Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No. 32516-MG

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 53.9 MILLION

(US$SO MILLION EQUIVALENT)

TO

THE REPUBLIC OF MADAGASCAR

FOR A

SECOND POVERTY REDUCTION SUPPORT OPERATION

June 9,2005

Poverty Reduction and Economic Management 1 Africa Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not otherwise be disclosed without Bank authorization.

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AAA AfDB ACM ADER AGOA APMF AT1 CAPE CAS CBM CFAA CGDIS CISCO COMESA CNFA CPAR CPI CPIA CRESED CROCC CSLCC DEA EBFs EFA ENAM ENMG EPM EPZ EU FERHA FID FDI FMG FNE GDP GOM GTZ GUIDE HASYMA HIPC

CURRENCY EQUIVALENTS (as o f June 7,2005)

Currency unit = M a r y

US$1 = 2012.70 Ariary

FISCAL YEAR January 1 - December 3 1

WEIGHTS AND MEASURES Metric System

ABBREVIATION AND ACRONYMS Analytical and Advisory Activities African Development Bank Civil Aviation Agency Agency for the Development o f Rural Electrification The African Growth and Opportunity Act Maritime, Ports and River Agency African Trade Insurance Agency Steering Committee for Enterprise Promotion Country Assistance Strategy Central Bank of Madagascar Country Financial Accountability Assessment General Commission for Development of the South School District Agency Common Market for Eastem and Southem Africa National Center for Administrative Training Country Procurement Assessment Review Consumer Price Index Country Policy and Institutional Assessment Credit for Strengthening the Education System in Madagascar Technical Working Group on Anticorruption Anticorruption Commission Directorate of Water and Sanitation Extra Budgetary Funds Education for Al l Malagasy National School for Administration National School for Magistrates Household Survey Export Processing Zone European Union Imgation Maintenance Fund Community Development Fund Foreign Direct Investment Malagasy Franc National Fund for Electricity Gross Domestic Product Govemment of Madagascar German Technical Cooperation Agency One Stop Shop for Investment and Enterprise Development Cotton Company Highly Indebted Poor Countries

.. - 11 -

FOR OFFICIAL USE ONLY

IDA IFC IGF IMCI-C IMF JIRAMA JSA MDG MECIE MEFB MENRS MENSUP METFP MFA MIGA MINESEB M O H MOU MTEF NEAP NER N G O N N P N P V ONE ORE PADR PARP PER PGDI PIP PRGF PRS PRSC PRSP PSIA RA RMF RWSS SACU SADC STA TCSP TSA UNDP USAID VAT V P M W A S H WB WBI

Intemational Development Association International Finance Corporation General Inspectorate for Finances Integrated Management o f Childhood Illness Intemational Monetary Fund Electricity and Water Company Joint Staff Assessment Millennium Development Goal National Environment Impact Legislation Ministry o f Economy, Finance and Budget Ministry o f National Education and Scientific Research Ministry o f Higher Education Ministry o f Vocational and Technical Education and Training Multi-Fibre Agreement Multilateral Investment Guarantee Agency Ministry o f Basic and Secondary Education Ministry o f Health Memorandum o f Understanding Medium Term Expenditures Framework National Environment Action Plan Net Enrolment Rate Non-Govemment Organization National Nutrit ion Policy Net Present Value National Office o f Environment Regulatory Agency for Electricity Action Plan for Rural Development Budget Support Program for Poverty Reduction Public Expenditure Review Governance and Institutional Development Project Public Investment Program Poverty Reduction and Growth Facil ity Poverty Reduction Strategy Poverty Reduction Support Credit Poverty Reduction Support Paper Poverty and Social Impact Analysis Road Authority Road Maintenance Fund Rural Water and Sanitation Supply Southern African Customs Union Southern African Development Community Technical Secretariat for Adjustment Technical Committee on Social Protection Treasury Single Account United Nations Development Organization United States Agency for International Development Value Added Tax Vice Prime Minister Water, Sanitation and Hygiene Committee World Bank World Bank Institute

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise'disclosed without World Bank authorization.

Vice President - Gobind Nankani

Sector Director - Paula Donovan Sector Manager - Emmanuel Akpa

Country Director - James Bond

Task Team Leader - Benu Bidani

The PRSC Team includes Benu Bidani (Task Team Leader), Luc Razafimandimby (Macroeconomics); Guenter Heidenhof, D. Randriamanampisoa, Gervais Rakotoarimanana, Sylvain Rambeloson, Odile Keller (Public expenditure management and govemance); Sajitha Bashir, Patrick Ramanantoanina (Education); Jean-Pierre Manshande (Health); Claudia Rokx, Anne M. J. Bossuyt (Nutrition); Christophe Prevost, Patrice Rakotoniaina (Rural water supply); Susanne Holste, Noroarisoa Rabefaniraka (Transport); Bienvenu Rajaonson (Environment); Ziva Razafintsalama (Rural development); Nadine T. Poupart, Hope Neighbor (Social protection); Risseme Gabdibe, Lanto Ramanankasina and Emma Fabienne Raharinjanahary (overall support) and Jean-Charles de Daruvar (Legal). Harold Alderman and Sanjay Pradhan (PRMPS) are the peer reviewers.

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THE REPUBLIC OF MADAGASCAR

SECOND POVERTY REDUCTION SUPPORT CREDIT

TABLE OF CONTENTS

I . Introduction ...................................................................................................................................... 1

I1 . Recent Economic Developments ................................................................................................... 2 A . Macroeconomic Performance ....................................................................................................... 2 C Medium Term Outlook 3 D . HIPC Initiative and Debt Sustainability ............I ........................................................................... 6

. .................................................................................................................

I11 . Madagascar’s Poverty Reduction Strategy ................................................................................ 7 A . Poverty in Madagascar ................................................................................................................. 7 B . The Government’s Strategy for Reducing Poverty and i ts Implementation ................................. 8 C . World Bank Country Assistance Strategy and Support to the Implementation o f the PRSP ..... 13 D . Donor Collaboration in Supporting the Implementation of the PRSP ........................................ 15 E . Donor Support for Capacity Building ........................................................................................ 16

I V . Poverty Reduction Support Credits Program .......................................................................... 16 Strategic Axis 1: IMPROVING GOVERNANCE ...................................................... i. ................... 23

A . Public Expenditure Management ................................................................................................ 23 B . Fighting Corruption .................................................................................................................... 29 C . Justice ......................................................................................................................................... 31 D . Customs ...................................................................................................................................... 33 E . Decentralization .......................................................................................................................... 34

Strategic Axis 2: BROAD BASED GROWTH ................................................................................ 36 A . Private Sector Development ....................................................................................................... 36

C . Rural Development and Environment ........................................................................................ 40 Strategic Axis 3: PROVIDING HUMAN AND MATERIAL SECURITY ................................... 42

A . Education .................................................................................................................................... 42 B . Nutrition ..................................................................................................................................... 45 C . Health ......................................................................................................................................... 47 D . Rural Water Supply .................................................................................................................... 50 E . Social Protection ......................................................................................................................... 52

B . Transport ..................................................................................................................................... 37

Strengthening Monitoring and Evaluation of the PRSP ................................................................. 53

V . Credit Implementation and R i s k s ........................................................................................... 55 . ................................................................................................................ A Credit Administration 55

B . Environmental Aspects ............................................................................................................... 57 C . Risks ........................................................................................................................................... 58

- v -

Annexes

Annex 1: Chairman’s Summing Up for Sixth Review under the PRGF Program ...................................... 61 Annex 2: Policy and Institutional Reform Matrix ....................................................................................... 63 Annex 3 : Letter o f Government Policy ....................................................................................................... 80 Annex 4: Madagascar at a Glance ............................................................................................................... 86 Annex 5: Madagascar Key Economic Indicators ........................................................................................ 93 Annex 6: Monitoring Indicators Annex ...................................................................................................... 95

Boxes

Box 1 : Vision 201 5 . Madagascar Naturellement ........................................................................................ 9 Box 2: Lessons Learnt - Implementation o f PRSC 1 .................................................................................. 18

Figures

Figure 1: The Three Year PRSC Program ................................................................................................... 17

Tables

Table 1: Exports 2003-2004 .......................................................................................................................... 3 Table 2: Selected Indicators o f Real Sector Activity, 1997 - 2008 .............................................................. 5 Table 3: Macroeconomic Framework 2003-2008 ......................................................................................... 6 Table 4: Madagascar Key Debt Sustainability Ratios ................................................................................... 7 Table 5: Implementation of the Poverty Reduction Strategy, July 2004 onwards ...................................... 12 Table 6: Analytical and Advisory Activities ............................................................................................... 14 Table 7: Status o f Indicative Triggers for PRSC 2 ...................................................................................... 19

Table 9: Broad-Based Growth - Key Policies ............................................................................................ 39 Table 10: Expected Results o f the EFA Program ........................................................................................ 45 Table 1 1 : Key Intermediate Outputs o f the Nutrition Program ................................................................... 46 Table 12: Prior Actions for PRSC 2 and Indicative Triggers for PRSC 3 .................................................. 56

Table 8: Key Development Outcomes 2003-2006 ...................................................................................... 22

. vi .

