massive
investments that are beyond Government’s capacity.
2.4 Public Finance Management
2.4.1 The overall efficiency of the public finance management system has not improved since
the 2006-2008 period. The 2014 Public Expenditure and Financial Accountability (PEFA) assessment
highlighted the urgent need to strengthen public expenditure management. Nine performance indicators
were revised downwards between this assessment and that of 2008, prior to the political crisis of 2009
(Technical Annex - TA 5). The reforms did not yield the expected results. Expenditure assessment
reveals inconsistencies between budget estimates (unchanged rating of D) and budget execution
(deterioration of the rating from A to C+), in terms of amount and composition. With regard to the
expenditure chain, the infra-annual budgetary implementation profile is unbalanced, with most of the
commitments deferred to the end of the year. Implementation of the organic law on finance laws (LOFL)
is not yet complete. The weaknesses of budget enforcement mechanisms neither facilitate control nor
guarantee public expenditure quality.
2.4.2 Strengthening of public finance management is an indispensable pillar for ensuring
effective economic recovery. Given the results of PEFA 2014, the authorities in October 2014 adopted
a Priority Action Plan (PAP) for public finance management (PFM) reforms in 2014-2015. The progress
achieved in PAP implementation includes the identification of public agencies, the preparation of
audited budgets for 2008-2013, the prioritization of public expenditure, greater transparency, the
Table 3: Doing Business 2015 and 2016 Indicators (rank)
Indicators DB
2016
DB
2015 Change
Starting a business 128 112 -16
Dealing with construction permits
182 183 +1
Access to electricity. 188 188 0
Registering property 161 162 +1 Getting credit 167 180 +13
Protecting investors 105 109 +4
Paying taxes 76 72 -4 Trading across borders 125 128 +3
Enforcing contracts 153 153 0
Resolving insolvency 127 128 +1
OVERALL RANKING 164 166 +2
Source: Doing Business, www.doingbusiness.org.
6
gradual introduction of multi-year budgeting, and the strengthening of public procurement procedures.
To transition from PAP, the Bank is supporting GoM through the PAGI project to prepare a PFM reform
strategy for 2016-2020. Hence, one of the main objectives of this new strategy will be to expand the
fiscal space in order to increase the volume and efficiency of expenditure that promotes poverty
reduction and economic growth through structuring public investments.
2.5 Inclusive Growth, Poverty Situation and Social Context
2.5.1 Madagascar is one of the poorest countries in the world. From 2001 to 2012, about four-
fifths of the population lived in extreme poverty (per capita consumption of less than USD 1.25 per day
in purchasing power parity (PPP) terms in 2005). Over the same period, the population’s absolute
poverty rate (USD 2 in PPP terms per person per day) increased from 88.9% in 2001 to 92.7% in 2005
and then inched down to about 91.2% in 2012. Madagascar is not expected to achieve any of the
Millennium Development Goals due to, among others, the lack of rural infrastructure investments to
improve the living conditions of the poor, especially farmers who are often exposed to natural shocks.
With donor support, the authorities have committed to improving the people’s living conditions through
the National Development Plan.
2.5.2 With regard to gender, the legal and statutory framework enshrines equality between men and
women. However, the smooth implementation of women's empowerment policies, including the 2000-
2015 National Women’s Empowerment Policy and the 2004-2008 National Gender and Development
Action Plan (PANAGED), was undermined by periods of political instability. The Global Gender Gap
Report 4 ranks Madagascar in the 74th position with a score of 0.698 (1 = equality). Women's
participation in politics remains difficult. However, as regards their participation in economic activities,
Madagascar is ranked among the top 10 gender-equal countries (88% of women versus 91% of
Malagasy men are economically active), even though these activities are increasingly conducted in the
informal sector. Madagascar's 2015-2019 National Development Plan, whose implementation is
supported by PARGE, has factored gender into the country’s priority themes and strategic pillars. The
vulnerable groups, especially women and girls in Madagascar, will benefit from public investment in
the social sectors that the programme intends to support.
III. GOVERNMENT DEVELOPMENT PROGRAMME
3.1. Government’s Overall Development Strategy and Medium-Term Reform Priorities
3.1.1. The strategic guidelines for Madagascar’s development are outlined in the 2015-2019
National Development Plan (NDP) and the 2015-2016 Presidential Emergency Plan (PUP). The
2015-2019 NDP, the accompanying 2015-2019 Implementation Plan (PMO), and the 2015 – 2016 PUP,
reflect the direction of the country’s new inclusive and sustainable development policy. These
instruments are intended to implement “Vision Madagascar”, as presented in the General State Policy
titled: “Vision - Madagascar: a Modern and Prosperous Nation”. Hence, the main objective of these
two documents is to create enabling conditions for sustained and inclusive growth, through five strategic
priorities: (i) governance, rule of law, security, decentralization, democracy and national solidarity; (ii)
preservation of macroeconomic stability and development support; (iii) inclusive growth and territorial
anchorage of development; (iv) appropriate human capital to contribute to the development process;
and (v) valuation of natural capital and building of resilience to disaster risks.
3.1.2. Implementation of the NDP and PUP will primarily require the acceleration of urgent
economic and structural reforms. The NDP and PUP implementation plan approved in June 2015
4 World Economic Forum, The Global Gender Gap Report, 2015
7
seeks to considerably increase spending on infrastructure and social development in order to achieve
inclusive growth. Thus, the priority of the authorities is to operationalize reforms aimed at: (i) raising
more domestic resources through tax policy and revenue administration reform; (ii) increasing the
volume and improving the efficiency of public expenditure on the poor and on growth; (iii) improving
governance of State-owned enterprises whose mismanagement prompts the need for State subsidies,
thus reducing the resources needed for economic growth; and (iv) increasing public investment in
infrastructure by improving the prioritization of the public investment programme, strengthening public
debt management, and refining the legal and institutional framework for public-private partnerships
(PPP).
3.1.3. PARGE is consistent with Madagascar’s overall development strategy. This programme
is aligned on the following two priorities of NDP 2015-2019: (i) preservation of macroeconomic
stability and development support; and (ii) inclusive growth and territorial anchorage of development.
Alignment with these strategic priorities enables the Bank to support Madagascar’s ongoing efforts
aimed at creating conditions conducive to inclusive and sustainable growth, as well as gradual
emergence from fragility through better economic management.
3.1.4. The guarantee proposed under PARGE (ADF PCG) to address the country’s financing
needs in this difficult post-crisis situation, will enable GoM to secure substantial funding at
concessional rates that do not undermine its debt sustainability in the medium term. The ADF as
an independent entity has no credit rating from rating agencies. However, it benefits from the support
of all donor countries and of AfDB, which has an “AAA” credit rating. Thus, the ADF's PCG will enable
GoM to borrow at competitive rates and for longer maturities. Amounting to USD 40 million, the
guarantee will enable the country to raise USD 55 million on the local and international syndicated loan
market. Madagascar was recently classified as a country with moderate debt distress risk by the recent
DSA conducted by the IMF and the World Bank, principally due to a sharper depreciation of the Ariary
against the US dollar. The country intends to raise part of the non-concessional loan of USD 55 million
in local currency, so as to reduce the foreign exchange risk during debt servicing.
3.2. Weaknesses and Challenges in Implementing the National Development Programme
3.2.1. The immediate and urgent challenge for the authorities is to maintain macroeconomic
stability and improve on domestic revenue collection, in order to achieve sustainable and inclusive
economic growth. The preservation of economic stability in 2014 and 2015 was obtained at the cost of
cuts in growth -inducing public expenditure, necessitated by limited budget revenue as well as fuel
subsidies and subsidy payments to loss-making State-owned companies (§2.2.4). These sacrifices
significantly scaled down investments, thus forcing the economy to operate far below its potential, at a
rate that barely matches population growth. It is worth recalling that Madagascar has a very low tax
burden representing less than 10% of GDP since the beginning of the crisis in 2009. This very low level
of domestic revenue is not enough to support the ambitious strategy outlined in the NDP. Effective
implementation of the NDP to ensure a lasting reversal of this situation requires the immediate
improvement of revenue collection, further adjustments to the tax policy and efficient combating of tax
fraud. The combination of these factors will provide the authorities with greater budgetary headroom to
better support economic recovery and improve the delivery of public services to disadvantaged
segments of the population.
3.2.2. Accelerating the recovery of the Malagasy economy to ensure sustained growth that is
capable of reversing the deterioration of social indicators remains a major challenge in the
medium term. Economic recovery efforts initiated in 2014 could not be sustained in 2015 due to several
factors, both domestic and international. In 2015, torrential rains caused the displacement of 39,000
people in the highlands, while another 200,000 people in the South were in need of food aid, due to a
prolonged drought. This situation further worsened the living conditions of the Malagasy people.
8
Consequently, economic recovery is imperative to reduce poverty. This requires increased public
investment in physical, human and institutional capital, as well as better support to the private sector,
notably by: (i) clearing current arrears and not accumulating new arrears ; and (ii) improving the legal
framework governing PPPs, in order to attract additional resources to fund infrastructure.
3.3. Consultation and Participation Process
3.3.1 Malagasy authorities have conducted extensive consultations with all stakeholders to
ensure broad ownership and adoption of the NDP, the PUP and measures envisaged under the
programme. Consultations on programme design particularly saw the involvement of directorates of
the Ministry of Finance and Budget (MFB), the Directorate of Economy in the Ministry of Economy
and Planning, the private sector, civil society representatives, as well as technical and financial partners
(TFPs), namely the WB, EU, IMF, JICA, AFD and USAID. These consultations helped to highlight the
major challenges that Madagascar faces in creating sustainable and inclusive growth, and to propose
reforms that are consistent with the various interventions.
IV. BANK SUPPORT FOR THE GOVERNMENT STRATEGY
4.1 Linkage with the Bank Strategy
4.1.1 PARGE is in line with the Bank’s Ten-Year Strategy (TYS) 2013-2022 and the Interim
Country Strategy Paper (I-CSP) 2014-2016. The programme is consistent with the first thrust
"Inclusive Growth" and two of the five key operational priorities of TYS 2013-2022, namely: (i)
Governance and Accountability; and (ii) Private Sector Development. In light of the reforms supported
by PARGE in the social sectors and investment promotion, particularly in infrastructure and industry,
programme outcomes will contribute to the Bank’s "High 5s", especially “Feed Africa”, “Industrialize
Africa” and “Improve the Quality of Life for the People of Africa”. Although PARGE is not included5
in I-CSP 2014-2016, it contributes in general to achieving the priority actions of Pillar 1 thereof
("Strengthen Governance to Consolidate the State"), and specifically to the following thrusts of the said
pillar: "Strengthen Budget Management" and ̋ Stimulate Private Investment". Moreover, PARGE is also
aligned on two of the three pillars of the Governance Strategic Framework and Action Plan, 2014 –
2018 (GAP II), related to "Public Sector and Economic Management" and "Investment and Business
Climate". It is also consistent with the Bank’s Private Sector Development Strategy, 2013-2017,
particularly Pillar 1 on accelerating major structural reforms aimed at promoting private investments.
PARGE is in keeping with the strategy for transition countries entitled "Strategy for Addressing
Fragility and Building Resilience in Africa 2014 – 2019", notably Strategic Thrust No. 1 "Strengthen
State Capacity and Support Effective Institutions". Table 4 summarizes the linkages between NDP, the
I-CSP and PARGE.
Table 4: Linkages Between NDP 2015-2019, CSP 2014 – 2016 and PARGE
NDP 2015 - 2019 I-CSP 2014 - 2016 PARGE
Strategic Objective: Create
conditions for lasting, shared
and sustainable economic
growth
Strategic Objective "Contribute to the country’s
inclusive and sustainable economic and social
recovery”
Strategic Objective "Contribute to inclusive,
strong and sustainable economic growth
through enhanced economic management and
economic recovery promotion"
Pillar 2 "Preservation of
Macro-economic Stability
and Development Support" Pillar 1 "Strengthen Public
and Private Sector
Governance"
Thrust 1 "Strengthen
Budget Management" Component I – Broadening Budget Space
Pillar 3 "Shared Growth and
Territorial Anchoring of
Development"
Thrust 2 "Stimulate
Private Investment" Component II – Economic Recovery
Promotion
5 The resources for this operation are derived from loan cancellations on closed projects.
9
4.2 Compliance with General Budget Support Eligibility Criteria
4.2.1 Madagascar meets the eligibility criteria for general budget support operations. The
detailed analysis of eligibility criteria is presented in Technical Annex (TA) 1. Concerning
government’s commitment to reduce poverty, through NDP 2015 – 2019 and PUP 2015 – 2016, the
Government, has resolutely undertaken as a priority to increase social and infrastructure spending, and
to create conducive conditions to ensure inclusive growth. Regarding macro-economic stability, in
November 2015, the authorities and the IMF concluded a Rapid Credit Facility (RCF) agreement, the
assessment of which shows that despite the effects of internal and external shocks, the authorities have
demonstrated strong commitment to implement the agreed reforms in order to preserve macro-economic
stability. As concerns political stability, recent trends are encouraging, even though the situation
remains fragile. With regard to fiduciary review, the Bank conducted a fiduciary framework
assessment (TAs 2 and 3) and agreed with the Government on the minimum measures that would help
strengthen the framework. Lastly, harmonization efforts have continued within the "Budget
Support/Public Finance Partnership Framework" between the Bank and other development partners,
notably the IMF, WB, EU and AFD which are the major budget support donors in Madagascar.
4.3 Compliance with ADF Partial Credit Guarantee (PCG) Eligibility Criteria
4.3.1 Despite Madagascar’s recent reclassification from a country with a low risk of debt stress
("green country") to a country with a moderate risk of debt stress (“yellow country”), it is still
eligible for ADF - PCG. According to the Strategic Framework and Operational Guidelines for the
African Development Fund (ADF) Partial Credit Guarantee Instrument (ADF/BD/WP/2013/120)
adopted in 2013, PCG is offered only to performing ADF countries with low risk of debt stress (“green”
country) and a sufficient debt management capacity. These ADF - PCG eligibility criteria are aligned
with the Bank Group’s Policy on Non-Concessional Debt Accumulation (NCDA)
(ADF/BD/WP/2011/23/Rev.1). Article 5.5 of the said framework stipulates, among other things, that
“…. any modification of the NCDA policy shall be reflected in the ADF - PCG instrument eligibility
criteria”. Up to 2014, the NCDA policy limited the grant of non-concessional resources to ADF "green"
countries with low risk of debt stress. However, in May 2014, the Bank approved the document6 entitled
"Diversifying the Bank’s Products to Provide Eligible ADF-only Countries Access to the AfDB
Sovereign Window". Henceforth, all ADF countries have access to AfDB non-concessional resources
subject to fulfilling the additional eligibility conditions, including the criterion on low or moderate risk
of debt stress, which amounts to a de facto amendment of the NCDA policy. To ensure consistency with
these trends, Bank Management, during the November 2015 ADF-13 mid-term review, submitted a
document on the modification of ADF- PCG eligibility criteria, thus making the PCG available to
"moderate risk" “yellow countries” with access to AfDB resources in accordance with the revised
version of the lending policy. The document was approved. It should be noted that these changes are in
line with WB’s "International Development Assistance – IDA" PCG introduced after that of ADF in
2014, and which takes into account this trend in granting IDA PCG to "green" and "yellow" countries.
It is also important to note that of the USD 200 million ceiling of non-concessional loans agreed with
the IMF to ensure Madagascar’s sustained and inclusive recovery, the authorities used only 16.2% of
that limit. Resources to be raised through ADF PCG fall within the limit of this loan envelope.
4.4 Collaboration and Coordination with Other Partners
4.4.1 The programme was designed to align with the interventions of other donors within the
Partnership Framework, to ensure the enhanced effectiveness of support interventions. With
6 ADB/BD/WP/2014/48/Rev.1.
10
improvement in the political situation, the TFPs have revived the mechanism for coordinating their
efforts in terms of policy dialogue, operations alignment and harmonization. They coordinate their
activities through the following sector and thematic groups: private sector, governance/budget support,
rural development, environment, decentralization, transport, energy, education and health. The Bank
leads the "Drinking Water and Sanitation" and "Rural Development" working groups. It also actively
coordinates its budget support operations with the WB, EU and AFD. In November 2015, the IMF
approved a second RCF worth USD 42.1 million, supported by the Staff-Monitored Program (SMP). A
preliminary review of the SMP concluded that the reform program is being implemented satisfactorily
which could lead to a medium-term economic programme supported by an Extended Credit Facility
(ECF). Thus, PARGE reforms were discussed beforehand with members of the Partnership Framework
and selected according to the comparative advantages and the value added of each stakeholder in a spirit
of harmonization, in accordance with the Paris Declaration and the Busan principles on development
assistance effectiveness.
4.5 Linkage with Other Bank Operations
4.5.1. The volume of the Bank’s overall active portfolio in Madagascar as of February 2016
included ten (10) public sector operations, totalling UA 180.35 million. It is concentrated in
Agriculture (60.59%) and transport (32.27%). Other sectors namely Governance and health represent
6.37% and 0.765 respectively. The overall active portfolio disbursement rate is at 18.23%. The portfolio
performance is deemed satisfactory with a score of 3 on a scale of 1 to 4. The active portfolio does not
have any problematic projects.
4.5.2. PARGE is complementary with other Bank operations in Madagascar. PARGE-backed
reforms enjoy the technical and financial support of ongoing institutional support projects in
Madagascar. Thus, the PAGI project approved in September 2013 and the PAPI project approved in
June 2015 will contribute technically to efforts made by the authorities in implementing the reforms
contained in this new operation as follows: PAGI, through its activities aimed at enhancing public
resource mobilization (tax/quasi-tax and customs revenue), preparing the public finance management
modernization strategy and improving control and transparency systems in the extractive sector; PAPI,
through its activities that seek to build institutional capacity for investment promotion and PPP
operationalization, with a view to attracting private financing for infrastructure rehabilitation and
modernization. PARGE will help to consolidate PURE outcomes, which enabled the State of
Madagascar to embark on reforms aimed at increasing public resources.
4.5.3. The design of this single-tranche ADF – PCG general budget support operation reflected
lessons learned from similar Bank operations in Madagascar. The Bank financed many budget
support programmes in Madagascar prior to the political crisis, starting with the Poverty Reduction
Budget Support Programme Phase II (PABRP – II) approved in 2008. Following institutional
normalization, the Bank approved an urgent budget support operation called "Emergency Economic
Recovery Programme (PURE) in 2014. The achievements of PABRP – II were not sustained owing to
the negative effects of five years of political crisis. Regarding PURE, the implementation of reforms
was relatively mixed due to the difficult economic situation. Nonetheless, PURE fostered some
outcomes (§ 1.1). The progress made in implementing PURE, coupled with the country’s fragility
situation, explain the need to continue to support GoM’s structural economic reform efforts, in
collaboration with other TFPs. Therefore, in designing this new single-tranche budget support operation,
the Bank also took into account lessons from previous programmes. The reforms retained were
discussed at length with the authorities and development partners to ensure their ownership and
feasibility by the authorities, and complementarity in an approach aimed at harmonizing with the
programmes of the other donors using the same instrument. The lessons summarized in Table 5 below
were reflected in PARGE’s design.
11
Table 5 : Lessons Learned from Previous Operations and Reflected in PARGE Design
Key Lessons Reflection in PARGE
Budget support operations should be supported
by institutional support projects to facilitate the
implementation of reforms
PAGI and PAPI technically support the Malagasy authorities in implementing
some reforms in this new budget support operation
The reform program should not be limited to
adoption of reforms but to the effective
implementation of measures and their impact on
fragility
The prioritization of reforms was done by taking into account their effects/impacts
would create the necessary conditions for a gradual emergence from the fragility
situation. PARGE focuses on the effective operationalization of these reforms with
an agreement on the quantitative objectives to be achieved prior to Board
presentation.
4.5.4. From the guarantee standpoint, this operation is the first ADF PCG and will give the
Bank more visibility in the region. Through other PCGs approved by the Bank (PCG Seychelles for
debt restructuring, PCG Cameroon for exchange risk coverage), the Bank has learned the following key
lessons: (a) flexibility in addressing countries’ changing needs and the capacity to clearly define the
roles of all guarantee stakeholders, notably the government, ADF and commercial banks with respect
to the scope of guarantee, the risks covered and financial terms; (b) strategic structuring of guarantee to
provide more additionalities in terms of development for countries; and (c) the need to target critical
reform areas with emphasis on structural and institutional governance reforms, for use of funds
mobilized.
4.5.5. Over the years, the Bank has acquired rich regional experience through its economic
reform support operations in States in fragile situations. This gives it a comparative advantage in
Madagascar. The Bank’s holistic and integrated approach, which combines general budget support and
institutional support, is a comparative advantage in relation to more isolated approaches. Its
implementation of institutional support projects should contribute to the successful execution of
PARGE reforms. The Bank has continuously provided public finance management support to the
Malagasy authorities before and after the transition. As such, it ensures continuity and has solid
experience in budget support in fragile States such as Mali, the Central African Republic, Burundi,
Comoros, Liberia and Sierra Leone.
4.6 Analytical Works Underpinning this Operation
4.6.1. Several analytical works conducted by GoM, the Bank and other TFPs underpinned the
design of this programme. The reforms contained in this new single-tranche ADF PCG general budget
support operation are technically justified by many analytical works, including: (i) the IMF Report on
the 2014 Consultations under Article IV of January 2015; (ii) the IMF Report on the Staff-Monitored
Program of November 2015; (iii) the World Bank’s Study on the Country’s Systematic Diagnosis
conducted in August 2015; (iv) the Bank’s 2014 Study on the Assessment of the State of Madagascar’s
Fragility; and (v) the Government’s NDP and PUP. The main findings of these studies highlight the
need to: (a) improve tax revenue collection through compliance with tax obligations, fraud control,
elimination of some tax exemptions and broadening of the tax base; (b) step up the control and quality
of public spending by gradually eliminating inefficient petroleum product subsidies and reducing
transfers to unprofitable public enterprises; and (c) promote public and private investments to enhance
the country’s economic recovery.
V. THE PROPOSED PROGRAMME
5.1 Programme Goal and Objective
5.1.1. PARGE is designed to consolidate the achievements of previous programmes, and
contribute to creating the conditions required for strong, inclusive and sustainable economic
growth by broadening the fiscal space to generate additional resources for economic recovery and
implementation of Madagascar’s National Strategy. The country’s post-crisis economic challenges
12
persisted in 2015, despite the return to constitutional order, notably: (i) low internal revenue collection;
and (ii) the urgent need to unlock the economic potential to ensure inclusive and sustainable economic
growth. Given this situation, the PTFs have agreed on the need to continue providing support to the
Malagasy authorities, to enable them to pursue and deepen the major structural reforms started in 2014..
This operation will also help address fragility factors associated with: (i) deepening poverty; (ii) poor
public finance management; (iii) low private investment and deterioration of the business climate; and
(iv)increased unemployment and under-employment, especially among youths and women.
5.2. Programme Components
5.2.1. PARGE is structured around two complementary components: (i) enhance fiscal space to
support economic growth; and (ii) foster economic recovery through investments that promote job
creation and reduce socio-economic inequalities. The complementarity between these two components
is attributable to the fact that the quest for greater fiscal space leads to better budget management, since
emphasis is laid on increased efficiency in domestic resource mobilization, and to enhanced expenditure
prioritization to better address investments with high impacts on growth.
Component I – Broadening fiscal Space
5.2.2. This component is to support reforms aimed at creating the necessary fiscal space for
expenditure in favour of the most vulnerable segments of the population, while preserving macro-
economic stability. It will cover the following areas: (i) enhancing tax resource mobilization; and (ii)
public expenditure rationalization.
(a) Context, Challenges and Recent Government Actions
5.2.3. Enhancing tax resource mobilization: Madagascar’s tax revenue is one of the lowest in
sub-Saharan Africa. Tax revenue over the period 2003 – 2012 averaged approximately 10.4% of GDP,
way below the average 16.5% of GDP for developing countries in sub-Saharan Africa (Graph 2). During
the same period, Madagascar was slightly ahead (less than 4 percentage points) of a few low-income
countries (Democratic Republic of Congo, Central African Republic, Gambia and Sierra Leone) and far
below (more than 4 percentage points) a number of similar countries in terms of economic potential
(Ghana, Kenya and Mauritius). The average tax revenue level during the last political crisis in 2009 to
2013, which stood at 9.7% of GDP, was very low compared to the pre-crisis period from 2003 to 2008
(11% of GDP). Over the five years of crisis, this situation reflected the low economic activity, the
growing proportion of the informal economy and the serious revenue collection challenges faced by the
tax and customs administrations.
5.2.4 Despite a relatively moderate taxation rate compared with other African countries, the
tax revenue collection rate is still very low. Direct taxation is simple and corresponds to a single-rate
tax system of 20% on all income sources.7 The general tax code provides for a tax credit of 50% of the
investment made in renewable energy production and supply, tourism and industrial activities,
7 Direct taxation comprises tax on the income of natural and legal persons (IR), tax on wages and similar income (IRSA), tax on income from movable capital (IRCM) and
fixed capital gains tax (IPVI).
13
and public works. In spite of the simplified nature of this direct taxation, the tax revenue for 2013 was
particularly low, at 2.4% of GDP. The share of
external trade in tax revenue (tax on external trade
and international transactions) fell drastically from
15.3% in 2008 to 11.7% in 2014, owing to the drop
in imports during the political crisis and revenue
collection difficulties faced by the customs
administration as a result of substantial tax
exemptions and customs fraud. Such weakness
could be explained by the measures set forth in the
law to exempt part of final consumption from
taxes, and the weaknesses inherent in the tax
administration’s VAT management system (for
instance the loopholes in VAT credit
reimbursement and failure to honour tax obligations). However, according to an IMF study, the
country’s tax potential remains largely untapped. Given some features of the country’s economy (share
of agriculture in GDP, share of imports in GDP and real per capita GDP), the IMF concludes that the
resource mobilization potential stands at approximately 17%.
5.2.5 Faced with this low tax revenue situation, the Malagasy authorities have implemented a
number of reforms. In connection with taxes, the following actions were taken: (i) simplification of
the tax system by eliminating low-yield taxes; (ii) streamlining and modernization of tax procedures
notably by introducing on-line tax returns and payment by bank transfer; (iii) review of the organization
of the General Directorate of Taxation by setting up an internal inspectorate of services, a research and
investigations division, taxation centres in the provinces and 10 regional services for medium-sized
enterprises; and (iv) deployment of a software for on-line VAT annex returns. At the customs level,
major actions were also taken in 2008, notably to: (a) secure customs revenue through the creation of a
risk analysis division, the reimbursement of oil tax in lieu of tax exemptions and the opening of a
customs office for mining operations surveillance; and (b) facilitate trade through the introduction of
the accelerated customs clearance procedure for some one hundred importers. Despite all these efforts
made over the period 2008 - 2013, the level of internal revenue remains low (Graph 2).