THE REPUBLIC OF MADAGASCAR

SECOND POVERTY REDUCTION SUPPORT CREDIT

Borrower:

Amount:

Terms:

Description:

CREDIT SUMMARY

The Republic o f Madagascar

SDR 53.9 mill ion (US$SO mill ion equivalent) credit

Standard IDA terms: 40-year maturity

A series o f single tranche Poverty Reduction Support Credits (PRSCs), provided in the form o f budget support, i s envisaged to support implementation o f Madagascar’s Poverty Reduction Strategy Paper (PRSP).

PRSC 2 i s consolidating and deepening support for policy and institutional reforms in governance and human development commenced under PRSC 1. On governance, PRSC 2 assists the Government in continued implementation o f i t s 2004 Priority Action Plan for public expenditure management reforms, and in developing the follow-on 2005 Priority Action Plan. The main achievements have included improved alignment o f the 2005 budget to the priorities o f the PRSP, introduction o f program budgets, which have both introduced a medium-term perspective and improve the link between sector priorities and budget allocations. There has been continued progress in implementing the new Procurement Code, with most o f the draft implementing rules and regulations ready, and the Procurement Oversight Institution established by decree. A transitional integrated financial management system i s functional in Tamatave and i s expected to be functional in August 2005 in the central treasury and four other regional treasuries, and this will greatly facilitate budget execution and monitoring. The Auditor General has made strong efforts to clear the backlog o f the draft budget execution laws (Projet de Loi de Riglements) till 2001. The Projet de Loi de Reglements for 2002 and 2003 are expected to be finalized by December 2005. The institutional and legal environment for anti-corruption has been significantly strengthened, and the Anti-Corruption Agency i s now operational. Customs reform i s now being guided by reform strategy and action plan. PRSC 2 continues to support the Government’s Education for All Agenda with continued support to policy measures aimed at increasing access to, and quality of, primary education, including the update o f the EFA plan, elimination o f school fees, provision o f learning materials to all primary students, teacher recruitment, reform o f the curricula and reinforcement o f management capacity at central and decentralized levels. Primary net enrolment rates have increased dramatically, beyond expectations, to well over 90 percent. Now, the challenge l ies in improving the quality o f schooling and enhancing learning outcomes. PRSC 2 also supports policy and institutional reform in the nutrition sector, including the establishment o f a National Nutrition Council and i t s supporting secretariat, the Office National de Nutrition. PRSC 2 has also supported health reforms, through the updating o f the national policy on health and the introduction o f a Medium Term Expenditure Framework for the sector. Health outcomes for immunization and infant and child mortality have improved significantly between 1997 and 2003, with the child mortality declining from 163.9 in 1997 to 94 in 200314, a 43 percent decline. PRSC 2 has also supported

- vii -

Benefits:

Risks:

Estimated Disbursement:

improved access to rural water through the development o f a Water for All program, and scaling up implementation with higher budget allocations and increased sector capacity.

The Country Financial Accountability Assessment (CFAA, 2003), the Country Procurement Assessment Report (CPAR, 2003), and the 2005 Public Expenditure Review (PER) provide the analytical underpinnings for the public sector reform agenda, and updated analysis for the Education for All underpins education reforms. A Health Sector Note has provided the foundations for the health policy reforms. A supporting Governance and Institutional Development project i s assisting the government to put in place systems to strengthen budget management, and finance technical assistance and capacity building.

The proposed series o f PRSCs will contribute to Madagascar reaching its development goals. The reforms supported will strengthen the institutional infrastructure needed to improve the public sector’s capacity to carry out i t s role more effectively. In addition, strengthened monitoring and evaluation w i l l lead to an enhanced accountability and results focus. Improved delivery o f public services i s essential if the Government i s to reach i t s goals for poverty reduction and improve the quality o f l i fe in Madagascar.

The Bank sees the following risks in the implementation o f the PRSP: (i) various external shocks including cyclones; (ii) political risk and deterioration o f popularity for the President and his reforms, and with forthcoming elections in eighteen months, short-term considerations could dominate, jeopardizing longer-term PRSP goals; (iii) unsatisfactory implementation o f budgetary and governance reforms could hamper the delivery o f results; (iv) erosion o f trade preferences and slow pace o f reforms allowing other developing countries to become more competitive; (v) low confidence o f private sector investors in the Malagasy economy; and (vi) difficulties in PRSP implementation, due to weak institutional capacity, under-financing or lack o f a coherent donor effort.

The Government and Bank are undertaking several measures to mitigate risk. A Risk Management and Social Protection Review by the Bank i s underway to assess risk prevention and mitigation strategies, and the Bank has modified procedures for its Community Development Project to rapidly respond to emergencies. On governance reforms, the Bank i s continuing to support reforms in the areas o f public financial management and capacity building through ongoing operations, the governance project and WBI capacity building support. The Bank proposes to mitigate political r isk by trying to achieve quick successes, by accelerating disbursements, as was seen in FY03 and FY04. O n trade, the government i s accelerating reforms to improve competitiveness, and actively participating in trade negotiations. O n the last risk, the donor community has intensified efforts at coordinating assistance programs, harmonizing disbursements and procurement procedures and developing common programmatic approaches around the PRSP. The donor community i s increasing its level o f financial aid to Madagascar, and i s also providing technical assistance and support for capacity building for sustainability.

SDR 53.9 mill ion (US$SO equivalent) w i l l be disbursed in a single tranche following effectiveness.

... - Vl l l -

Project ID Number: PO83326

- ix -

THE REPUBLIC OF MADAGASCAR

SECOND POVERTY REDUCTION SUPPORT CREDIT PROGRAM DOCUMENT

I. INTRODUCTION 1. This Program Document proposes a second Poverty Reduction Support Credit (PRSC) for Madagascar for US$SO million. This operation follows the f i rst PRSC approved by the Board on July 20, 2004, and continues the implementation o f the three-year policy and institutional reform agenda as laid out in the policy matrix. This operation i s an integral part o f the Bank’s Country Assistance Strategy (CAS) to support the implementation o f the Government’s poverty reduction strategy, as spelled out in the Poverty Reduction Strategy Paper (PRSP). The objective o f Madagascar’s PRSP i s to promote rapid and sustainable development to reduce poverty by half in ten years. To attain this objective, the PRSP lays out three key priorities: (i) improving governance; (ii) promoting broad based growth; and (iii) providing human and material security. A cross-cutting pillar o f monitoring and evaluation underpins the strategy.

2. The implementation of the program supported under the first operation (PRSC 1) has been satisfactory. Most o f the prior actions for PRSC 2 are broadly on track to be completed by mid-June 2004. The program document reviews the progress made in implementing the poverty reduction strategy, with particular emphasis on the areas o f focus o f PRSC support (governance and human development). The reform program supported under PRSC 2 has continued to deepen and consolidate reforms that commenced with PRSC 1 in fighting corruption, improving public expenditure management and customs, and in implementing the Education for All and nutrition programs. In addition, reforms to expand access to safe drinking water, improve health outcomes and provide protection from shocks have also advanced.

3. The PRSC program for the first three PRSCs focuses explicitly on the strategic axes of governance and human development as explained above, and includes specific policy actions in these areas. The PRSC does not include any specific policy actions on the pillar o f broad-based growth. While we do have a policy dialogue in these areas as part o f the PRSC, the Bank support for growth i s through our significant portfolio o f ongoing investment projects in infrastructure, environment, rural development and the new Integrated Growth Poles project being presented to the Board in FY06. Starting with PRSC 4, the focus on growth will be enhanced, based on the analytical work that i s currently ongoing, on the investment climate, the financial sector, and land rights.

4. Madagascar has continued to make good progress in implementing its poverty reduction strategy over the last year, despite the difficult year marked by exogenous shocks. While 2004 has been a difficult year, with many external shocks, and the impact o f the 2003 tax-exemptions taking effect, the Government has responded appropriately with policy adjustments aimed at maintaining macroeconomic stability. Two cyclones hit Madagascar in early 2004 causing widespread damage to infrastructure and agricultural land and leaving thousands homeless. The policy decision to give a two- year tax exemption in September 2003 for investment goods and unfortunately, a range o f luxury consumer goods, spurred imports. In addition, imports increased due to the accelerated implementation of the investment program, and increase in the international price o f oil, and contributed to a sharp depreciation o f the exchange rate in the f i rs t half o f 2004, leading to inflationary pressures. Erratic management in the early part o f the year by the Central Bank contributed to exchange rate volatility. The Government responded to these shocks quickly in May 2004 with a mix o f monetary and fiscal policy measures complemented by safety nets, and the exchange rate stabilized. But, the sharp increase in

1

international o i l and rice prices continued to put pressure on inflation. The Government has continued to adjust i t s policy to manage inflation. Inflation for the year 2004 was 27 percent (year on year), but the inflation calculated for prices excluding o i l and rice, was a more modest rate o f just over 6 percent (end November 2004, year on year). Rice prices, which had continued to rise sharply during the f i rs t two months o f 2005 contributed to 30 percent inflation in February 2005 (year on year). But rice prices have started declining in March 2005 and overall inflation for 2005 i s expected to decline to single digit figures. The latest inflation numbers show a decline in April 2005 to 21.9 percent (year-on-year).

5. Despite these large shocks, GDP growth in 2004 i s projected to remain robust at 5.3 percent due to strong growth o f the Export Processing Zones (EPZs), tourism and increased public investment, especially for infrastructure. Madagascar has also maintained i ts focus on implementing i t s poverty reduction strategy, as documented in i t s First Annual PRSP Progress Report, with good results evident particularly in the implementation o f the roads program, Education for All, nutrition, and improving the institutional environment for anti-corruption. Madagascar reached the Heavily Indebted Poor Country (HIPC) Initiative Completion Point in October 2004 bringing significant debt relief and improved prospects to maintain sustainable debt levels in the medium term. Madagascar has also recently become the f i rst country to receive financing from the Millennium Challenge Account.

11. RECENT ECONOMIC DEVELOPMENTS

A. MACROECONOMIC PERFORMANCE 6. The macro-economic environment in 2004 has been difficult, marked by exogenous shocks, sharp depreciation o f the exchange rate, with high inflation but the reform program that Madagascar embarked upon after the economic and political crisis o f 2002 has continued to be implemented steadily, and growth i s st i l l projected to be a robust 5.3 percent in 2004. As noted in the PRSC 1 program document, Madagascar was hit by two back-to-back cyclones barely a month apart in early 2004, which rendered over a third o f a mil l ion people homeless, destroyed 300,000 hectares (or 10 percent) o f agricultural land and caused widespread destruction o f infrastructure, including around 4,600 damaged or destroyed schools and health centers. There was a huge increase in imports in the f i rst part o f 2004, linked to the tax-exemptions granted in Fall 2003, the impact o f the cyclone, the scaled-up implementation o f the investment program and an increase in the international price o f oil. This put pressure on the exchange rate which depreciated strongly. Erratic and unsuccessful attempts by the Central Bank to maintain the value o f the FMG against the Euro, led to volatility in the exchange rate market. The Government responded with a series o f measures and since the middle o f 2004, the exchange rate has stabilized.

7. Given the recent volatility of the exchange rate and i t s adverse impact on the economy, Madagascar has adopted measures to ensure exchange rate stability and competitiveness, and secure an adequate level of international reserves. These measures include the issuance o f guidelines by the Central Bank in December 2004, with technical assistance from the IMF, for intervention in the foreign exchange market with the aim o f directing Central Bank interventions to achieving i t s foreign assets objectives and at dampening sharp swings that would create uncertainty'. The establishment o f a continuous inter-bank foreign exchange market with an electronic trading system i s expected to provide accurate information to the operators and reduce the volatility o f the exchange rate. The transition to the Ariary, the new currency introduced fully in January 2005, was orderly.

' Indeed, in 2004 the Central Bank reduced considerably i t s international reserves to the equivalent 2.8 months o f imports as opposed to 4 months in 2002 and 3.3 months in 2001, in an attempt to stabilize the nominal exchange rate.

2

8. But inflation poses a major risk. The depreciation o f the exchange rate put pressure on prices. This combined with sharp increases in international o i l and rice prices has contributed to inflation o f 27 percent year-on-year at the end o f December 2004. The Government has made policy adjustments to manage inflation. The Government increased the Central Bank base rate in three steps from 7 percent to 16 percent and raised reserve requirements from 12 percent to 15 percent. In mid-2004, non-wage current expenditures were reduced by 10 percent, while efforts were made to protect priority expenditures in education and health. But rice prices continued to rise through February 2004, on the heels o f high international prices, and low imports in the f i rst ha l f o f the year, which prompted the Government facilitation o f rice imports with selected companies for sale at a regulated price o f FMG 3500kg. A dual rice market existed, with the regulated rice available in limited quantities, and open market rice at around FMG 7-8,OOOkg. The high rice prices have likely caused hardship for local consumers, especially during the lean season o f November-February 2005. Producer prices are reported to have been higher for the early harvest than previous years, which should be good for rural farmers. Consumer prices have finally started declining in March 2005, and inflation end April 2005 stands at 21.9 percent (year-on-year).

The VAT on luxury consumer goods was also re-instated.

2003

9. The Government implemented safety net programs to help the poor deal with the negative economic shocks (cyclones, high rice prices and overall inflation). Donor and government financing for safety nets reached around US$16-18 mill ion for these shocks in addition to the regular funding o f around US$2.8 mil l ion for safety nets through the Community Development Fund project. The most important intervention was labor-intensive public works programs. But in response to the large increase in rice prices, towards the end o f the year, the labor intensive public works included free health care and child care in highly affected areas o f Antananarivo and Toamasina. Emergency nutrition packages were also made available to children under the age o f five, pregnant and lactating women.

1,595 284 758 468 5,767

B. MEDIUM TERM OUTLOOK

10. Growth has rebounded quickly after the 2002 crisis. After a sharp decline o f 13 percent in 2002, growth was 9.8 percent in 2003 and i s projected to reach 5.3 percent in 2004. The macroeconomic projection o f the IMF under the PRGF forecasts an average growth rate o f 6.5 percent over the medium term (2005-2008).

1 1. The reforms adopted in the last two years are expected to promote a private sector, export- led growth in the medium-term. Exports are projected to recover from the adverse impact of the 2002 crisis and average 20.6 percent of GDP over the forecast period. Recovery has already taken place with exports/GDP reaching 22 percent o f GDP in 2004 thanks to a surge in tourism receipts and good performance o f textiles. Despite the expiration o f the Multi-Fibre Agreement (MFA) and the instability o f the prices o f primary products such as vanilla, exports are projected to remain stable at around 20 percent o f GDP in the medium-term. Textiles, tourism, mining and shrimps are s t i l l expected to account for the bulk o f Malagasy exports.

Table 1: Exports 2003-2004

2004 I 2,050 265 918 1,442 7,783 In % o f Tot. Exp

2003 I 27.66 4.93 13.14 8.12 533 2004 I 26.34 3.40 11.79 18.53 60

Source: INSTAT - Ministry o f Tourism - 2005.

3

12. Overall investment will average 23.7 percent of GDP against an average of 15.7 per cent over the 1997-2001 period and will be driven mainly by an increase in private investment. Private investment i s projected to reach 15 percent o f GDP for the year 2005, compared to an average o f 8.1 per cent o f GDP between 1997 and 2001, and i s projected to average 13.5 percent o f GDP over the forecast period. Although foreign direct investment (FDI) s t i l l remains low after the crisis, amounting to 1 percent o f GDP in 2004, it i s expected to increase in the coming years with a projected average o f 1.5 o f GDP’. The privatization o f the cotton company, direct investment in tourism and mining and the investment related to the implementation o f the management contracts in infrastructure (airports, ports, telecommunications, electricity and water) will give impetus to an increase in FDI.

13. Government expenditures will average 21 percent of GDP over the forecast period, with public investment averaging 10.2 percent of GDP versus 7.4 percent of GDP over the 1997-2001 period. Government expenditures on capital reflect the 2004-2008 investments in roads, in irrigation (FERHA) and the planned investments under the Bank’s Integrated Growth Poles Project on energy, water and sanitation investment in Nosy B e as well as additional infrastructure around the EPZ and information communication and technology (ICT) parks o f Antananarivo.

14. A few export-oriented sub-sectors will play a major role in driving growth although all sectors are expected to improve their performance. The EPZ sector will grow at an average rate o f 5 percent. Despite the extension o f the AGOA and Madagascar’s price competitiveness, growth in the sector will gradually decrease due to the impact o f the expiration o f the MFA and a projected decrease in intemational prices in textiles. Tourism and related activities are expected to grow further given the planned private investment in hotels3 and the increasing number o f tourists (254,000 tourists visited Madagascar in 2004 compared to 179,000 visitors in 2001). Current reforms in air transport such as the implementation o f the open-sky policy, the opening o f additional gateway cities and the planned concessioning o f the main airports in 2005 are expected to further increase the number o f tourists in the coming years. A number o f large scale investments are expected to take place in mining from 2005. The sector i s projected to grow by 5.6 percent in 2005 but wil l experience a net increase from 2006 onwards at an annual rate o f 8 percent with the planned investments in the sector. Fisheries will grow at a stable rate o f 3 percent thanks to a sustained growth in the shrimp sector. Madagascar st i l l benefits from the niche export market for high quality farmed shrimp with the European Union due to good farming practices and the stringent quality controls adopted by the large corporate firms. The creation o f certification in 2005 wil l also help increase the value o f Madagascar’s shrimp.

15. Agriculture i s projected to sustain the good performance initiated in 2003 and 2004 in the medium-term, with an annual growth rate of 3.5 percent. Despite the cyclones, agriculture grew by 3.5 percent in 2004. A significant increase in producer prices in rice in 20044, the implementation o f the FERHA program aimed at rehabilitating and establishing a viable maintenance mechanism for the large scale irrigation in Madagascar from 2005 onwards and the impact o f the road program are expected to provide stronger incentives to producers. In addition, the emphasis on agriculture as spelled out in the vision, Madagascar Naturellement (see Section 110, and additional donor support for the sector provided by the Millennium Challenge Account are expected to sustain the projected growth performance o f the agriculture over the medium-term.