5.2.6 In the context of this programme, the authorities have undertaken to streamline fiscal and
customs resource mobilization. At the General Directorate of Taxation (DGI) level, the programme will
support reforms aimed at: (i) enhancing revenue collection; (ii) simplifying and modernizing procedures
as well as the IT tool for better service adapted to taxpayers; and (iii) stepping up tax compliance and
broadening the tax base through risk analysis-based management and communication enhancement to
attract informal activities to the formal sector. At the General Directorate of Customs (DGD) level, the
programme will back reforms aimed principally at putting in place an effective mechanism to combat
customs fraud.
Graph 2: Tax Revenue (% of GDP) in some African Countries, 2003 -
2012
Source : World Bank, WDI, October 2015
6,98,7 8,9
10,210,410,711,711,912,8
14,014,314,815,415,916,1
18,518,718,720,1
Congo
Dem
o.
Rép
. C
entr
afri
que
Sie
rra
Leo
ne
Gam
bie
Mad
agas
car
Nig
er
Ugan
da
Tan
zan
ie
Rw
anda
Cote
d'I
voir
e
Zam
bie
Mal
i
Togo
Ghan
a
Ken
ya
Moza
mbiq
ue
Île
Mau
rice
Sén
égal
Cab
o V
erde
14
5.2.7 Streamlining public spending: the ambitious objective of the 2015 initial budget was to
reduce subsidies and transfers to public enterprises. This could not be done due to internal and
external factors. Between 2012 and 2013, about one-third of current discretionary expenditure (total
expenditure excluding salaries, debt servicing
and investments) was allocated to fuel and
electricity subsidies. This proportion
increased by half in 20148. The 2015
Appropriation Act projected a gradual
reduction of fuel subsidies representing 0.1%
of GDP, transfers to JIRAMA of 0.4% and
transfers to the Civil Service Pension Fund of
0.5% of GDP. The international economic
situation and natural disasters that negatively
affected the country led to lower-than-
projected growth. Consequently, the losses
incurred by JIRAMA and Air Madagascar,
coupled with the financial imbalances of the Civil Service Pension Fund, resulted in increased State
subsidies and transfers to these enterprises. Initially budgeted at MGA 844 billion, this less productive
spending, which is the main cause of budgetary constraints, was reviewed upwards to MGA 1 008
billion in the 2015 Appropriation Act approved in December 2015 (Table 6).
5.2.8 In the face of these difficulties, the authorities deployed the following actions to
streamline public spending and put prudent debt management mechanisms in place: (i) gradual
elimination of fuel subsidies with the aim of returning
to market pricing; (ii) preparation of reform strategies
for the two biggest public enterprises - JIRAMA and
Air Madagascar,9 (iii) consolidation of the file index
of top state positions (“Hauts Empois de l’Etat –
HEE”); and (iv) audit of Civil Service Pension Fund
to clean the list of retirees. This audit, which started in
2015, has identified 2 256 irregular civil servants
(ghost workers and those holding multiple positions),
thereby helping to reduce the wage bill by MGA 1.3
billion per month. In order to support public
expenditure control, the State has undertaken to adopt
a prudent public debt management (Table 7) by preparing and implementing a new debt management
strategy, and setting up a public debt management technical committee as provided for in the Law
governing public debt.
(b) Programme Reforms
5.2.9 With the programme framework, the Bank will support the implementation of the following
reforms: Firstly, as concerns public resource mobilization: (i) preparation and adoption of a 2015 –
2019 five-year taxation strategy (Prior Action 1); (ii) broadening of the tax base by not only identifying
new taxpayers and new enterprises, but also suppressing sales without invoice and stepping up field
controls (Qualitative Objectives 1 and 2); and (iii) establishment of a mechanism to combat customs
fraud (Prior Action 2). Secondly, with regard to streamlining streamline public spending: (i) the
commitment to gradually reduce petroleum subsidies and transfers to public enterprises (Quantitative
8 These subsidies are regressive, given that 97% of direct fuel subsidies benefit the richest 10% of the population, and that only 14% of the population
have access to electricity.
9 The publication of the implementing decree of Law 2014-04 on commercial public enterprises has clarified the role of the State in the management of public enterprises.
Table 6 : Review of Central Administration Spending in 2015
Initial
Budget
Revised
Budget (%)
MGA Billion
Wages and Salaries 1 775 1 648 -7
Goods and Services 262 167 -36
of which: Social Sector 108 76 -30 Transfers and Subsidies 844 1 008 19
of which : JIRAMA 85 179 111
Air Madagascar 0 28 - Civil Service Pension Fund 150 250 67
Interest Charges 343 250 -27
Internally Financed Investments 422 179 -58 Externally Financed Investments 868 1 204 39
Recapitalization by the Central Bank 0 340 -
Settlement of Arrears 118 229 94
Total 4 975 5 558 12
Sources : Malagasy Authorities and IMF Projections, Report No.15/325
Table 7: Breakdown of Debt Contracted and Guaranteed by the State
– CGS (end-2014)
Creditor USD
million
%
GDP
% of
Total
Internal Debt, of which: 1 217 11.4 34.1
Treasury Bonds 425 4.0 11.9
Debt owed BCM 276 2.6 7.7 Arrears 282 2.6 7.9
Other, of which loans 234 2.2 6.5
External Debt, of which: 2 357 23.7 65.9 Multilateral 1 854 18.7 51.9
Paris Club 107 1.1 3.0
Excluding Paris Club 380 3.8 10.6 Commercial 17 0.2 0.5
Total Debt CGS 3 574 35.1 100
Source: IMF Report 15/325, November 2015
15
Objectives 3 and 4); (ii) the abolition of subsidies on pump prices for petroleum products; (iii) the
cleaning up of the payroll of top civil servants; (iv) the preparation and adoption of a 2016 – 2018
medium-term debt management strategy (Prior Action 3); and (v) the adoption of the decree
establishing the debt technical committee provided for in Law No. 2014-012 of 21 August 2014
governing public debt and debt guaranteed by the Central Government (Prior Action 4).
5.2.10 Expected outcomes: the implementation of these major reforms is expected to lead to the
creation of sufficient budget space to sustainably finance NDP projects and programmes through the
following outcomes: (i) increased tax revenue, from 9.9% of GDP in 2015 to 10.8% of GDP in 2016;
and (ii) non-productive expenditure savings from 0.9% of GDP between 2013 and 2014 to 0.6% of GDP
between 2015 and 2016.
Component II – Promotion of Economic Recovery
5.2.11 This component will focus on the following two areas: (a) public expenditure quality
improvement; and (b) investment promotion.
(a) Context, Challenges and Recent Government Actions
5.2.12 Public expenditure quality improvement: substantial cuts were made in social expenditure
and public investments during the crisis to preserve macro-economic stability. Expenditure
dropped from 23.5% of GDP in 2004 to 12% in 2012. Social services deteriorated, notably primary
health care and basic education. A comparison of
domestic resource spending between 2002-2008
and 2009-2014 shows that a large part of the State
budget was allocated for public sector salary and
a substantial part of discretionary spending for
highly regressive fuel and electricity subsidies
(Graph 3).
5.2.13 In this post-crisis situation, there is
need to rebalance public spending composition
in favour of priority expenditure in social
sectors and in economic infrastructure, to ensure sustainable and inclusive growth. To finance
major NDP growth projects, the Malagasy authorities should improve budget composition by
redirecting public expenditure towards investments and national wealth-producing social spending.
Thus, while building its capacity to mobilize more resources required to finance these investments (§
Component I), GoM has undertaken to improve the investment process in order to make investment
plans more efficient in support of the NDP. In March 2015, the authorities set up the Investments
Steering Committee, whose role is to improve the selection and prioritization of major public
investments. A national social security policy to guide the design and implementation of programmes
for the poorest and most vulnerable households was also adopted in December 2015 and its
implementation will begin in 2016. The Government has undertaken to prepare a manual on the criteria
for selecting projects to be included in the priority investment plan. With these social and investment
planning policy instruments, and to ensure better quality of economic recovery support expenditure, the
authorities have committed themselves to use domestic resources to increase budget allocations for
priority social spending and public investments in the 2016 Appropriation Act.
Graph 3: Internally Financed Expenditure (Period Average)
2002-2008 2009 - 2014
Source: Ministry of Finance and Budget (MFB
Capital
(domestic
financing); …
Interest ;
15%
Recurrent
expenditure
(excluding salaries);
26%
Salary
expenditure;
39%
Capital
(domestic
financing); 13%Interest;
7%
Recurrent
expenditure
(excluding
salaries); 31%R
Salary
expenditure ;
49%
16
5.2.14 Investment Promotion: to ensure sustainable
economic recovery and efficiently combat poverty, it is
indispensable to meet the challenge of promoting private and
public investments. To foster the emergence of new growth
sources while creating sufficient sustainable jobs for the people,
the Malagasy authorities must focus public policies on enhancing
competitiveness, especially by improving the business climate.
They are aware that public investment alone, which is relatively
low (Graph 4), cannot solely address the major challenges of NDP
financing. In this context, it is essential to explore all available
financing options, including PPPs, without, however,
jeopardizing debt sustainability. Experience shows that PPP management can be complex and comprises
major risks: it requires solid institutional capacity to monitor and implement contracts. The authorities
have compiled a list of projects that could be financed by PPPs, in compliance with NDP priorities.
They also decided to set up a PPP unit specialized in control and management of PPP projects, and to
strengthen the legal and regulatory framework. In 2008, a national strategy, a general law on PPPs and
a bill on partnership contracts were drafted with Bank support. The ongoing revision of texts will lead
to the preparation of a PPP law and a procedures manual for the establishment of PPP projects, with the
support of the Bank’s PAPI project.
5.2.15 Arrears accumulation by GoM deteriorates the business climate and reduces the
propensity for private investment, which is a key job-creation instrument. Since 2009, the central
administration and public enterprises have accumulated a large stock of arrears, notably VAT
reimbursements, petroleum product distribution subsidies and direct payments to JIRAMA’s suppliers.
Arrears accumulation impedes economic recovery by affecting private sector investment potential. An
agreement on a payment schedule was signed with most of the creditors in 2014 within the framework
of PURE, but due to economic and financial shocks, new arrears were accumulated at end-2014 and in
2015. The total stock of arrears in November 2015 is estimated at MGA 1 101.3 billion. As a result, the
authorities undertook to pay MGA 363.4 billion in 2015. The amount effectively paid as at November
2015 was MGA 116.8 billion, of which more than 60% to JIRAMA’s suppliers, 17% to petroleum
product distributors and about 10% for VAT reimbursement. The authorities are negotiating the
settlement of arrears and ongoing invoices by issuing treasury bonds (securitization) with a maturity of
one (1) to 5 years. The authorities have undertaken to avoid accumulating new arrears and to facilitate
the payment of existing outstanding debts.
(b) Programme Reforms
5.2.16 PARGE will support reforms in the following areas: Firstly, regarding improvement of
public expenditure quality and efficiency, the Bank plans to focus on: (i) preparing and adopting a
manual on the criteria for selecting investment projects to be included in GoM’s Public Investment
Programme (PIP); (ii) increasing domestic resource expenditure (commitment basis) in priority social
sectors (education, health and nutrition) (Quantitative Objective 5); and (iii) increasing expenditure
(commitment basis) using domestic resources allocated to PIP (Quantitative Objective 6). Secondly,
as concerns investment promotion, the Bank’s support will focus on: (i) the effective
operationalization of the Arrears Settlement Plan (Prior Action 5); (ii) the adoption by the Council of
Ministers and submission to Parliament of the Bill on PPPs (Prior Action 6); (iii) the opening of an
escrow account at the Central Bank of Madagascar intended to reimburse VAT credits; and (iv) the
preparation of a PPP manual and policy.
Graph 4: Private and Public Investments (as % of
GDP)
Source : IMF Report No.15/325 of November 2015
10,27,6 7,7
4,9 5,0 4,2 2,7 2,5 3,9 4,8 5,2
10,8
20,7 20,722,6
14,5
7,66,1 8,2
8,7 8,7 8,7
4,0
4,7 4,7 8,2
3,9
7,8
7,8 5,2 2,93,1 3,3
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
FDI Private investment (Excl. FDI) Public Investment
17
5.2.17 Expected Outcomes: the implementation of structural reforms within the PARGE framework
will help to attain the following major outcome: increase in the public and private investment rate from
3.9% and 11.6% of GDP in 2014 to about 5% and 13% of GDP in 2016, respectively.
5.3. Description of ADF Partial Credit Guarantee
5.3.1 As with the budget support, PCG’s goal is to support the Malagasy authorities’ structural and
economic reforms to pave the way for a gradual exit from the
fragility situation resulting from the 2009-2013 political crisis.
The USD 40 million PCG will help to raise USD 55 million on
the national and international bank syndication market, which
represents part of the financing need for 2015. Hence, GoM
wishes to use the PCG to mobilize funds from the international
and national banking markets (Figure 1). Annex 7 presents
details of the ADF PCG.
5.3.2 PCG Mechanisms: the USD 40 million PCG will cover
part of defaults on payment related to the scheduled repayments of the commercial debt against all
commercial and policy risks (Figure 1). The guarantee will cover a fixed number of interest payments
and/or repayments of the capital of the underlying debt, the structure of which will be defined in
collaboration with GoM and commercial banks. GoM would like to mobilize funds for a minimum
seven-year period, including a two-year grace period.
5.3.3 PCG Terms: the terms of the PCG to support reforms implementation (§ 5.2) are as follows:
Cross-guarantee: the ADF PCG will require a cross-guarantee from the beneficiary member country
whereby the country undertakes to repay to the Fund any amount paid under the guarantee; Financial
leverage: the ADF PCG is a leveraged instrument which will use only 25% of the nominal value of the
guarantee of the country’s performance-based allocation (PBA). The leverage effect of the Fund’s
resources will thus be 4 to 1. For the USD 40 million guarantee, only USD 10 million of the country’s
PBA will be used; Pricing: it is based on the pricing applicable to the equivalent of the ADF loan and
will not reflect the specific country risk. For Madagascar, the guarantee fees will stand at 75 basis points
applicable to the amount guaranteed.
5.3.4 PCG Benefits: the PCG will help Madagascar to access financial markets, mobilize private
funds, extend debt maturities and reduce the cost of borrowing to finance the budget deficit. The PCG
will also help to attract other financiers who, normally, would have been very reticent to directly take
the Madagascar country risk and grant long-term loans. Without the PCG, Madagascar’s capacity to
fulfil the required financial conditions, namely a minimum seven-year maturity, including a two-year
grace period, at competitive levels, would be minimal, and this would not have enabled the achievement
of the objectives set in GoM’s public investment agenda. So far, the local banking market offers only
one-year maturities to the Malagasy Government and the international market practices exorbitant rates
and offers maximum maturities of three years.
5.4. Policy Dialogue
5.4.1 The Staff-Monitored Program intervention areas will be the subject of constant dialogue
between the authorities and the Bank. Dialogue on programme reforms, which started in July 2015,
will continue in 2016 with emphasis on areas supported by the programme. Dialogue on economic
reforms is conducted with the Malagasy authorities in a transparent manner, and with development
partners in a consultative and complementary manner in intervention areas, within the Budget
Support/Public Finance Partnership Framework. Such dialogue will be backed by analytical work to be
Figure 1: Description of ADF - PCG
Source : Authors of the Report
Figure 1: Description of the ADF PCG
18
conducted under PAGI and PAPI, namely: (i) the design of a public finance management modernization
strategy; (ii) the conduct of a study on internal revenue mobilization and the addressing of Tuléar; (iii)
the conduct of a study on the dematerialization of the processing of accounting transactions for
improved control of public resource utilization; (iv) the conduct of a study on the strategy and action
plan on investment opportunities in the textile sector; and (v) the conduct of a feasibility study for the
establishment of a special economic zone.
5.5. Loan Conditions
5.5.1 This single-tranche disbursement and PCG operation is supported by a reform
programme to be implemented over the period 2015 to 2016. As part of dialogue with GoM on this
operation, the authorities promised to implement a set of major reforms identified in collaboration with
members of the Partnership Framework and the IMF, prior to presentation to the Board of Directors,
and to achieve the quantitative objectives related to the effectiveness of the reforms. The deadline agreed
with GoM for fulfilling these two commitments precedent to presentation of this budget support
operation and the PCG to the Board of Directors was 31 December 2015. As earlier explained, after
disbursement of the single tranche, continued dialogue will help to support GoM in negotiations with
commercial banks within the framework of the PCG, and to monitor the implementation of the entire
programme, some quantitative objectives of which should be achieved in December 2016. The
effectiveness of the reform programme and the quantitative objectives will help to lay the foundations
for more comprehensive reforms that could lead to a programmatic budget support operation spanning
three years (2017-2019) during the next ADF-14 cycle.
5.5.2 Precedent Quantitative Measures and Objectives: measures precedent to Board presentation
and the quantitative objectives with end-December 2015 target dates have all been achieved by the
Malagasy authorities. Table 8 below presents these programme measures and quantitative objectives:
Table 8: Actions and Quantitative Objectives Precedent to Board Presentation of PARGE
Prior Actions Quantitative Objectives
Component I – Broadening of Budget Space
Prior Action 1: Preparation, adoption and operationalization of
a 2015 – 2019 five-year taxation strategy. Status: Implemented.
Evidence: Letter from the Minister of Finance and Budget
forwarding the certified true copy of the records of the Council
of Ministers meeting adopting the five-year taxation strategy
before end-December 2015. Quantitative Objective 1: Increase tax revenue – Tax revenue
ceiling: (i) December 2015: MGA 2 900 billion
Status: Implemented
Quantitative Objective 2: Broaden the tax base – Ceiling of the
number of taxpayers (all taxes): (i) December 2015: 214 000
taxpayers Status: Implemented
Quantitative Objective 3: Gradually reduce subsidies and transfers
to public enterprises - Gap between the Calculated Reference
Price (PPRC) and the Price at the Pump in force (PPV): (i)
December 2015: 0 Status: Implemented
Quantitative Objective 4: Reduce subsidies - transfers to public
enterprises – Ceiling of effective direct subsidies and transfers: (i)
December 2015: MGA 381 billion
Status: Implemented
Prior Action 2: Establishment of a mechanism to combat
customs fraud. Status: Implemented.
Evidence: Letter of the Minister of Finance and Budget
forwarding the records of the Council of Ministers meeting
adopting the ex post control procedures manual and the
Corporate Control Charter before end-December 2015.
Prior Action 3: Preparation, adoption and operationalization of
a 2016 – 2018 medium-term debt management strategy. Status:
Implemented.
Evidence: Letter from the Minister of Finance and Budget
forwarding the records of the Council of Ministers meeting
adopting the 2016 – 2018 medium-term debt management
strategy before end-December 2015
Prior Action 4: Adoption of the decree establishing the Public
Debt Technical Committee. Status: Implemented.
Evidence: Letter of the Minister of Finance and Budget
forwarding the records of the Council of Ministers meeting
adopting the decree establishing the Public Debt Technical
Committee before end-December 2015.
Component II – Promotion of Economic Recovery
19
Prior Action 5: Operationalization of the Arrears Settlement
Plan. Status: Implemented.
Evidence: Letter of the Minister of Finance and Budget
forwarding the certified true copy of the Convention to Settle
the Stock of VAT Credit Reimbursement Arrears signed by the
Government and its creditors (petroleum product distributors
and miners).
Quantitative Objective 5: Increase spending in priority social
sectors (education, health and nutrition) – Ceiling of social
spending commitments under domestic financing: (i) December
2015: MGA 51 billion committed Status: Implemented
Quantitative Objective 6: Increase public investment programme
resources –Ceiling of commitments under PIP domestic financing:
(i) December 2015: MGA 200 billion committed
Status: Implemented
Quantitative Objective 7: Operationalize the Arrears Settlement
Plan – (7a) Ceiling of stock of VAT reimbursement arrears
concerned by the settlement agreement: (i) December 2015: At
least 95% of the balance of arrears settled at end-October 2015
(petroleum product distributors or miners);
(7b) – Ceiling of stock of VAT reimbursement arrears of the other
suppliers: (i) December 2015: At least 95% of the balance of
arrears effectively settled at end-October 2015.
Status: Implemented
Prior Action 6: Adoption and submission to Parliament of the
Bill on PPPs. Status: Implemented.
Evidence: Letter from the Minister of Finance and Budget
forwarding a certified true copy of the decree adopting the Bill
on Public-Private Partnerships.
5.6. Application of Good Practice Principles on Conditionality
5.6.1 In compliance with Bank policy on programme-based operations10, programme design
reflected five good practice principles on conditionality. This operation was initiated within the
framework of flexible and inclusive dialogue, to allow for the smooth implementation of major
economic reforms. Thus, to better accompany the authorities during programme implementation, good
practice principles were observed: (i) GoM took ownership of the programme since it was designed
with the active collaboration of State entities involved in reforms implementation, civil society and the
private sector; (ii) coordination among TFPs was ensured for better complementarity of policy-based
support operations; (iii) the programme is fully in line with the country’s national policies and
contributes to support its efforts to create sustainable conditions for strong economic growth; and (iv)
conditions precedent to Board presentation are realistic and achievable, and were agreed with the
authorities during appraisal.
5.7. Financing Needs and Arrangements
5.7.1 The resources of this operation are part of external
financing that will contribute to filling the 2015 financing
gap. The financing need (cash basis) for 2015 stands at 5.3%
of GDP. Domestic financing is equal to 1.3% of GDP and
external financing represents 4% of GDP. Regarding external
financing, 2.3% of GDP comes from budget support. The
partial credit guarantee amount of USD 40 million to obtain
a USD 55 million loan will help to fill the financing gap, with
part in the form of domestic financing and part in the form of
external financing.
5.8. Application of Bank Policy on Debt Accumulation
5.8.1 Bank principles on non-concessional debt policy are applied and observed under
PARGE. The last DSA conducted by WB and the IMF in November 2015 showed a moderate risk of
debt stress for Madagascar. During the 2009-2013 crisis, the authorities refrained from contracting non-
concessional foreign loans, thereby preserving debt sustainability. However, to address the many
development challenges in the post-crisis situation and finance the major growth projects identified in
the NDP, the authorities could, while consulting development partners (i.e. the IMF), contract non-
concessional loans amounting to USD 200 million (commitment basis) in 2016.
10 See Ref: ADF/BD/WP/2011/38/Rev.3/Approval of 29 February 2012.
Table 9: Financing Needs and Sources (% of GDP)
2015 2016
Total revenue and grants 12.4 13.0
Total revenue 10.3 10.9
Grants 2.1 2.1
Total expenditure and net loans 16.9 16.2
Budget balance (commitment) -4.5 -3.2
Overall balance (cash) -5.3 -3.8
Total financing, of which: 5.3 1.0
Domestic financing 1.3 0.7
External financing, of which: 4.0 0.4
Budget support and PCG 2.3 0.0
FINANCING GAP 0.0 -2.8
Source: Malagasy Authorities, MFB
20
VI. PROGRAMME IMPLEMENTATION, MONITORING AND EVALUATION
6.1. Programme Beneficiaries
6.1.1 PARGE will benefit the entire population of Madagascar. This loan and reform support
guarantee operation is intended to generate a distributive and sustainable impact by enabling the State
to have the fiscal space required to improve the provision of basic social services, notably education
and health, and to enhance public and private investment promotion. The Madagascan people who have
generally borne the brunt of the negative effects of five years of socio-political crisis, will be the main
programme beneficiaries. The payment of domestic arrears and increased productive public investment
will enable economic operators to benefit from business opportunities, thereby contributing to national
wealth generation and job creation for youths and women. Thus, the programme will contribute to
creating conditions for inclusive economic recovery. PARGE implementation will help to strengthen
social cohesion and peace, and improve the living conditions of the vulnerable segments of the
population.
6.2 Impact on Gender, Poor and Vulnerable Groups
6.2.1 The implementation of reforms under PARGE will improve the living conditions of poor
people and vulnerable groups. Better expenditure streamlining through the gradual reduction of
subsidies will enable GoM not only to address urgent public investment needs and provide support to
social groups seriously affected by the crisis, but also to provide support to the private sector and the
entire economy by settling domestic arrears. Such improved use of public resources to ensure inclusive
and sustainable economic recovery will help to increase job opportunities for youths and vulnerable
persons, as well as facilitate access to better quality social services by a larger proportion of the masses,
thereby improving their living conditions.
6.2.2 Impact on gender: PARGE’s design incorporated the gender dimension during consultations
with institutions in charge of formulating and implementing the reforms retained. PARGE is intended
to produce a positive impact on gender issues in general, and women’s condition in particular, notably
via structural reforms aimed at strengthening social capital through investments in education, health and
social protection. The commitment of the authorities regarding social spending ceilings are actions that
will contribute in the short term to addressing social emergencies resulting from the crisis and that affect
the most underprivileged segments of the population, namely women and youths.
6.3 Impact on the Environment and Climate Change
6.3.1 PARGE is a general budget support that backs reforms, with no impact on the environment
and climate change. It has been classified under Environmental Category III.
6.4. Implementation, Monitoring and Evaluation
6.4.1 The programme will be implemented by the Ministry of Finance and Budget. PARGE’s
implementation will be coordinated by a Budget Support Monitoring Committee placed under the
supervision of the Secretariat General of MFB, and the Directorate of Public Debt. These two entities
hold regular meetings with development partners on the implementation status of the various economic
and financial reforms agreed upon with the authorities. They are also responsible for submitting to
21
development partners all evidence on reforms implementation. The programme will also be monitored
during meetings of the Budget Support/Public Finance Partnership Framework. Discussions are ongoing
for the preparation of a common reform matrix that will be aligned with the next International Monetary
Fund programme under the ECF. Further, continued dialogue with the authorities through the
Madagascar Field Office will also help to monitor PARGE’s implementation. At the end of the
programme, a completion report will be produced jointly with the Government.
6.5 Financial Management and Disbursement
6.5.1 Country Fiduciary Risk Assessment (CFRA): The fiduciary framework assessment conducted
by the Bank in November 2015 concluded that the fiduciary risk was substantial. This fiduciary risk
level is mainly due to the weak capacity of institutions and organizations responsible for PFM. GoM is
committed to implementing major structural reforms with the assistance of all TFPs. The priority pillars
for mitigating the fiduciary risk include: (i) effectiveness of expenditure control mechanisms; (ii)
transparency of intergovernmental fiscal relations; (iii) reducing the significant gaps between actual
total expenditure and the initially approved budget; and (iv) effectiveness of accounting and cash-flow
management. Technical Annex 2 (TA 2) presents a detailed country risk analysis with proposed country
fiduciary risk mitigation measures. This analysis is made in accordance with the Policy on the financial
management of Bank Group-funded operations. The continuation of on-going reforms will maintain the
national public finance system on the right track.