FDI i s expected to increase from SDR30 mi l l ion in 2004 to SDR 61.7 mil l ion in 2008. The French holding ACCOR has announced a significant investment in Madagascar. The restructuring o f the state-

owned hotels and the rksewes fonciers touristiques are starting in 2005 and the Integrated Growth Poles Project i s expected to start by end-2005.

I t was reported that producer prices increased from 700 Fmg on average in the previous years to 2000 Fmg in 2004.

4

16. The Government has started to implement a number o f actions to increase tax revenues gradually and support the planned increase in public investment, with the goal of reaching 13 percent of GDP in 2008 from 10.9 percent o f GDP in 2004. The increase in tax collection i s necessary to support fiscal consolidation without imposing limitations on the required levels o f expenditures in relation to the growth and poverty reduction objectives. In the short-term, the Government will address tax administration weaknesses and broaden the tax base. Customs’ reform will be at the core. In September 2004, The Government rescinded the VAT on the luxury consumption goods exempted for two years in September 2003. Major reforms under way include actions to: (i) strengthen the Sewice des Grandes Entreprises (SGE) collecting tax fkom large enterprises; (ii) close loopholes that reduce tax collections and to recover arrears and amounts in dispute; (iii) rationalize the tax and tariff structure; (iv) install one-stop shops in the main ports to speed up customs clearance. The Government has merged the customs and import taxes into a single tax; customs duties credit has been eliminated (crbdit de droit); payments o f the customs duties through the banking system i s mandatory since April 2005; and the immunity o f customs agents from enquiries and prosecution has been abolished.

17. In the medium term, the balance of payments i s projected to improve with the level o f international reserves recovering gradually and reaching the equivalent o f 3.5 months of GNFS imports at the end of the forecast period compared to 2.7 months in 2004. Along with an improvement o f the capital and financial account due to the net increase in FDI, the current account balance deficit, including grants, i s projected to decrease steadily from 10.6 percent of GDP in 2004 to 4.7 percent o f GDP in 2008, with the trade account deficit registering 5.5 percent o f GDP compared to 9 percent o f GDP in 2004.

Table 2: Selected Indicators o f Real Sector Activity, 1997 - 2008

199 2003 2004 2005 7 2008 2005-2008 GDP growth

Primary

, ..of which agriculture

Secondary

. . . o f which EPZ

. . . o f which mining

Tertiary

.,..of which construction

4.6 -12.4 9.8 5.3 6.3 7.0 6.3 6.3 6.5

2.5 -1.3 1.3 3.1 3.6 3.5 3.2 3.2 3.4

1.8 0.8 2.6 3.5 4.0 3.5 3.5 3.5 3.6 5.8 -20.7 14.5 6.5 6.1 6.8 6.9 6.9 6.7

22.9 -40.0 75.8 25.0 5.0 5.0 5.0 5.0 5.0 -5.5 -34.2 10.2 7.7 5.6 8.0 8.0 8.0 7.4 5.3 -15.0 10.6 6.0 7.4 6.8 6.6 6.5 6.8

10.1 -36.3 22.9 29.0 18.2 17.0 17.0 17.0 17.3

. , .of which telecommunications 9.3 -5.7 8.4 5.0 6.6 6.0 6.0 6.0 6.1

5

Table 3: Macroeconomic Framework 2003-2008 (YO of GDP, unless otherwise indicated)

GDP Growth Investment Non-government

Central Government Account Total Revenue and Grants Total Revenue

Grants Tax Revenue

Total Expenditure Current Expenditure

Capital Expenditure Domestic budgetary balance Primary balance Overall Balance (on commitment basis) Excluding grants Including grants Change in arrears Total Overall Balance (cash basis, excl. grants) Total Overall Balance (cash basis, incl. grants)

Trade balance Export, f.0.b Imports, c.i.f Current Account (incl. Grants)

of which Interest Payment

2008 6.0

23.7 13.4

18.4 13.4 5.2 13

20.3 10.7 1.6 9.6

4.1 -0.6

-6.9 -2.9 -0.3 -7.2 -2.2

20.1 27.1 -4.7

2003 12.8 17.9 10.1

15.4 10.3 5.1

10.0 19.5 11.4 2.2 7.8

-2.7 1.1

-9.3 -4.2 -0.6 -9.9 -4.8

19.7 20.7 -4.9

2004 5.3

23.7 12.2

20.3 12.0 7.9

10.9 25.1 12.6 2.9

12.5 -1.3 2.1

-13.1 -3.4 -0.8

-13.9 -5.7

22.0 32.3

-10.6

2005 6.3

27.5 15

17.5 12.1 8.2

11.4 21.4 11.1 2.8

10.3 -2

3.6

-9.3 -4.9 -0.5 -9.8 -4.3

21.6 31.3 -8.8

2006 2007 7.0

24.3 14

18.1 12.6 5.5

12.1 21.3 10.6 1.9

10.7 -0.4 3.7

-8.7 -3.9 -0.5 -9.2 -3.7

20.4 29.3 -6.9

6.3 24.2 13.5

18.3 13

5.5 12.6 21.2 10.8 1.7

10.3 -0.5 3.8

-8.1 -3.2 -0.3 -8.5 -3.2

20.3 28.2 -5.8

[Gross Official Reserves in months of imports of GNFS 2.7 2.8 2.7 3.0 3.2 3.51 Source: IMF Macroeconomic Framework from Article IV Consultation Report (May 2005)

c. MPC INITIATIVE AND DEBT SUSTAINABILITY

18. Madagascar attained the Heavily Indebted Poor Countries W P C ) completion point in October 2004. Subsequent to the approval by the Executive Boards o f IDA and the IMF, the Government met with representatives o f the Paris Club group on November 16, 2004 to discuss the reduction o f i ts stock o f debt. The Paris Club cancelled i ts share o f the debt in the framework of HIPC. After assuming full del ivery o f HIPC debt relief, the NPV of external debt would be reduced to the equivalent to 194 percent of exports. At the request o f the Malagasy authorities, most bi lateral creditors have commit ted to grant additional debt re l ie f to Madagascar. If this assistance i s forthcoming, the NPV of external debt will represent the equivalent to 137 percent o f exports at end-2003, restoring debt sustainability be low the thresholds o f 150 percent (see Table 4). Madagascar i s exi t ing from the enhanced HIPC Ini t iat ive with signif icantly improved chances to achieve and maintain sustainable debt levels over the med ium term.

19. Debt Data Management. T h e authorities have undertaken steps to improve debt data management. All the loans for wh ich the Central B a n k and the M in i s t r y o f Finance were responsible had

6

been entered into the UNCTAD’s (DMFAS) new database system (SYGADE) and an integrated data management system will be established between the Central Bank and the Ministry o f Finance. In addition, the authorities have contacted relevant international agencies to build capacity on debt analysis5.

Table 4: Madagascar Key Debt Sustainability Ratios

NPV o f Debt Debt Service

I/ 2/ at end-2003 (Avg 2004-2023)

NPV o f debt to expt Debt Service ratio US million ratio (%) US million (%I

After traditional debt relief 3,053 284 222 8.1

After Enhanced HIPC re l ie f 2,079 194 168 5.8

After Enhanced HIPC re l ie f and 1,467 137 139 5.0 bilateral debt rel ief beyond HIPC Source: Bank and Fund staff estimates 1/ Assuming full delivery debt relief under each scenario. 2/ Includes estimated debt service on new borrowing.

111. MADAGASCAR’S POVERTY REDUCTION STRATEGY

A. POVERTY IN MADAGASCAR

20. Between 1960 and 2001, per capita income in Madagascar declined from US3430 to US$230, and as a consequence poverty increased, especially during the 1980s. The long economic decline impacted adversely on people’s quality o f l i f e as demonstrated by the low levels o f many social indicators and access to basic utilities. Wi th the resumption o f sustained growth during the period 1997-200 1, there was poverty reduction, but limited to urban areas. The poverty profile i s available from the analysis o f the 2001 household survey. A household survey has recently been completed (in March 2005) and the analysis i s just commencing. Recent trends in household welfare are available from a recently completed commune survey and the Demographic and Health Survey o f 2003/2004 and the updated poverty profile from the 2004 household survey wil l be presented in the next PRSC document.

21. Poverty in Madagascar i s mainly prevalent in rural areas with 77 percent of the rural population being poor in 2001 compared to 44 percent in urban areas. In contrast to urban poverty, which had a strong correlation with economic performance, particularly during the last five years, the trends show that rural poverty has steadily increased, irrespective o f the evolution o f the economic situation.

22. About 80 percent of the rural population has no reliable transport services due to poor road conditions, and of these one third has no road access at all. Studies suggest that lack o f access to

~~

Options will be training provided by (i) UNCTAD to the staff of the Central Bank and the Ministry of Finance in DSM+; or alternatively by (ii) DRI (Debt Relief International) in Debt pro, the software currently used by the IMF and the Bank’s HIPC Unit

7

roads and markets, low agricultural productivity and rural poverty are closely associated. In participatory investigations, as well as quantitative analysis o f household surveys, rural families stress poor roads and the need to improve agricultural productivity among their major concerns. This i s mirrored, for example, in the relationship between yields and remoteness. Rural households better connected to markets have a significantly higher productivity than those living in more isolated areas and the same relationship holds for the use o f modem inputs such as fertilizer. Isolation also implies lacking access to financial institutions and credit, forcing poor farmers to sell at times o f low, post-harvest prices.