6.5.2 Financial management, audit and procurement mechanism: Resources for this budget
support and ADF PCG operation fall within the public expenditure circuit. The Ministry of Finance and
Budget will be responsible for the administrative, financial and accounting management of programme
resources. This operation will be audited in accordance with the programme-based support policy11
which provides for the use of the national mechanism, i.e., the Court of Auditors, which oversees budget
execution. Moreover, this external audit will be preceded by a financial flows audit conducted by an
independent firm in accordance with Bank-approved terms of reference. The report of this financial
flows audit shall be forwarded to the Bank no later than 30 October 2017. Madagascar’s public
procurement legal framework in force is based on Law No. 2004-009 of 26 July 2004. The review of
Madagascar's National Competitive Bidding procedures conducted by the Bank in 2011 concluded that
they are generally consistent with the Bank's Procurement Rules and Procedures, despite the existence
of a number of divergences with regard to the Bank’s fiduciary requirements (TA 3). In light of these
conclusions, the Malagasy public procurement framework seems appropriate for ensuring the effective
use of Bank resources granted as budget support. However, it should be borne in mind that the socio-
political crisis experienced by the country has led to a deterioration in the procurement control process.
The Malagasy Government, with the technical support of the PAGI project, will initiate measures to
revitalize and streamline the institutional public procurement framework with focus on system integrity
and capacity building.
6.5.3 Disbursement: The loan will be disbursed in a single tranche of UA 12.5 million, subject to
fulfilment by the Borrower of the relevant general and specific conditions mentioned in Section 7.2
below. At the Borrower’s request, the Bank will disburse the funds into a special account at the Central
Bank of Madagascar (BCM). This account will be used solely to receive PARGE resources. Moreover,
MFB shall forward to the Bank a written confirmation of receipt of funds in the special account.
Thereafter, PARGE resources will be transferred from the special account to the general account of the
Treasury at the BCM. BCM will charge no fee for this operation. In case the guarantee is approved, the
Bank will assist the country in its negotiations with local and international commercial banks. The Bank
will ensure that the guarantee and the financial strength of the ADF are well factored into the loan
proposals. A counter-indemnity whereby GoM agrees to pay to the Bank any amount disbursed in case
11 See section 9.3 of Bank Group Policy on Programme-based Operations (ADF/BD/WP/2011/38/Rev.3/Approval)
22
the commercial banks decide to call on the guarantee shall be signed. As soon as collateral arrangements
with commercial banks and counter-indemnity with the State have been signed, funds may be raised on
financial markets in accordance with the terms of the contracts.
VII. LEGAL INSTRUMENTS AND AUTHORITY
7.1. Legal Instruments
7.1.1. The legal instruments include: (ii) a loan agreement between the Fund and the Republic of
Madagascar (the Borrower) within the budget support framework; (ii) guarantee agreements with
commercial Banks that will be selected after Board approval of the programme; and (ii) a counter-
indemnity agreement signed between the Fund and the Republic of Madagascar, related to the
reimbursement of all payments made by the Fund under the guarantee agreement.
7.2. Conditions Associated with Bank Intervention
7.2.1. Conditions precedent and effectiveness: Effectiveness of the loan agreement and the counter-
indemnity agreement shall be subject to fulfilment by the Borrower of the conditions set forth in Section
12.01 of the General Conditions Applicable to Loan Agreements and Guarantee Agreements of the
Bank. Effectiveness of the guarantee agreement shall be subject to their signature by the Fund and each
commercial bank concerned, as well as signature of the counter-indemnity agreement and additional
conditions that may be negotiated with the commercial banks following their selection.
7.2.2. Conditions precedent to disbursement of resources: In addition to the conditions precedent to
effectiveness mentioned under 7.2.1 above, the disbursement of loan resources amounting to UA 12.5
million shall be subject to the following condition: Provide evidence of opening a special account with
the Central Bank of Madagascar (BCM) to receive the loan resources.
7.3. Compliance with Bank Group Policies
7.3.1. PARGE complies with Bank Group policies and guidelines for programme support. It is
consistent with the operational priorities of the Bank’s Ten-Year Strategy (2013-2022) and the I-CSP
(2014-2016).
7.3.2. The PCG complies with Bank Guidelines for partial credit guarantees. Under this operation,
no exception is required in respect of Bank Guidelines. Pursuant to paragraph 3.3 of the Bank's Policy
on Guarantees, PCG may be granted in conjunction with a Bank loan or on a stand-alone basis.
VIII. RISK MANAGEMENT
8.1. Several major risks could affect the achievement of this operation's development objectives.
These are presented in Table 9 below:
23
Table 9: Risks and Mitigation Measures
Risks Mitigating Measures
Risk related to political uncertainty: In the wake of the
restoration of constitutional democracy in 2014, reaching
political consensus seems to be difficult. Conflicts between the
Executive and the Legislative branches of Government
paralyze the implementation of major reforms. Hence,
political uncertainty could adversely affect the implementation
of essential reforms and confidence in the economy. High
level
This risk is mitigated by the municipal elections of July 2015 that
paved the way for the formation of the Senate and other institutions.
The new authorities are committed, with the support of development
partners, to make every effort to achieve national reconciliation
through social and inclusive political dialogue, strengthening the rule
of law and governance, which are needed to kick-start the country’s
economic and social recovery.
Risk related to human capacity for reforms implementation:
Although currently improving, human capacity in
administrative services is still limited due to the recent
institutional crisis from 2009 to 2013. This situation could
slow down the implementation of programme reforms.
Medium level
This risk is mitigated by the various technical assistance projects
sponsored by development partners. The implementation of key
programme reforms is technically supported by PAGI and PAPI,
which are ongoing. These projects provide technical support in public
finance management and the promotion of private investments,
consistent with the programme.
Fiduciary Risk: The control environment and financial
management systems in Madagascar entail a level of fiduciary
risk deemed substantial overall. Substantial level
A detailed fiduciary risk analysis was conducted in TA 2 with specific
mitigation measures for each area namely: budget preparation,
execution and control; and cash flow and funds management. This
detailed assessment was prepared and the implementation plan for
monitoring the measures established in conjunction with the
Malagasy authorities.
Risk related to vulnerability to external shocks: This risk
could stem from external shocks pertaining particularly to: (i)
low level of economic growth in the Euro zone; (ii) cyclones,
floods and drought; and (iii) the downturn of the Chinese
economy in 2015-2016. These factors could adversely impact
the Malagasy economy, particularly through: (a) delays in the
disbursement of development assistance from partners,
thereby leading to the non-fulfilment of the State's
commitments in terms basic social services funded with
external resources; and (b) a decline in export earnings.
Medium level
This external risk could be mitigated by several factors, namely: (i)
concerted support from development partners, highlighting benefits
and requirements of the medium-term development plan; (ii)
substantial efforts in the quest for budget resources to ensure
minimum public services; (iii) better streamlining of expenditure to
cater for the poorest and public infrastructure for greater protection of
sensitive areas; and (iv) continued stabilization of the macroeconomic
framework while maintaining the flexibility of the foreign exchange
rate and ensuring improved domestic resource mobilization.
IX. RECOMMENDATION
It is recommended that the Board of Directors approve: (i) a loan of UA 12.5 million; and (ii) a Partial
Credit Guarantee of USD 40 million for the Republic Madagascar, for the purpose of financing the
Economic Governance Reform Support Programme (PARGE).
.
I
Antananarivo, 28 January 2016
Minister of Finance and Budget
to
The Resident Representative of the African
Development Bank
MINISTRY OF
FINANCE
AND BUDGET
-----
MINISTER
-----
Annex 1: Letter of Government Economic Policy
Mr. Resident Representative of AfDB,
Madagascar is currently in the implementation phase of the National Development Plan (NDP) aimed
at reducing poverty and laying the groundwork for inclusive and sustainable development. This plan
outlines the medium-term strategic challenges and directions of the General State Policy (GSP), and
develops the vision called “Madagascar: a modern and prosperous nation" for the period 2015-2019.
The NDP hinges on five strategic thrusts: (i) governance, rule of law, security, decentralization,
democracy, national solidarity; (ii) preservation of macroeconomic stability and development support;
(iii) inclusive growth and territorial anchoring of development; (iv) appropriate human capital for the
development process; and (v) development of natural capital and strengthening of resilience to disaster
risks.
This letter shows the willingness to tackle the challenges with a view not only to strengthening the
performance of the tax and customs services to ensure the effective recovery of economic growth, but
also to optimizing the allocation of resources to sectors with tangible impacts on the population
(education, health and infrastructure).
Since its emergence from the crisis, the country is still experiencing a difficult economic environment.
The economic recovery that began in 2014 could not be accelerated due to a series of shocks and
structural weaknesses. The adverse effects of the socio-political crisis are still evident in the social
indicators despite the government's desire to promote human capital development and social protection
mechanisms and systems. The poverty rate has stagnated at around 71%. In 2014, 92% of the population
lived on less than USD 2 a day. Access to quality health resources is still limited. In parallel, the problem
of chronic under-nutrition remains. In the education sector, the primary net enrolment rate is still low,
estimated at 69.4% in 2014. The deficit in terms of the number of out-of-school children is estimated at
approximately half a million. The country occupies the 155th spot out of 187 countries in the United
Nations Human Development Report 2014.
II
The growth rate for 2016 is forecast at 4.3%. Investment and exports are expected to sustain the growth
to initiate economic recovery. The secondary sector remains the engine of economic growth with a 4.8%
rate, driven primarily by the dynamism of the export processing companies (8.0 %). Regarding the
primary sector, growth is projected at 2.5%, resulting from the measures undertaken by the Government
to develop the agricultural sector. For the tertiary sector, 5.1% growth is expected, driven by increased
activity in public works (9.9%).
Inflation will be contained at 7.2% by the end of the period. The assumptions take into account the
relative stability of crude oil prices on the international market.
Regarding external trade, the trade balance will experience a deficit of 4.2% of GDP. A more substantial
increase in imports (5.8%) will be expected with the resumption of economic activities. Petroleum
products will account for 15.8% of goods exports and the latter will increase by 2.3%. Mining will
experience a slight drop of 1.7% due to a slump in the activities of major mining projects and falling
world market prices. The export coverage rate will stand at 85.3%, compared with 88.2% for the
previous year.
The public finance outlook for 2016 remains realistic, predicated on sustained macroeconomic stability,
socio-economic development support and good governance. Fiscal policy will aim to increase fiscal
space by broadening the tax base and intensifying efforts to improve public spending efficiency.
The net tax burden rate will stand at 10.4% in 2016. This will result from the implementation of
legislative and fiscal measures with immediate impact on revenue. These measures will be supported by
prosecuting defaulters, strengthening the control and tax audit system and, particularly, by strengthening
the reliable and efficient risk management system, as well as the control of goods subject to excise duties.
The public spending programming is in line with the NDP development priorities. In 2016, public
spending is estimated at 16.6 of GDP and will focus not only on activities that contribute to economic
growth, but especially on those that will have tangible impact on the lives of the population. Thus, the
State's priorities include: (i) strengthening governance, the rule of law and the establishment of equitable
justice; (ii) strengthening the security of persons and goods; (iii) rural development support; (iv)
infrastructure development; (v) strengthening food security; (vi) facilitating access to basic social
services (health, education, etc.); (vii) energy sector revitalization and promotion of renewable energy;
(viii) restoration of a business-friendly environment; and (ix) development of activities that promote job
creation. High socioeconomic impact sectors will be given preference (education, health, infrastructure,
and agriculture/rural development), and allotted 47.3% of the State budget.
An upswing in total investment is expected. Relative to the Supplementary Finance Law (LFR) 2015,
public investment expenditure will witness an increase of 27.7%.
The Government also undertakes to avoid accumulating domestic arrears and to clear the existing stock
of arrears as soon as possible. Given the amount of existing stock, an action plan with a timetable for
paying off existing arrears (VAT payables) has already been drawn up. The repayment started already
in 2014 and will continue until 2019. In addition to these, there are State arrears that are currently being
identified. An Arrears Identification Committee will be set up. A draft Order relating to the
establishment of the Inter-ministerial Committee for the Monitoring of Arrears has already been
prepared and is awaiting signature by the authorities. Furthermore, concerning the progress of the
preparatory work for arrears identification, 24 out of 32 ministries and institutions have responded so
far to the request for information that was forwarded to them and filled the identification table relating
to the exercise.
Public finance management reforms will enhance the efficiency of public spending. As part of the long-
term objective, the Government will step up its efforts to enhance the efficiency and transparency of
public finance. The reform action plan will take into account the recommendations of the PEFA self-
assessment report for 2013 and those of the assessment missions fielded by technical and financial
III
partners. In this regard, the measures to be implemented include the periodic publication of the budget
execution report by the Treasury (Opération Globale du Trésor - OGT) on the website of the Treasury
Department, in continuation of the public funds transparency policy begun in May 2015.
The Government also undertook to submit to the National Assembly the Audited Budget since 2009,
during the regular sessions of 2015 and 2016. In fact, according the organic law relating to finance laws
(LOLF) 2004, the draft Audited Budget should be submitted to Parliament for adoption within two years
following the year of budget execution. Those of 2009, 2010 and 2011 were submitted to Parliament for
adoption during the second session of 2015. The Government plans to submit the draft Audited Budget
for 2012, 2013 and 2014 during the 2016 parliamentary sessions. It is worth mentioning that the draft
Audited Budget for 2014 will be submitted to Parliament in 2016, which is within the legal timeframe
prescribed by the LOLF.
In the medium term, macroeconomic policy should sustain the effectiveness of the sector-specific
measures and actions. It should aim at improving predictability for economic operators by offering them
a stable intervention framework.
The growth outlook is projected at an average of 5.0% over the 2017-2018 period, and aims at supporting
the inclusive and sustainable development process. Achieving this goal calls for a stable economic
environment. Agriculture, extractive industries, construction and public works (BTP) contribute to this
growth.
In the medium term, goods and services imports will be on the uptrend with an average growth of 7.9%.
For their part, goods and services exports are improving at an annual growth rate of 5.6%. A 5.6% GDP
deficit will thus be recorded in 2018, which will lead to an overall deficit of 2.4% for the same period.