23. Education i s negatively correlated with poverty. Individuals in households with few or no members who have completed primary education are more l ikely to be poor. The difference between urban and rural areas i s significant in terms o f school enrolment, completion and literacy rates. But, the Government's priority to primary education and policy initiatives under the Education for All program, including the abolition o f school fees, recruitment o f teachers for rural schools, rehabilitation and reconstruction o f school establishments, payment o f FRAM teachers' salaries in the and distribution o f materials and supplies have led to a very large increase in enrolment, and this has been pro-poor.

24. While there have been improvements in health status indicators, health services for the urban poor and rural population remain inadequate. While overall trends have improved for immunization, pre-natal consultation, and skilled attendance at delivery, low income populations remain inequitably served. For example, based on the recent DHS, only 32 percent o f the lowest quintile o f the population, based on an asset index, are completely immunized, compared with 80 percent among the better-off population. Furthermore, while the child mortality rate significantly decreased from 163.9 in 1997 to 94 in 2003 (a 43 percent drop), the poor-rich differential in child mortality remains high as 3.5. L o w incomes are compounded by low effective health coverage (60 percent o f the population live within 5 km o f a health facility) and an insufficient number o f physicians and other health care providers in existing health facilities. While free access to drugs in 2002 and 2003 boosted health facility utilization, the supply system failed to sustain drug availability due to the absence o f the demand-side "pull" from the patients and the peripheral health centers.

B. THE GOVERNMENT'S STRATEGY FOR REDUCING POVERTY AND I T S IMPLEMENTATION

25. Implementation of the PRSP i s proceeding well (see Table 5). The Government prepared i t s First Annual Progress Report outlining progress in implementing i ts PRSP in July 2004. The Government i s preparing a Progress Report for the calendar year 2004, and i s planning to prepare i t s Annual Report on a calendar year basis to correspond to the budget cycle with a mid-year report on implementation in July to inform the budget preparation for the following year. In November 2004, the Government articulated a vision up to 2015: Madagascar Naturellement (see Box 1). While recognizing the enormous potential o f Madagascar, this vision puts a renewed focus on rural development, through the roads program, education and health and establishing better linkages between the urban and rural areas, and increasing the value added in agriculture. The vision sees a transformation o f Madagascar from a subsistence economy to a market economy, increased exports, and enhanced linkages between rural economy and the industrial economy through agro-industries, pharmaceuticals, textiles and the transformation o f mineral products, and through economic services such as tourism and agricultural credit. In line with i t s vision, the Government has presented a results-framework (La Politique Gdnkrale de I'Etat 2005) which aims for growth o f at least 7 percent, inflation o f 6 percent or less and private investment o f at least 14 percent. The key priorities identified include the reinforcement o f the effectiveness o f Government, good governance, infrastructure, education for all, rural development and environment, drinking water for all, health and AIDS prevention, private sector development, and tourism. These priorities are formulated as national programs, and there i s a strong focus on integrating donor interventions into the national programs. The Government has prepared an update o f the PRSP

8

incorporating this vision and this was discussed at a two-day workshop in early June 2005 involving a wide range o f stakeholders.

Strategic A x i s I: Good Governance

26. In the area o f governance, the main elements o f the PRSP include the fight against corruption, improved public expenditure management, respecting democracy, establishing an equitable justice system, and implementing decentralization.

27. The Government has continued to focus on fighting corruption and implementing public finance reforms. The Anti-Corruption Agency i s now fully functional. The Government remains committed to implementing public finance reforms and improving the efficiency and equity o f public funds (see Section IV for a detailed description o f the reform program). The implementation o f the 2004 Priority Action Plan has been satisfactory, and based on this plan, the govemment has strengthened i ts budget preparation process (e.g. by aligning the budget closer to PRSP priorities) as well as introducing a medium term perspective into the budget (through the introduction o f program budgeting for all ministries). Other reforms include the implementation o f the key recommendations o f the independent audit o f the Treasury, and strengthened internal and external controls. The Government has established regions and competitively selected chefi de rkgions to co-ordinate development activities across communes.

28. There has been some progress in the functioning of customs and justice. The improvements in customs have been geared to speeding up clearance processes, combating corruption and improved revenue collection. The Govemment has prepared a strategy and action plan to implement customs reforms. Justice reform i s geared towards deterring corruption in the sector, expediting the processing o f cases, and improving the legal environment for the economy.

Strategic A x i s 2: Broad-Based Growth

29. The Government’s strategy for broad-based growth i s geared toward maintaining macroeconomic stability and achieving high annual growth. The main elements o f the Government’s strategy for broad-based growth focus on facilitating private sector development, accelerating the roads program, rural development, fostering public-private partnerships and greater opening up o f the economy.

30. The ambitious transport sector program has been successful in rehabilitating the road network. However structural reforms have been slower. In 2004, the Government rehabilitated around 2,700 km o f road. The creation o f the Agency for Terrestrial Support (ATT) and the Road Authority have been delayed and are expected by end-2005 and mid-June 2006 respectively.

3 1. Rural development and environment are critical elements of the Government’s strategy to fight poverty, since over four in five poor people live in rural areas. The Government has implemented i ts priorities, including institutional strengthening, the implementation o f i ts Action Plan for Rural Development, and taken steps towards the establishment o f Fond d’Entretien des Rbeaux Hydro Agricoles (FERHA) to provide financing for the maintenance o f irrigation infkastructure. The Government has continued to implement the National Environment Action Plan (NEAP), focusing on institutional reforms, improving governance, and improving the financing for the environment.

9

Box 1: Vision 2015 - Madagascar Naturellement

Madagascar Naturellement, the vision for the country in 2015, was defined by the President of Madagascar during a Cabinet meeting on November 24,2004 : Madagascar will be a country known worldwide for the beauty o f i t s r ich and well-protected biodiversity. The diversified and r ich natural resource base (agriculture, favorable climate combined with the large surface o f available land, livestock and fisheries, mining) w i l l contribute to the creation o f products wi th high value added such as essential oil, agri-business, pharmaceutical, mining etc. Madagascar will be a reputable destination for ecotourism. The rural areas w i l l grow steadily, thanks to more diversified and transformed agricultural products and the development o f industrial infrastructure in the regions. Exports will be on a upward trend to support the current account balance and help stabilize the exchange rate. Broader impact o f growth and a progressive redistribution o f i t s benefits w i l l help reduce poverty substantially. Education and health w i l l be accessible to the population and infrastructure wil l be wel l developed allowing for free movement o f goods and people. The gap between the rural and urban areas w i l l be smaller and movements o f people f rom rural areas to urban areas will be limited. Investments w i l l be secured and Madagascar w i l l develop harmoniously.

What i s rewi red to achieve the 2015 obiectives?

The strengthening of the rural areas as a prerequisite to shared and accelerated growth. With the majority o f the population eaming their l iving f rom agriculture emphasis should be put on the strengthening o f the rural areas. This approach also entails indirect actions through the strengthening o f the linkages o f the economy to the rural areas - development o f industrial activities related to agriculture (agri-business, pharmaceutical, textile, tourism, mining) to increase higher value-added agricultural exports.

Improved govemance and capacity; provision o f assets through infrastructure, education and health; enhanced openness to the world economy; promotion o f a market economy thiough the abolition o f monopolies, rent seeking and predatory behavior.

Better infrastructure through measures ranging from: (i) the rehabilitation o f ports and airports to support exports; (ii) the creation o f adequate storage facilities in regions, and: (iii) the creation o f agro-cities aimed at supporting the development o f specific product value chains.

Education: introduction o f training o n agriculture in secondary education; strengthening o f research and training on agri-business, tourism and textiles through partnership with international experts.

Incentives through standards, regulation and tax system: acceleration o f land titling; improved rural credit; flexible land taxation system depending o n the use o f land; setting up o f norms and certification.

L a Politique Gknkrale de 1’Etat in 2005

La Politique Gknkrale de I ’Etat are the critical actions and results in 2005 that are critical steps towards attaining the objectives o f Madagascar Naturellement in 2015. There are 3-5 results by Ministry which form part o f the result: agreement between the President and his Cabinet.

Update of the PRSP: (i) include Madagascar Naturellement vision into the PRSP ; (ii) improve coordination o f tht donors’ program to reflect the Government’s vision; (iii) revise and elaborate on 2005 and 2006 action plan basec on the followings priority areas.

Priority areas: (i) strengthen the capacity o f the Government and high officials; (ii) good govemance; (iii infrastructure ; (iv) education for all; (iv) rural development, agri-business and environment (v) water for all; (vi) health; HIV-AIDS; (vii) private sector development and (viii) tourism.

10

32. The Government has continued with public enterprise reform. TELMA, the telecommunications company was privatized in June 2004, and the cotton parastatal (HASYMA) was privatized in October 2004. A management contract for the sugar company (SIRAMA) commenced in June 2004 for the plant in Ambilobe, July 2004 for Namakia and October 2004 for Nosy Be and Brickaville. The energy parastatal (JIRAMA) was put under management contract in February 2005. Air Madagascar i s continuing operations under a management contract, and the Government has announced a free s k y policy in February 2005. The Northern Railway has been concessioned, and plans to concession the Southern Railway are underway.

33. The Government has continued to consolidate and simplify the tariff structure. The import tax and customs duty were consolidated into a single customs duty in the 2005 Loi des Finances. The two year exemption granted for luxury consumer goods and investment goods in September 2003 was partly rescinded by reinstating the VAT on luxury consumer goods in September 2004. The VAT will decrease from 20 percent to 18 percent in September 2005 when the import tariff and VAT are re- imposed on tax exempted goods. Tariffs on rice were reduced from 20 percent to 10 percent. T h i s was in response to the new economic environment, where the depreciation o f the exchange rate and higher world prices o f rice, mean that a lower tariff s t i l l ensures that at the prevailing producer price most farmers would be able to recuperate production costs, while ensuring a reasonable retail price for urban consumers.

Strategic Axis 3: Human and Material Security

34. Under the strategic axis of human and material security, the main objective i s to enhance human capacity and strengthen each individual’s assets, through education, health and nutrition. The PRSP views the commune as the main local service provider and the anchor for all interventions in this domain.

35. Ensuring a basic education for all Malagasies - Education for All (EFA) remains the top priority. Enrolment rates have continued to increase, with a net enrollment ratio of over 90 percent in the school year 200415 (see Section IV for details). The main policy initiatives include keeping the Madagascar EFA plan on track, gradually introducing a nine-year quality basic education; ensuring equality o f access to education; and improving the cost-efficiency o f education, through reductions in grade repetition and improved primary completion rates. The enrolment increase in response to these policy initiatives has exceeded expectations and the Government has updated i t s EFA plan. Madagascar has also submitted i t s application for the EFA Fast Track Initiative, and it i s expected that Madagascar will receive incremental funding to support i t s EFA plan. But, while the enrollment increase has been remarkable, the challenge now lies in retaining the children in school and ensuring they learn. Improving the quality o f schooling remains a big challenge.

36. The objective o f the Five Year Health Plan (2002-2006) o f the Ministry o f Health (MoH), as reflected in the PRSP, i s to improve the access o f the Malagasy people, especially the poor, to health services and protect them from diseases by immunizing al l children; improving the access o f women to prenatal care and to assisted childbirth; combating public health problems; improved access to medical care and medicines, and improving the performance and financial viability o f the health system. The Government’s strategy for improved access to health care by the poor includes (i) instituting appropriate financing mechanisms based on solidarity for the indigents at health center level; (ii) establishing equity funds at hospital level to protect the poor from overwhelming expenditures; and (iii) piloting mutual insurance schemes in areas where seasonal variations in income hamper access to health care temporarily.

37. Specifically, in a context o f scarce financial and human resources, the M o H will assure health care availability by: (i) making existing health facilities (health centers and f irst referral hospitals) fully

11

functional; (ii) boosting referrals from peripheral health centers to hospitals through improved communication and transport; (iii) setting up mobile preventive and curative clinics to reach populations lacking access to primary health care facilities; (iv) extending the range o f drugs and consumables available in public health facilities; and (v) guaranteeing free or subsidized treatment for l i f e threatening diseases or dissases with significant externalities.

38. M o H will also seek to ensure minimum levels of health care quality by: (i) strengthening the drug and consumables’ supply system; (ii) providing regular on-the-job training opportunities for health staff; (iii) ensuring proper maintenance o f buildings, equipments and vehicles; and (iv) setting up a proper quality assurance mechanism. I t will seek to contain the growth o f public health expenditure by: (i) promoting efficient health care delivery (good quality services at the least possible cost), notably through rationalizing human resources management (qualifications, incentives and geographical redeployment between urban and rural health facilities); (ii) targeting the poor for free or subsidized interventions; and (iii) making informed decision on drug policy issues and technological choices.

President has established results framework (as outlined in Political General d’Etat) with

Developed 2005 Priority Action Plan for public management reforms.

Note: Th is list includes some prior actions for PRSC 2

39. Strengthening the fight against malnutrition and continuation o f the national AIDS awareness and prevention campaign are also important priorities in the PRSP. Communicable diseases targeted by the GOM include malaria, tuberculosis, leprosy, schistosomiasis, plague, STI and HIV/AIDS. Priority activities include supporting surveillance activities, prevention and improving patient care individually or through mass treatment. Activities to reduce non-communicable diseases include improved health infrastructure, referral and care programs, and prevention and community mobilization. The targeted illnesses include cardiovascular disease, cancers, mental disorders, and diabetes. The Government will

12

also implement activities for prevention o f disabilities and improved access to public infrastructures for individuals with disabilities.

40. In rural water supply, the Government’s objective i s to expand coverage to 80 percent o f the rural population and 100 percent o f urban areas by 2015. Drinking water for all i s one o f the priorities o f the Government, as outlined in the Politique Gdndrale de 1’Etat 2005. The Government has prepared a strategy for water and sanitation for all, and has significantly increased i t s allocations in the budget for 2005 to scale up the implementation o f i t s drinking water program.

c. WORLD BANK COUNTRY ASSISTANCE STRATEGY AND SUPPORT TO THE IMPLEMENTATION OF THE PRSP

41. The Bank’s support to Madagascar, as outlined in the Country Assistance Strategy of November 2003, i s geared towards the implementation of the PRSP, using ongoing and new investment lending and budget support, analytical work, and the services o f the broader Bank Group (IFC, MIGA, and WBI). The FY05 program for Madagascar reflected the transition to programmatic lending with the f i rs t single-tranche annual Poverty Reduction Support Credit approved in July 2004. A supplemental credit for US$50 mil l ion for the Community Development Project was also approved to aid Madagascar rebuild i t s infrastructure after the devastating back-to-back cyclones o f early 2004. A supplemental credit for health will also be approved in late FY05. In FY06, an Integrated Growth Poles Project and a second HIV/AIDS project i s planned along with the PRSC 2.

42. As noted in PRSC 1 Program Document, the CAS also outlines a program of analytical and advisory activities (AAA) (see Table 6) to underpin its policy dialogue and programmatic lending. Two key analytical reports have been completed this year. The integrative Development Policy Review on Sustaining Growth for Enhanced Poverty Reduction outlines the growth strategy and priorities for reform for Madagascar to achieve shared growth. The Public Expenditure Review, which provides recommendations on the public expenditure reform agenda and specific recommendations for the transport, education and environment sectors, also helped underpin the key reforms for PRSC 2. The findings o f the Country Financial Accountability Assessment (CFAA, FY03) and the Country Procurement Assessment Review (CPAR, FY03) as noted before, have also been critical in defining the reform program o f the Government. The Government remains committed to monitoring progress in implementing i ts public expenditure reform program under the HIPC Public Expenditure Assessment and Action Plan. Madagascar i s also a pilot country for the Public Expenditure and Financial Accountability (PEFA), which i s a joint initiative o f the World Bank, EU, IMF, DFID, France, Norway and Switzerland, to develop a strengthened approach to public fmancial management. The PEFA approach includes a country-led strategy on public financial management reforms, a coordinated program o f assistance by donors and a performance measurement framework. The Education For All program strategy and costing was updated and revised to take into account the higher than expected enrolment increase and a plan has been submitted by Madagascar to the Fast Track Initiative in May 2005. A Health Sector Note, currently being finalized informs the health sector dialogue and uses new analysis from two recently completed surveys (the Demographic and Health Survey, and the Study o f the efficiency and equity o f health facilities). The ongoing Investment Climate Assessment, the Financial Sector Assessment Program and the land tenure review will underpin the reforms under the growth pillar in subsequent PRSCs.

13

Table 6: Analytical and Advisory Activities

PRSC 2 PRSC 3/PRSC 4

MemorandumJPoverty Assessment (FY07)

Strategic Axis 1: Governance Public exDenditure I Countrv Procurement Assessment Review

Decentralization

management

Accountability (PEFA, FY05) Decentralization Study (FY03)

(CPAR; FY03)

Country Financial Accountability Assessment (CFAA, FY03)

Public Expenditure Review ( PER FY05)

HIPC AAP Tracking (FY03, FY04)

Public Expenditure and Financial

Sources o f Growth

Private sector

Public Expenditure Review (FY07)

Development Policy Review (FY05) Export Processing Zone Report (FY03) Tourism Sector Study (FY03)

Investment Climate Assessment (FY06)

Rural development and environment

Transport Opening up to world

development I (FY06) Land Tenure Review (FY06) Rural and Environment Sector Review (FY03)

and PER FY05 includes a focus on environment. PER FY05 includes focus on transport sector. Integrated Framework (FY03)

Financial Sector Assessment Program

.