To ensure public finance transparency and efficiency, the Government developed a Medium-Term
Macro-Budgetary Framework (CMBMT) 2016-2018, on which the State Budget estimates for the period
are based. This framework reflects the economic recovery policy that will continue until 2019.
Achieving these objectives calls for intensified mobilization of domestic resources. The net revenue
collection rate will improve by 0.5 % of GDP annually to reach 11.4% in 2018, while public spending
and investment rates will reach 16.1% and 6.9% of GDP, respectively. By allocating public expenditure
rationally, tangible results will be achieved in infrastructure, agriculture, health and education sectors to
respond to national priorities. The public deficit should decrease year on year to a target of 3.0% of GDP
in 2019.
A debt management strategy has been developed to take account of the costs of the Central Government's
debt portfolio risks in the contraction of external and domestic borrowing.
Despite the moderate level of Madagascar's debt sustainability, according to the ranking of the
International Monetary Fund and the World Bank, the Government has adopted a mechanism for
regulating the grant of loan guarantees. To that end, the decree defining the terms and procedures for the
issuance of loan guarantees by the Central Government was adopted by the Government Council. In
addition, Decree No. 2015-1457 of 27 October 2015 laying down the procedures for opening and
managing project accounts at the Central Bank of Madagascar, and settlement of operations from those
accounts, was put into effect.
For domestic borrowing, a new bond was issued on the domestic market in 2015. This bond, known as
Fihary Treasury Bond (BTF), has a minimum subscription that is accessible to any economic agent
(households, individuals, companies, etc.). Efforts will focus on developing the domestic market for the
future.
The Government will continue reforms to strengthen the performance of tax and customs services in
order to establish an efficient and equitable tax system, while relying on enhancing and securing tax
IV
revenue. Fiscal policy will focus on increasing revenue, ensuring the optimal allocation of resources
based on previously established priorities, and on bringing the deficit under control. In the short term,
focus will be on increasing tax collection and correcting dysfunctionalities, which constitute sources of
distortion and imbalance.
A modern customs system will be established by facilitating border crossings and conducting greater
ex-post control. In this regard, electronic procedures will be strengthened to enable: (i) the acceleration
and traceability of operations; (ii) the security of the procedure, to reduce risks, fraud and the use of
false documents; (iii) corruption control by reducing direct contact between users and government
officers; and (iv) the professionalization of the customs clearing agent occupation. Control channels will
also be improved to ensure better management of customs-related risks.
The Tax Department plans to adopt a number of innovative measures to optimize domestic resource
mobilization. These include: (i) conducting a general census of potentially taxable activities; (ii)
developing a mechanism for cross-checking multiple sources, including the establishment of records of
bank accounts opened by individuals and companies with banking institutions; (iii) intensifying the use
of data derived from the recent introduction of the online submission of value added tax (VAT) to combat
fraud; and (iv) systematic updating of the user guide on the General Tax Code, to help enhance the
transparency and intelligibility of tax laws.
Moreover, to improve the budgetary transparency of tax waiver measures, an inventory of tax
expenditures will be regularly carried out with systematic publication of the list of beneficiaries of such
waivers, approved by the Government Council.
Regarding the prevention of corruption, 77 asset declarations were received at the High Constitutional
Court in 2015, including from 14 Members of the Government headed by the Prime Minister and 60
Members of Parliament (including the Speaker of the National Assembly). The list of names of those
who filed the declaration is published on the HCC website: www.hcc.gov.mg.
As part of efforts to revive the national electricity company (JIRAMA), the Government has set up task
forces in a bid to reduce fuel diversion and improve the billing rate. The organizational restructuring of
JIRAMA will be carried out to comply with the law on commercial enterprises. Short-term measures
include operations management reform, especially to eliminate power outages. In the medium term, the
Government will adopt measures to control fuel expenses in terms of price and volume, and to reduce
the amount of electricity generated and not sold. In this regard, oversight will be strengthened to ensure
consistency between the use of fuel inputs and the electricity generated. JIRAMA will publish relevant
statistics of the 19 large centres to facilitate the monitoring of progress. The Committee will, in addition,
review issues relating to electricity pricing, increasing operations efficiency and ensuring that the Statute
of JIRAMA complies with the provisions of the law on commercial enterprises.
Regarding Air Madagascar which is the main pillar of tourism and one of the leading foreign exchange
earners and job providers, an audit of the 2014 accounts is currently underway. The result of this audit
will be published on the websites of the Public Treasury and Air Madagascar. The company’s financial
statements from 2011 to 2013 are available on its website.
The Board of Directors appointed Mr Gilles Filiatreault as General Manager, through a competitive
process in accordance with Law No. 2014-014 of 4 September 2014 on commercial companies with
public shareholding and with Decree No. 2015-849 of 12 May 2015 relating to the organization of the
line ministry and State representation in the management and administrative bodies of companies with
State shareholding. His mission will be to transform Air Madagascar into a profitable company offering
quality services to its customers.
To further streamline public expenditure management, a fuel subsidy elimination plan was prepared, to
be implemented by end-2015. Therefore, from January 2016, the pump prices of fuel should reflect
V
fluctuations in world prices and exchange rates. The Government, with the support of the World Bank,
is bracing for the transition to this new scheme.
The management of the State’s human resources was also streamlined to ensure the effectiveness of
wage expenditure. The pay of state employees in irregular situations has been stopped and the birth dates
of all employees are being updated. The purpose of this exercise is to ensure the effectiveness of wage
expenditure and cut the wage bill down to acceptable levels. Moreover, reform is also underway to
reduce the deficit of the Civil and Military Pension Fund.
In conducting these reforms, Madagascar has always been supported by the African Development Bank
(AfDB), as evidenced, among others, by the Economic Recovery Emergency Programme (PURE)
financed by the Bank in 2014. For 2016, given that one of the goals of the National Development Plan
and the General State Policy consists in "strengthening the management of public finances and fiscal
transparency", the country aims to build on actions already undertaken in terms of: (i) improving the
budgetary process for better resource allocation; (ii) promoting transparency in public expenditure and
procurement management; and (iii) streamlining State employee management. The Government cannot
achieve these goals without the support and assistance of its technical and financial partners, including
AfDB. It is indeed for this for this reason that a request for budget support was addressed to the Bank
on 9 April 2015 for financing the Economic Management Reform Support Programme (PARGE) to the
tune of UA 12.48 UA million under ADF-13.
However, to fill the USD 55 million financing gap for the 2015 programme, Madagascar requested the
AfDB to grant, in addition to approving the previous budget support, a Partial Credit Guarantee (PCG)
of USD 10 million, to be deducted from the ADF-13 allocation for the RN9 Project. The PCG will thus
help to guarantee 72% of the funds to be raised on the market. This approach is intended to bring about
acceptable financial conditions for Madagascar's debt sustainability, guarantee for its macroeconomic
stability.
Minister of Finance and Budget
VI
Annex 2
MADAGASCAR – Economic Growth Support Programme
Programme Reform Matrix
Objectives Reforms 2015 Reforms 2016 Output Indicators Outcome Indicators
Component I – Broadening the fiscal space
I.1 – Improving
public resource
mobilization
Preparation, adoption and
operationalization of a five-
year tax strategy 2015 - 2019
Operationalization of the five-
year tax strategy 2015 - 2019
The five-year strategy is prepared and
adopted in 2015 by the CM
Fiscal resources (%
GDP):
Baseline: 9.9% of
GDP in 2014;
Target: 10.8% of GDP
in 2016
Two semi-annual reports in 2016
Signing of the contract for the
preparation of the public
finance modernization
strategy
Preparation, adoption and
operationalization of the public
finance modernization strategy
The contract is signed in 2015
The strategy is prepared and adopted by
end-July 2016
Broadening of the tax base Broadening of the tax base
Number of taxpayers, all taxes included:
At least 245 000 taxpayers at end 2016
Number of taxpayers subject to the
corporate profit tax charged on large and
medium-sized enterprises: 617 large and
medium-sized enterprises at end-2016
Operationalization of a
customs priority action plan
2015 - 2018
Progress report for the first half of 2016
available before end-July 2016.
Establishment and
operationalization of a
mechanism for combating
customs fraud
Operationalization of the ex
post Control Procedures
Handbook
The ex post Control Procedures
Handbook adopted before end-2015 by
the Government
Corporate Control Charter adopted
before end-2015 by the Government
Number of spot fiscal controls: 70 fiscal
controls in 2016
VII
Objectives Reforms 2015 Reforms 2016 Output Indicators Outcome Indicators
I.2 - Streamlining
and controlling
public
expenditure
Clean-up of the government
payroll
Clean-up of the government
payroll 0 Ariary spent on fictitious senior service
jobs in 2016
Expenditure savings12
(% GDP):
Base: 0.9% of GDP
(2014);
Target: 0.6% of GDP
(2016)
Preparation and adoption of a
medium-term debt
management strategy for 2016
- 2018
Operationalization of a
medium-term debt
management strategy for 2016
– 2018
Medium-term debt management strategy
for 2016-2018 prepared and adopted by
the Government Council by end-
December 2015
Progress report of the first half of 2016 on
the implementation of the strategy
available before end Q4 2016
Adoption of the decree
establishing the Debt
Technical Committee
The Debt Technical Committee is
established by Government Council
decree before end-December 2015
Gradual reduction of
subsidies and transfer of
public enterprises
Gradual reduction of subsidies
Ceiling on subsidies brought down to
MGA 325 billion by end-2016
The gap between the calculated baseline
price (PPRC) and the price at the pump in
force (PPV) was zero (0) in December
2015 and is maintained at that level in
2016
Component II – Promoting economic recovery
II. 1 - Improving
the quality of
public spending
Preparation and adoption of a
handbook on the selection
criteria for projects to be
included in the Public
Investment Programme (PIP)
Operationalization of the
handbook on the selection
criteria for projects to be
included in the PIP
Handbook on the selection criteria for
public investment projects
Baseline: 44.88 for 1
000 live births (2014);
Target: 42 for 1 000
live births in 2016
Public investment rate:
National Investment Policy available
before end-2016.
Increased spending in priority
social sectors (education,
health and nutrition)
Increased spending in priority
social sectors (education,
health and nutrition)
Amount of social expenditure
(commitment basis) in 2015 and 2016 - A
minimum of MGA 73 billion with
domestic funding at end- 2016.
12 Transfers to public enterprises and the reform of fuel subsidies
VIII
Objectives Reforms 2015 Reforms 2016 Output Indicators Outcome Indicators
Increased resources for the
public investment programme
(PIP)
Increased resources for the
public investment programme
(PIP)
Minimum commitment under the
domestic financing of the PIP for 2015
and 2016. At least 200 billion in
commitments at end-2015 and 250 billion
at end-2016
Baseline: 3.9% in
2014;
Target: 5% in 2016
II. 2 – Promoting
investment
Adoption and transmission to
Parliament of the bill on PPPs
Preparation of a PPP policy
handbook
The PPP bill is adopted by the Council
Ministers (CM) and forwarded to
Parliament by end-November 2015
Private investment
rate:
Baseline: 11.6% in
2014;
Target: 13% in 2016
The PPP Unit is established before end-
November 2015
Handbook and policy available before
end- 2016
Operationalization of the
arrears clearance plan
Operationalization of the
arrears clearance plan
Arrears clearance plan available by end-
December 2015: Agreement signed end-
2015 covering at least 95% of the balance
of arrears at end-October 2015
Percentage of the cleared stock of arrears
owed to other providers: 100% (5% of the
remaining stock at end-October 2015) of
the arrears cleared by end-2015.
IX
Annex 3
NOTE ON RELATIONS WITH IMF
Press Release No. 16/101 International Monetary
Fund
FOR IMMEDIATE RELEASE Washington, DC 20431
USA
March 11, 2016
IMF Staff Visit Completes Review of the Staff-Monitored Program
with Madagascar
End-of-Mission press releases include statements of IMF staff teams that convey preliminary
findings after a visit to a country. The views expressed in this statement are those of the IMF
staff and do not necessarily represent the views of the IMF’s Executive Board. This mission
will not result in a board discussion.
An International Monetary Fund (IMF) team, headed by Marshall Mills, visited Antananarivo,
Madagascar, from March 2–11 to assess progress under the Staff-Monitored Program (SMP)1 with Madagascar.
At the end of the mission, Mr. Mills issued the following statement:
“The Malagasy authorities and IMF staff see the staff-monitored program (SMP) as a crucial tool
in guiding policy and building a strong track record. Successful implementation of this program
will strengthen economic stability and sustainability, provide a framework that boosts confidence
and assists in catalyzing external assistance, and help lay the groundwork for a future request for an Extended Credit Facility (ECF) arrangement.
“Economic and financial conditions are improving. Growth is expected to accelerate from last year
to more than 4 percent this year. Economic activity will be driven by a recovery in tourism, which
was affected by Air Madagascar’s operational problems in 2015; strengthening construction
activity led by public investment; and restored AGOA (African Growth and Opportunity Act)
eligibility benefiting manufacturing. With better rainfall for most of the country so far this year,
agricultural production is also expected to recover slowly in 2016 after contracting in 2015.
Inflation remains contained below at 8 percent. The external environment is challenging, in light
of low commodity prices and slow growth in some export markets. Risks to the outlook stem
mainly from fiscal challenges, weak global commodity prices, adverse weather conditions, and policy implementation in a difficult political environment.