Health

Nutrition Rural Water

Social Protection

FY03)

PER FYOS includes education chapter and PSIA background work includes focus on expenditure management and institutional bottlenecks Health Sector Note (FY05) National Health Accounts (FY06)

Poverty and Social Impact Analysis of reinstatement o f cost recovery in health sector (FY06)

Impact Evaluation o f nutrition program Water Sector Review (FYOl) Public Expenditure Review o n rural water (FY05)

Risk Management and Social Protection Review (FY06)

14

D. DONOR COLLABORATION IN SUPPORTING THE IMPLEMENTATION OF THE PRSP

Cooperation with the Multilateral and Bilateral Donors

43. The donors are collaborating to support Madagascar in implementing i ts development vision, by providing financial ‘and technical support in a coordinated way. The European Union (EU), France (Agence Frangaise de DCveloppement, and the French Co-operation) and the World Bank have initiated joint-donor missions in October 2004 to review the implementation o f the PRSP and supervise their respective budget support operations. This i s part o f the overall effort to harmonize our assistance and reduce the transactions cost for the Government. A follow-up joint donor mission i s planned in Fall 2005 to review the h u a l PRSP Progress Report for calendar year 2004, and the draft budget for 2006. The AfDB, EU, France and the World Bank have signed a Partnership Agreement with the Government to provide a framework and to lay out procedures and modalities for a multi-donor approach to budgetary support. The AfDB i s also in the process o f preparing i t s Country Assistance Strategy and we are discussing the possibility o f coordinating our budget support closely, starting with PRSC 3. The AfDB will soon also have a local office which will greatly facilitate greater co-ordination with them.

44. In the joint supervision missions, common areas o f support with the EU include the public sector reform agenda, education and health with the EU’s program o f budget support (Programme d’Appui Budge‘taire a la Rkduction de la Pauvretk, PARP). The public expenditure reform agenda support i s co: ordinated to support the Government’s Priority Action Plan. The Government has convened meetings periodically with the key donors to inform them o f progress on implementation. Key reforms in public financial management and against corruption are bringing financing from IDA together with technical assistance from the EU, GTZ and the French Cooperation. Donor coordination around implementing customs reforms has also improved. In education, the donors coordinate support around the Education for All implementation. In health, the key donors are also coordinating support using a sector-wide approach.

45. In addition, transport, water, agricultural and environmental sector reforms and investment needs continue to be approached together with other partners through sector-wide approaches. As noted above, the Bank i s continuing to conduct joint supervision and evaluation missions o f Madagascar’s (i) PRSP with all bilateral and multilateral donors present (and issuance o f joint aide memoires); and (ii) HIPC progress together with all multilateral donors. Lastly, the Bank continues to work closely with other multilateral and bilateral donors and the UN family, in particular, on emergency efforts such as post- cyclone reconstruction projects, which are needed when natural disasters threaten the country’s longer term poverty reduction.

Coordination with the IMF

46. The Bank closely collaborates and coordinates activities with the IMF staff. The staffs o f the two institutions conduct joint assessments o f the PRSP implementation regularly. IMF and World Bank staff also work closely together on (i) reforms set out at the decision point o f the Highly Indebted Poor Countries Initiatives (HIPC); (ii) analysis and reforms in public financial management; (iii) other governance reforms, including customs; (iv) support o f the privatization program; and (v) participation in the integrated framework trade project. The Bank also contributes to the IMF’s regular monitoring o f the Poverty Reduction and Growth Facility (PRGF).

47. The IMF completed i t s Poverty Reduction and Growth Facility (PRGF) arrangement with Madagascar in February 2005, presented i t s Article IV consultation along with their Ex-Post Assessment to their Board in early June 2005, and will be beginning discussions on a new program shortly. The staffs

15

o f IDA and IMF will continue to coordinate the content o f the PRSC and PRGF to ensure that the instruments complement one another. In general, the structural and social benchmarks will be covered by the PRSC, while the PRGF will cover macroeconomic issues.

E. DONOR SUPPORT FOR CAPACITY BUILDING

48. Capacity constraints can hamper Madagascar’s ability to achieve its development objectives. The donor community i s supporting Madagascar in strengthening capacity, through a range o f technical assistance grants and training initiatives designed to enhance the implementation o f the PRSP. The key donors involved in supporting the strategic pillar o f governance, include the World Bank, European Union, UNDP, French Co-operation, the African Development Bank, GTZ, and USAID. A number o f donors are very active in supporting education (UNICEF, French Co-operation, AfDB, AFD, Japan, U S A I D and World Bank). Donor coordination, to support capacity building efforts, are also being enhanced through the round table for public expenditure management reforms, and through the proposed Budget Support Group.

IV. POVERTY REDUCTION SUPPORT CREDITS PROGRAM

49. The first Poverty Reduction Support Credit approved in July 2004 was the first of a series o f annual single tranche development policy lending operations provided as budget support for the implementation of key elements of the PRSP. The design o f the PRSC program comprising the first three PRSCs (see Figure 1) to support the PRSP was based on discussions with the Government, the pace o f the reform agenda, the existing knowledge base and analysis o f development issues, other donor programs, and IDA resources. The objective o f the f i rst three PRSCs (2004-2006) i s to consolidate reforms underway in the public sector, fight corruption, improve transparency and accountability, and improve service delivery in education, health, water supply and nutrition. As outlined in the PRSC 1 Program Document, a set o f clear, well-defined milestones, policy actions or indicators have been defined to transition to PRSC 2.

50. The implementation of the program supported under the first operation (PRSC 1) has been satisfactory. Whi le there have been delays, the indicative triggers for PRSC 2 are broadly on track to being completed (see Box 2 for lessons learned from PRSC 1). In the area o f public finance reform, the implementation o f the 2004 Priority Action Plan was satisfactory, though there have been delays in operationalizing the new Procurement code and in installing the integrated financial management system. The Education for All program i s being implemented steadily. The enrolment increase has exceeded expectations, but the implementation o f some key measures, such as the delays in schools getting the school grants and partial implementation o f the planned school construction program has l ikely impacted on the quality o f service delivery. The institutional structure for delivering nutrition services has been strengthened. The Government i s working on updating i ts national policy on health, and has prepared a medium term expenditure framework (MTEF) for the health sector. As part o f this MTEF, they are also costing attaining the health MDGs, using a marginal bottlenecks approach.

5 1. Expected Results: The policy matrix in the PRSC 1 program document outlines the sequencing o f policy actions and institutional reform measures until 2006. The Government team has updated the policy matrix, both to streamline it, and to extend i t out one year. Table 8 reviews progress in Madagascar towards achieving the key development objectives, as outlined in Table 6 and Annex IX o f the PRSC 1 program document.

16

Figure 1: The Three Year PRSC Program

Objectives BROAD BASED2 1 GR0WII-I

- I I

Note: The striped blocks in the PRSC I-PRSC 3 rows indicate that that it i s an area o f focus under the respective PRSC.

52. Based on the data available to date, the Government's strategy i s delivering results. The Government i s using i t s budget in line with i ts strategic priorities - roads and education command large shares. These resources are being translated into results on the ground. More children are in school today than ever before (over 90 percent), and a larger percentage are l ikely to complete primary school. With the implementation o f the roads program in rural areas, the percentage o f rural population with reliable access to transport has increased from 45 percent in 2003 to 52 percent in 2004, and the condition o f the main road network has improved too. Rice productivity has increased from 1.8 tonshectare in 2003 to 2.4 tonsihectare in 2004, achieving the target set for 2006. Access to safe drinking water in rural areas has also improved. Immunization rates have remained stable and more women give birth in health centers than before. Infant and child mortality rates have declined significantly between 1997 and 2003/04, with the child mortality rate declining from 163.9 to 94 per 1000 over this period.

17

Box 2: Lessons Learned - Implementation of PRSC 1 T h e overall implementation o f the reform program supported under PRSC 1 has been satisfactory, but several lessons have been learned in the transition to budgetary support.

What worked

Enhanced inter-ministerial dialogue with the supervision missions fostering dialogue between the Ministry o f Finance and other sector ministries, but there i s still scope for improvement. Improved donor eo-ordination among budget support donors, with the launching o f joint donor missions ( f i i s t in October 2004, and a second planned for Fal l 2005). A Partnership Agreement between the Government and budget support donors (EU, WB, France with the U S and IMF as participants but not signatories) which outlines the principles o f collaboration with the objective o f harmonizing our assistance and reducing transactions costs to the Government has been signed. Sustained co-ordination and harmonization especially in the areas o f public financial management, education, nutrition and health. Much o f this co-ordination was ongoing before the PRSC, but this was sustained and strengthened with the transition to budget support. Increased budgetary allocations to priority sectors (especially, education) wi th the transition to budget support in 2004. In 2005, the high allocations to education were sustained and health, nutrition and rural water supply received significant increases in budgetary allocations, in l ine wi th the Government’s priorities.