“Implementation of the SMP was broadly satisfactory at end-December 2015, with generally good
performance on indicative targets and structural reforms moving ahead. Revenue mobilization was
above target, reflecting a gradual upward trend in tax and customs collections. The quality of
expenditure has improved, with the elimination of fuel subsidies, introduction of an automatic
pricing mechanism for fuel, agreement on plans to repay some arrears, and an ongoing cleanup of
government payrolls. That said, losses in state-owned enterprises, particularly the Electricity and
Water Company of Madagascar (JIRAMA), remain a major concern and pose significant risks to
the budget. The Central Bank of Madagascar has taken advantage of favorable conditions to
accumulate more international reserves and work on the draft Central Bank Act enhancing its independence continues to advance.
X
“Important challenges remain. Additional reforms, such as strengthening the financial system, will
be critical to strengthen the economy and fortify growth. Continuing with a prudent fiscal stance,
including through better management of JIRAMA, avoidance of arrears, and ensuring manageable
public debt remain important. Crucially, sustained progress will also depend on improvements in
governance, including the fight against corruption, to ensure that reforms are implemented and bear
fruits.
“The Malagasy authorities have demonstrated commitment to the program so far and are taking
important steps to advance their macroeconomic and structural reforms. Further advancing the
ongoing reforms should lift the economic outlook. The next staff visit is expected to take place in
May/June to assess end-March performance under the SMP. This assessment will help build a track
record that could support moving toward an ECF.”
“The team met with President Hery Rajaonarimampianina, Prime Minister Jean Ravelonarivo,
Minister of Finance and Budget Gervais Rakotoarimanana, Minister of Economy and Planning
Herilanto Raveloharison, Central Bank of Madagascar Governor Alain Rasolofondraibe, the
Economic Advisor to the President Léon Rajaobelina, and other senior government officials.
“The mission takes this opportunity to thank the Malagasy authorities for their strong cooperation
and the constructive discussions that took place.”
1 An SMP is an informal agreement between country authorities and Fund staff to monitor the implementation of the
authorities’ economic program. SMPs do not entail financial assistance or endorsement by the IMF Executive Board.
XI
Annex 4: Key Economic Indication 2013 - 2016
2013 2014 2015 2016
Real Prelim. Est.
Gross domestic product and prices
GDP at constant prices 2.3 3.3 3.2 4.3
GDP deflator 5.1 6.6 7.6 7.4
Consumer price index (end-period) 6.3 6 7.9 7.2
External sector
Goods exports in volume 21.7 5.7 13.9 5.9
Goods imports in volume 11.1 4.6 -0.8 6.5
Terms of trade (deterioration -) 10.3 12.6 -4 -2.8
Money and credit
Monetary base -6.1 14.1 10.8 11.9
Broad money (M2) 9 9.8 10.9 14.9
Net external assets¹ -15.8 6.1 11.5 6.6
Net domestic assets¹ 24.9 3.7 -0.6 8.3
including private sector credit 8.1 9.7 7.5 8
Public finances
Budgetary revenue (excluding grants) 9.6 10.1 10.3 10.9
including fiscal revenue 9.3 9.9 9.9 10.7
Grants 1.3 2.3 2.1 2.1
Total expenditure 14.9 14.7 16.9 16.2
Current expenditure 11.8 10.8 12.1 11
Wages and salaries 5.7 5.6 5.8 5.6
Interests payable 0.7 0.6 0.9 0.9
Others 4.8 4.1 4.1 4
Goods and services 0.6 0.6 1.3 0.5
Transfer and grants 4.1 3.2 3.5 3.1
Net treasury operations 0.6 1.2 0.6 1.5
Captial expenditure 3.1 3.9 4.8 5.2
With domestic funding 0.6 1.2 0.6 1.5
With external funding 2.5 2.8 4.2 3.7
Overal balance (commitment basis) -4 -2.3 -4.5 -3.2
Floating (variation in accounts payable -= increase) 0.2 -0.6 0 0
variation of domestic arrears(-= increase) -2.2 0.7 0.8 0.6
Budgetary balance (cash basis) -2 -2.4 -5.3 -3.8
External funding (net) 1 1.2 4 0.4
Domestic funding (net) 1 1.2 1.3 0.7
Fiscal gap after mobilized financing (+= surplus finan.) 0 0 0 -2.1
Savings and investment 15.9 15.6 16.6 17.2
Gross fixed capital formation
Public 2.5 3.9 4.8 5.2
Private 13.4 11.6 11.8 12
Gross domestic savings 7.5 11.3 13.3 14
Public -2 -0.2 -1.5 0.2
Private 9.4 11.4 14.8 13.8
National domestic savings 10.3 15.3 14.8 15.4
Public -0.9 1.6 0.4 2
Private 11.1 13.7 14.5 13.5
External sector
Goods exports, fob 18.4 20.6 22.7 24.5
Goods imports, cif 31.7 31.2 31.3 34.8
Current account balance (excluding grants) -6.9 -2.2 -3.9 -3.9
Current account balance (including grants) -5.6 -0.2 -1.8 -1.8
Public debt 31 35.2 40.6 40.1
External 22.8 23.7 30.7 31.5
Domestic 11.1 11.4 10 8.7
Gross official reserves (SDR million) 502 535 590 629
In months of goods and services imports 2.2 2.5 2.7 2.8
Real effective exchange rate
(Period average, percentage variation) 3.6 -3.3
GDP per capita (US dollars) 462 453 400 370
(as % GDP)
(Unit as indicated)
Forecasts
Growth as percentage of money supply (M2) at start
of period
Madagascar: Key Economic Indicators, 2013-16
(variation in percentage, except as otherwise indicated)
XII
Annex 5: Madagascar – National
Accounts 2013 -2016
Produit intérieur brut et prix
PIB a prix constants
Déflateur du PIB
Indice des prix a la consommation (fin de période)
Secteur extérieur
Exportations de biens en volume
Importations de biens en volume
Termes de l'échange (détérioration -)
Monnaie et crédit
Base monétaire
Monnaie au sens large (M2)
Avoirs extérieurs nets¹
Avoirs intérieurs nets¹
dont Crédit au secteur prive
Finances publiques
Recettes budgétaire (hors dons)
dont: recettes fiscales
Dons
Dépenses totales
Dépenses courantes
Traitement et salaires
intérêts exigibles
autres
Biens et services
Transfer et subventions
opérations nettes du trésor
Dépenses en capital
Sur Financement intérieur
Sur financement extérieur
Solde global (base engagement)
Flottant (variation des comptes créditeurs -= augmentation
variation des arriérés domestiques (-=augmentation)
Solde budgétaire (base caisse)
Financement extérieur (net)
Financement intérieur (net)
Gap fiscal après financement mobilisable (+=finan. excédentaire)
Epargne et investissement
Formation brute de capital fixe
Publique
Privée
Épargne intérieure brute
Publique
Privée
Epargne nationale intérieure
Publique
Privée
Secteur extérieur
Exportations de biens, fab
Importations de biens, caf
Solde transactions courantes (Hors dons)
Solde transactions courantes (dons inclus)
Dette publique
Extérieure
Intérieure
Réserves officielles brutes (en millions de DTS)
En mois d'importation de biens er services
Taux de change effectif réel
(moyenne de la période, variation en pourcentage)
PIB par habitant (dollars américain)
2013 2014 2015 2016
Real Prelim. Est.
Actual supply growth
Primary sector -6,1 3,3 0,7 2,5
Agriculture -12,8 4,5 0,6 3,3
Livestock and fisheries 1,4 2,8 0,8 1,9
Forestry -1,9 -1 1 1
Secondary sector 22,2 8,5 4,1 4,8
Food and drinks 3,1 3,4 4,1 3,7
Export processing zones (EPZs) 5,9 2,1 7,1 8
Energy 5,6 4,2 3,1 5,5
Extractive industries 219,2 25,9 3,3 5
Others -2 2,1 4,5 4,4
Tertiary sector 0,8 2,1 4 5,1
Transport 3,6 2,2 3,3 5,6
Services 2,2 1,2 5 5,8
Trade -3,4 2,9 3,1 2,8
Public administration 1 1,4 1 1
Public works/ construction -2,2 3,1 8,3 9,9
Indirect taxes
8,5 2,1 4,5 4,8
Real GDP at market prices 2,3 3,3 3,2 4,3
Nominal demand composition
Resource balance -8,4 -4,3 -3,3 -3,3
Exports of goods and non-factor services 38,7 37,1 37,7 40,7
30,3 32,8 34,4 37,4
Current account balance (including grants) =
(S-I) -5,6 -0,2 -1,8 -1,8
Consumption 92,5 88,7 86,7 86
Public 11,1 10,2 11,2 10,1
Private 81,5 78,5 75,5 75,9
Investment (I) 15,9 15,6 16,6 17,2
Public 2,5 3,9 4,8 5,2
Private 13,4 11,6 11,8 12
Foreign direct investment
Foreign direct investment
5,2 2,9 3,1 3,3
Private non-FDI
National savings (S) 10,3 15,3 14,8 15,4
Public -0,9 1,6 0,4 2
Private 11,1 13,7 14,5 13,5
Memorandum items
Nominal GDP (market prices) 23 397 25 775 28 618 32 055
Net factor income -3,2 -2,8 -3,6 -4
Transfers 6 6,9 5,1 5,5
Nominal GNP 23 400 25 779 28 620 32 056
Source: IMF Report No. 5/325 November 2015
Forecasts
(variation in percentage)
(in % GDP )
XIII
Annex 6: Annex 6: Evaluation of factors of fragility and sources of resilience in
Madagascar
1- Country Context
1.1. Physical geography: Located in the Indian Ocean, Madagascar is the fourth largest
island in the world, with an area of 587,041 km². The country is separated from Africa by the
Mozambique Channel. The island status, the nature of the relief and exposure to sudden changes
in rainfall and temperatures make the country vulnerable to a series of major natural hazards
(cyclones, floods, silting, drought and locust invasion of unprecedented proportions).
1.2. Governance and political situation: Madagascar has experienced repeated political
and economic crises (1972, 1981, 1991, 2002 and 2009), characterized by what is now known
as "the Malagasy ritual of power change in the streets, through the streets and by violence",
with the support of the Defence and Security Forces (FDS). Out of 12 accessions to the high
office of President, six were by coups d'état and one was due to the indisposition of the
incumbent. The crises are often sudden, brutal and short-lived. The last one, which occurred in
2009, lasted five years until 2013. The Malagasy political class has benefited from the support
of the international community, including the African Union (AU), the SADC and the
International Contact Group (ICG), which enabled the adoption of a crisis roadmap, signed on
17 September 2011. The roadmap contributed to the return to constitutional order on 25 January
2014, the date of inauguration of the new President elected in a peaceful political atmosphere.
To date, all the country’s institutions are in place (Prime Minister, Government, National
Assembly and its Bureau and various commissions).
1.3. Economic and financial context: Madagascar's economy is characterized by low,
slow and unstable growth. The weak real GDP growth rate that has for long stood at 1.6%
(reflecting a decline in real GDP per capita), is due to the under-performance of the 1972-1996
period and the deep crises of 2001-2002 and 2009-2013, which caused significant regression:
12.1% (1981); -9.1% (1991); -15.3% (2002) and 6.8% (2009). These results are also attributable
to the low attractiveness of the country, characterized by a low investment rate (12% of GDP)
and a decline in total factor productivity. The graphs in the annexes show the trend of GDP over
time and the country's relative position compared to countries of its cohort.
1.4. Demographics, poverty and inequality: The estimated population in 2011 was 22.3
million inhabitants, growing at an annual rate of 2.9%. Young people under 20 years account
for 53% of the population. The fertility rate is high at 5.6 children per woman. The human
development index (HDI) ranks Madagascar in the bottom quintile (148th out of 174). In
absolute terms, the population structure generates a pressing social pressure, compounded by
the challenge of increasing poverty: 92% of the population has an income of less than USD 2 a
day and over 53% live in extreme poverty. Poverty is exacerbated by the scale of inequalities
and the weak development of social safety nets: the relationship between extreme percentile
consumption stood at 9 points at 20% and 15 points at 10%.
2- Determinants, Explanatory and Constituent Factors of Fragility
2.1. Madagascar was declared a fragile State from 2013 and a thorough evaluation of its
fragility was launched in January 2014 by the Bank. Four categories of factors were analysed:
(i) physical geography (ecology and environment); (ii) political (and institutional and security)
factor; (iii) economic and financial factor; and (iv) social factor (poverty and inequality). The
effects of external factors considered exogenous are included in the four categories of
endogenous factors.
XIV
2.2. Physical geography: The low capacity of the State relative to the size of its territory
makes it impossible to deploy administrative and government offices in a manner that ensures
equitable delivery of State services. Three sources of weaknesses help to perpetuate the fragility
of the State, the regions and grassroots communities:
(a) The weak presence of the State at the grassroots level as a result of
devolution has not been offset by the decentralization process, which has
remained a dead letter: Apart from urban municipalities that have legitimate
resources and elected officials, the decentralization process has marked time and
failed to provide regional and local authorities (CTDs) with the appropriate
resources required to perform their duties and assist the State in its sovereign
functions. It has created lawless areas where people are exposed to influence
peddling and insecurity risks (dahalo effect - zebu rustling), and have to cope
with isolation and frustrations (farmers are often dispossessed of their land).The
illegal exploitation of natural resources is estimated at nearly USD 746 millioni
annually, according to the World Bank, followed by the destruction of the
ecosystem. The influence of external factors is just as important, in particular,
the demand for raw materials emanating from the world market, and more
specifically from emerging countries (China, India, Brazil and South Africa), as
well as demand falling within the geo-strategy of foreign powers.
(b) The island status of Madagascar is a major factor that has deprived the
country of regional or multi-national physical projects and goods (roads,
bridges and various other items). The permanence of natural disaster undermines
agricultural and food production, infrastructure and facilities, and poses a threat
to human lives: a quarter of the population is exposed to natural hazards. The
overall cost (economic, social and financial) is estimated at almost 4% of GDP,
representing a loss of over USD 700 million.
2.3. Political, Institutional and Security Factors
(a) The country's recurrent crises stem from the instrumentalization of justice,
the streets and the security forces, as well as from the manipulation of the
fundamental law and electoral laws in a semi-presidential or semi-
parliamentary system where the nascent democratic process is still weak,
and especially in a context where politicians, public authorities and the ruling
elite pursue parochial interests and seek privileges. The weakness of the
democratic process is mainly caused by the absence of constructive political and
social dialogue between the ruling coalitions, fuelled by a high sense of ego. The
behaviour of the teams in power, the political class and political and military
elites reflect a lack of leadership and vision, all of which weakens the institutions
and the State.
(b) A State that is weakened at the central and decentralized levels does not always
have a monopoly on legitimate force. The lack of political balance and consensus
results in the fragmentation of power and whittles down the capacity to control
and bring together security forces under one command. For want of resources,
the State's authority and legitimacy are compromised, in the face of Defence and
Security Forces that are poorly paid and have to ensure security in urban areas
and the regions. Such a situation perpetuates a vicious circle of insecurity,
lawlessness and corruption, which is detrimental to the interests of the State and
XV
the people. The situation prompted an eminent political figure to say: "Seizing
power in Madagascar is easier than keeping it."
2.4. Economic and Financial Factors
(a) The initial development conditions and past economic choices have for long
sustained the country's economic decline. The economic reforms implemented
from the late 1980s, in a context of political, institutional and regional fragility,
did not have enough impact to accelerate the economic catching-up and
adjustment process. Structural reforms are still inadequate to stimulate
sustainable growth in sectors with spill over effects such as: agriculture,
agribusiness, energy, small- and medium-sized industries and support services
(transport and trade). Growth and productivity are still low in these sectors.
(b) The low attractiveness of the country in a context of insecurity, instability
and corruption in the justice sector has led to the concentration of
investments in the NICT sector where risk is low and domestic demand high;
and in the extremely capital intensive mining sector, which constitutes an
enclave within the national economy. While it is not obvious that taking
resources from these areas to invest in agriculture would be an effective means
of reviving the latter, the opaque management of royalties and dividends from
mining remains a major challenge.
(c) The conditions for a lasting improvement in total factor productivity are far
from being met, despite the positive, though artificial, developments of the 1997
to 2008 periods, resulting from direct investment in the mining sector and the
delegated management of the sector. Except for the criteria for setting up and
establishing enterprises, the country is still ranked in the lower quintiles due to
indicators of business facilitation, competitiveness and logistics. The deficit in
infrastructure is significant: the density of paved roads (per thousand km2) stands at
9.7 km in Madagascar compared with 31 km in Africa South of the Sahara (ASS)
and 134 km – the average for low income countries. Forty-four per cent (44%) of
national roads are in poor condition and 31% in good condition. Only the Thomasine
Port is operational for handling large vessels. The railway network is obsolete.
2.5. Social Factors, Poverty and Inequality
(a) The high poverty rate poses a challenge in orienting consumption and
investment to meet the need to accelerate growth. The country needs USD 400
million annually to lift 53% of the population out of extreme povertyii. The depth of
poverty is such that it takes up 2% of GDP, whereas a growth rate of 1% of GDP
would help to reduce the incidence by 1%. The poverty gap is considerable and
social indicators continue to point to an increasingly precarious food security
situation, which jeopardizes the attainment of the Millennium Development
Goals (MDGs) by 2015.
(b) The intensity of poverty affects demand as well as supply, through its weak
contribution to improving productivity. The poor population as well as low
education and health indicators combine to weaken growth drivers (quality of labour
and competitiveness). Poverty and inequalities are sources of tension and insecurity,
which could fuel the illegal exploitation of natural resources and increase insecurity
for investors.
XVI
3- Reforms Implemented by the National Party
3.1. During the 2009-2013 Transition
(a) The transition, which was supposed to be short to make way for a return to
constitutional order, lasted five years. Within the framework of the roadmap
for emergence from the crisis, the transition authorities had been tasked with
forming a participatory government of national unity, ensuring reconciliation in a
peaceful political atmosphere and organizing elections. The duration of the
transition and the implementation of sanctions resulted in: (i) a pro-cyclical, tight
fiscal management to ensure macroeconomic stability at the expense of poverty-
reducing social actions; (ii) technical and financial partners were made to cover the
State’s social expenditure. Despite these two precautionary measures, the crisis had
very negative impacts that were difficult to neutralize in the short term.
(b) Elections were held in December 2013, and witnessed the emergence of an elected
President and elected MPs; the Prime Minister and the Government have been
installed. The Bureau of the National Assembly has also been constituted.
Gradually, the institutions of the Republic are being established. Local and regional
elections will also be held.
4- Options for a Resilience Strategy
4.1 The General State Policy (GSP)
The broad outlines of the GSP announced by the Head of State during his inauguration on 25
January 2014 and by the Prime Minister in his statement to the National Assembly relate to the
following priority themes:
i. Strengthening governance, the rule of law and the establishment of equitable justice;
ii. Ensuring economic recovery through the creation of a stable social and political
environment, maintenance of macroeconomic stability and restoration of a business-
friendly environment;
iii. Expanding access to high quality basic social services.
The GSP comprises three thrusts:
The General State Policy (GSP) Bank Positioning According to the Report
Strengthening governance, the rule of law and the establishment of equitable justice
Support for State resilience
Ensuring economic recovery through the
creation of a stable social and political
environment, maintenance of macroeconomic
stability and restoration of a business-friendly
environment;
Support for State resilience, poverty reduction and
accelerated, inclusive and green growth.
Expanding access to high quality basic social
services
XVII
5- The Bank Group’s Positioning
(a) The fragility report proposes that the Bank’s positioning should be oriented
along two thrusts: (i) support for State resilience, in accordance with the GSP’s
first thrust; (ii) support for the resilience of the population, the fight against
poverty, and accelerated, inclusive and green growth. This second thrust is in
line with thrusts 2 and 3 of the GSP. Priority actions will be identified within the
framework of deepening the dialogue with the authorities.
(b) The participatory process for the preparation of the interim CSP (I-CSP) 2014-
2015 was launched at a ceremony, on 26 May 2014, which was attended by
representatives of the Government, civil society, private sector, as well as technical
and financial partners, alongside the MGFO Resident Representative and four
members of Government, namely, Ministers in charge of: Finance and Budget;
Economy, Planning and Development Support; Strategic Resources; Water and
Sanitation.
(c) The I-CSP comprises the following two pillars: (i) Governance and private
sector support; and (ii) agricultural and rural infrastructure for food security.
XVIII
Annexe 7: Essential features of the Partial Credit Guarantee of the African Development
Fund13
I. Introduction
1. During the meeting on the Thirteenth General Replenishment of the African Development
Fund (ADF-13), Deputies approved the inclusion of the Partial Credit Guarantee (PCG) in ADF
instruments. Like the ADF’s Partial Risk Guarantee (PRG), which was approved during ADF-12,
Deputies recognized the crucial catalytic role that PCGs will play in the use of the Fund’s limited
resources to attract commercial sources of financing for structuring development projects in low-
income African countries.
2. The PCG, which is introduced on an experimental basis during the ADF-13 period, will
help meet the challenges facing the well-performing ADF countries with adequate debt
management capacity debt, as well as a number of State-Owned Enterprises (SOEs) of ADF
countries seeking to mobilize funds from domestic and foreign markets.
II. Structure of the PCG
3. Partial Credit Guarantees (PCGs) cover a portion of default payments linked to scheduled
repayments of commercial debt against all risks, of both commercial and political nature. They can
be used to leverage private funds for project financing, financial intermediation and financing
reform programmes:
a. Project financing: PCGs can be used for investment projects in the public sector
(notably public-private partnerships), especially in the infrastructure sector. Some
types of PCG, for example, guarantees linked to debt maturity extension, are
primarily intended to extend the financing conditions by guaranteeing payments on
the longer-term segment of the loan, which encourages private lenders to close the
gap;
b. Financial intermediation: PCGs can be used to support long-term resource
mobilization on international and domestic capital markets. Guaranteed debt issue
is intended to reduce the interest rate differential on the guaranteed total. This
guarantee can be structured to cover the principal in case of the issuance of bullet
bonds;
c. Financing reforms: PCGs can be used to support the mobilization of commercial
funds by sovereign entities for strategic and sector-specific reforms.
III. Cross-Guarantee
4. The ADF PCG requires the beneficiary or the host member country (as applicable for
state enterprises) to provide a cross-guarantee14 without which the PCG cannot be granted.
5. Where an ADF PCG is utilized, payments made with it will be immediately due and
payable to the Fund by the country that issued the cross-guarantee. The aim is to limit moral
hazard if a country hopes to obtain an ADF long-term loan after a default within the context of
the guarantee. Non-repayment to the Fund would result in arrears such as non-timely payment
of debt service on an ADF loan, and would trigger the application of the sanctions policy and
13 This annex is based on the Strategic Framework and Operational Guidelines on partial credit guarantees of the African Development Fund
approved by the Bank in December 2013 (Ref: ADF/BD/WP/2013/120/Rev.1) 14 An agreement under which a beneficiary member country agrees to indemnify the Fund for payments made by the Fund under the
guarantee. Any payment made by the Fund will be repaid by the country concerned.
XIX
cross-default provisions of the Bank Group. However, at its own and sole discretion, the Fund
may amortize the amount to be reimbursed in the form of a loan repayable over a fixed period.
IV. Commitment Capacity
6. ADF guarantees of Government performance are closely linked to the performance of
the countries concerned. The ADF PCG will be available to regional member countries through
their country allocations, particularly their performance-based allocation (PBA) and any
additional resources drawn on other mechanisms such as the Fragile States Facility or the
Regional Operations Envelope. Considering the lessons learned from other guarantees issued
by the Bank Group and specifically the ADF PCG, only 25% of the nominal value of the
guarantee will be deducted from the country’s PBA.
7. However, the country will be liable for the full amount of the guarantee granted. Each
country may decide to leverage its PBA by subscribing to more than one ADF guarantee
product (partial risk guarantee and partial credit guarantee), although the total guarantee amount
per country will be limited to 100% of a country’s PBA. The amounts deducted from a country’s
PBA will be paid into a reserve instituted to secure against calling the guarantees.
V. Pricing of Guarantees
8. The Fund will apply the same pricing policy to the PCG as to its loans. The financial
impact of a disbursement under an activated guarantee is considered same as a loan granted to
the country issuing the cross-guarantee, the only difference being the timing of disbursements.
Another strong argument for the alignment of guarantee charges with ADF loan charges is
based on the fact that, given the mutual nature of the Fund, it will be difficult to justify the
application of different rates to guarantees and loans which entail the same risk exposure.
VI. Benefits of an ADF Partial Credit Guarantee
9. The ADF and its borrowers will benefit from the use of ADF guarantees. The PCG
will help low-income countries (LICs) to gain access to markets, to extend debt maturity dates
and reduce borrowing costs for their projects. Commercial lenders would also benefit from such
a guarantee since certain risks associated with loans will be reduced, including the perceived
risk of default. The ADF’s close relationship with governments can reassure lenders and also
reduce the risk of default on the unsecured portion of the loan. Moreover, according to banking
rules governing the activity of commercial lenders, the portion of commercial loans covered by
the PCG may be exempted from the funding requirements associated with the country risk,
which would reduce the impact of the loan on their equity allocations, thus freeing their funding
capacity.
10. The ADF will also derive many benefits. The reduced maturity of the underlying loan
secured by a PCG relative to longer maturity for an ordinary ADF loan would effectively tie
down the Fund's resources for a shorter period and therefore have a beneficial effect on its
forward commitment capacity. The leverage effect of a PCG will have a positive impact on the
Fund in several respects: (i) it will generate additional income for the Fund since the guarantee
fee will be applied on the total amount and not just on the fraction of the performance-based
allocation (PBA) reserved to support the guarantee; and (ii) it will help to save the Fund’s
limited resources, which will continue to be channelled to its priority areas. Lastly, the PCG
would help to achieve the core objective of attracting private investors to finance low-income
African countries while ensuring prudent and proper debt management.
XX
11. Commitment capacity and financial leverage: The ADF PCG is a leveraged
instrument that will utilize only a portion of a country’s PBA and thus enhance the volume and
catalytic impact of financial transactions. Considering the lessons learned from other guarantees
issued by the Bank Group, particularly the ADF PRG, only 25% of the nominal value of the
guarantee will be deducted from the PBA.
12. Therefore, for a guarantee of UA 100, only UA 25 of the PBA resources of a country
will be utilized. The leverage effect of Fund resources would thus be 4 to 1. Accordingly, when
the Board approves a PCG, it is at the same time approving an increase in the Fund's
commitment capacity equivalent to 75% of the nominal value of the guarantee provided. Since
the guarantee will be denominated in one of the Fund’s disbursement currencies (USD, EUR,
GBP, JPY) whereas the unit of account (UA) remains its commitment currency, the Fund's
exposure in the event of activation of the guarantee may exceed the original amount approved
in UA. Hence, the Board acknowledges and approves any additional exposure arising from
currency fluctuations. It should be noted that the host country guarantee is committed for the
total nominal value of its exposure. Considering that on average guarantees cover a maximum
50% of the total investment amount, it is estimated that the ADF PCG will have both a leverage
and multiplier effect of at least 8 (eight) to 1 (one) on PBA resources utilized.
XXI
Annex 8 – MAP OF MADAGASCAR
i World Bank ii World Bank and UNDP