What worked less well

Unpredictableflow of funds: 2004 was a volatile and difficult economic environment. With the sharp depreciation o f the FMG and the cyclone needs, the expenditure needs increased, specially the cost o f imports. In addition, revenue collections were below expectations and there was a delay in donor aid flows. The main adjustment came through reduced expenditures, with a freeze in commitments in March 2004, reduction in expenditures mid- year, and a shortened expenditure cycle. While the Government attempted to protect expenditures in priority sectors, the unpredictability and stop-and-go cycles l ikely affected service delivery in al l sectors, and delays (e.g. in school construction, payment o f the caisse &cole, delivery o f nutrition services). Reforms took longer than anticipated: In general, the reforms took longer to accomplish than originally envisaged, highlighting the over-optimism o f the results, capacity constraints, a greater need to prioritize, and need for timely delivery o f donor technical assistance. Capacity for procurement and financial management in sector ministries needs to be improved. Despite technical assistance to prepare the sectors to transition to budget support, capacity constraints remain and “ f i e fighting” was needed to ensure that key programs remained on track.

Moving forward

Better align donor disbursements with the budget cycle of the Government: The donors, including the EU and the WB are seeking ways to better align their budget support disbursements with the Government’s budget cycle, to ensure that the Government has the resources upfront to implement their development priorities. Continue support for public Jinancial management reforms, with particular focus on improving budget execution and implementation, and better revenue forecasting and especially greater attention to capacity building in sector ministries for budget formulation, procurement, and financial management. Greater realism in setting targets: Being more realistic about what i s achievable, and working with the Government to prioritize i t s existing capacity to scale up implementation Greater need for monitoring and co-ordination among the Government to monitor the reform program.

18

Indicative PRSC 2 trigger in PRSCl Board

Document

Financial Management

Budget Formulation

Budget Execution

Procurement

Final PRSC 2 Prior Comments Actions

Satisfactory implementation o f Priority Action Plan for 2004, in particular:

Budget for 2005 allocates greater share o f resources to PRSP priority sectors relative to 2004, with adequate funding allocated to key priorities (such as education, health, nutrition).

Progressive implementation o f the recommendations o f the audit o f the treasury in particular

(i) monthly accounts produced until the 15' o f the following month in the treasuries that installed the transitional financial management system

(ii) final accounts for 2003 prepared by the Treasury.

Transitional financial management system installed in four sites.

Implementing rules and regulations for the new Procurement code issue- -y Government

Satisfactory implementation o f Priority Action Plan for 2004

Budget for 2005 allocates greater share o f resources to PRSP priority sectors relative to 2004, with adequate f inding allocated to key priorities (such as education, health, nutrition)

Monthly accounts produced until the 15' o f the following month in Toamasina, where the transitional financial management system i s operational.

Final accounts for 2003 prepared by the Treasury.

See action on production o f timely monthly accounts above.

See explanation in comments column.

rrigger fulfilled.

rrigger fulfilled. In the Loi des Finances o f October 2004, the allocations to the Ministry o f Education increased from 18.3 percent o f the budget in 2004 to 20.9 percent in 2005; for Ministry o f Health from 6.3 to 7.8 percent and for the transport sector from 13.3 to 22.1 percent over this period

Trigger fulfilled in one Treasury (Toamasina) where the transitional financial management system i s operational. The financial management system facilitates the production o f timely monthly accounts. The equipment i s in place, but due to problems with some o f the equipment ordered there are delays in the effective functioning o f the system in Antananarivo and four additional provincial treasuries. The system i s expected to be h c t i o n a l by August 2005. This i s proposed as a trigger for PRSC 3 for six treasuries.

Trigger fulfilled in June 2005.

See above.

Trigger mostly implemented. The draft implementing rules and regulations w i l l be produced by June 2005, and wil l be validated following stakeholder consultations. This reform w i l l be

19

Accountability

~

Indicative PRSC 2 trigger in PRSCl Board

Document

Final PRSC 2 Prior Actions

~ customs

Projet de l o i de rbglement for 2002 and 2003 examined by the Auditor General

Education

Projet de l o i de Rbglement for 2002 and 2003 sent to the Auditor General.

I

I

Establish the new 1 Establish the new procurement oversight institution (“Autoritt de RCgulation des Marches

procurement oversight institution (“AutoritC de RCgulation des MarchCs

Adopt a time-bound action plan for 2005 for customs reform and start implementation.

Adopt a time-bound action plan for 2005 for customs reform and start implementation.

terial Security Implementation o f the National 1 Implementation o f the Education for All (EFA) on track.

National Education for Al l (EFA) on track.

Comments

ollowed under PRSC 3 with a rigger that the new procurement ystem i s applied in Government rfter the implementing regulations rre issued and the necessary raining o f staff i s completed. r r igger fulfilled. Decree establishing the ARMP issued in May 2005.

Trigger part ial ly implemented; expected by December 2005. Adjusted p r io r action met. The Auditor General examined the draft budget execution laws (Projet de L o i de Rbglement) sequentially, and has completed the backlog. The 1998 Projet de L o i de Rbglement has been examined by Parliament. The 1999 law will be submitted to Parliament in June 2005. The 2000 law has been sent to Ministry o f Economy, Finance and Budget (MEFB) for onward submission to Parliament. The 200 1 law i s expected to be sent to MEFB by end-June 2005. For 2002 and 2003, i t i s anticipated this w i l l be done by December 2005. The finalization o f accounts from 2000 was delayed due to difficulties in establishing the final account balances as required by the law. Trigger fulfilled. The draft action plan has been under implementation since 2004 and an updated strategy and action plan was formally adopted in June 2005.

Trigger fulfilled. Large increases in enrolment. Some delays are observed in implementing school construction and providing school grants. A joint-donor assessment o f the revised EFA prepared by Government in April 2005, using guidelines issued by the EFA FTI secretariat, has been completed.

20

Nutrition

Health

Water Supply

Indicative PRSC 2 trigger in PRSCl Board

Document

MENRS w i l l prepare and submit a sustainable Human Resources (HR) rationalization plan. Creation o f National Council for Nutrition and establishment o f the secretariat (Office National de Nutrition) and appointment o f i t s coordinator.

Update health sector strategy.

Introduction o f Medium Term Expenditure Framework for the health sector commencing in C Y 2005.

The Directorate o f Water and Sanitation in Antananarivo and the six Faritany RWSS uni ts are adequately staffed and equipped to implement successfully the proposed RWSS national program "Water and Sanitation for All" endorsed by GOM and donors in October 2004

Final PRSC 2 Prior Actions

Completed Human Resources (HR) rationalization study.

Creation o f National Council for Nutrition and establishment o f the secretariat (Office National de Nutrition) and appointment o f i t s coordinator.

Update national policy for health.

Introduction o f Medium Term Expenditure Framework for the health sector commencing in C Y 2005.

The Directorate o f Water and Sanitation in Antananarivo and the six decentralized departments in the provinces have started to adequately staff and equip themselves to implement successfully the "Water for All" program.

Comments

The overall assessment i s that the 3FA plan i s sound, that the 3ovemment i s adjusting i t s strategy to focus on quality and mproving completion rates. rrigger fulfilled. The HR 7ationalization study was prepared u1 March 2005

rrigger fulfilled with the creation 3 f the National Council for Nutrition and ONN in November 2004, and the appointment o f the :oordinator o f the ONN in May 2005.

Trigger fulfilled in June 2005. The policy i s being updated and a workshop with key stakeholders, including EU, WHO, UNICEF, USAID, France Japan and the WB w i l l be held in late June 2005 to validate the document. Trigger fulfilled with the adoption o f the L o i des Finances 2005. In addition, a draft MTEF for FY06- 08 has been produced for informing the L o i des Finances 2006. Trigger mostly implemented; adjusted prior action met. The Water and Sanitation Strategy for All was presented to the donors in February 2005 and a study on the institutional strengthening to deliver on the strategy was undertaken. Based on the recommendations o f th is study, a monitoring unit for the program budgets has been established, the equipment i s in place for the provincial Directorates of Water and Sanitation; and recruitment to reinforce capacity at the decentralized levels i s in process.

21

Table 8: Key Development Outcomes 2003-2006

12.7% 13.6%

Cey M o n i t o r i n n Status in 2003 Status in 2004 Expected outcome in 2006 TBC 1 Poverty reduction

Zood Governance -

3 out of 15 benchmarks 4 out o f 16 benchmarks. 10 out of 16 benchmarks met (including reforms in the Treasury, Auditor General, budget execution, and procurement) Increased allocation of public resources in line with strategic objectives of the PRSP

1 Budget management benchmarks met as defined in the HIPC AAP

Budget planning process for 2004 led to increased

Budget for 2004 led to increased resources for key PRSP sectors (education, health, infrastructure, drinking water and nutrition).

TBD

1 Budget (2004-2006) includes proper planning and monitoring for public spending in high poverty relevant areas

allocation for key PRSP sectors (education, health, infrastructure)

Transparency and service delivery significantly improved as evidenced by independent audits

No standards I Govemment has introduced and published service delivery standards in key services with a large public- private interface (especially customs, land titling, primary education, courts, etc)

Broad-based Growth -

80%' 49% 61% D

B

Increasing rice productivity

Percentage of the (main) road network in good and fair condition Percentage of rural population with reliable access to transport

45% 52% 65%

Average rice yield = 2.4 tonsiha Average rice yield = 2.4 tonsiha

N A

Average rice yield = 1.8 tonsiha Deforestation rate in 2003 = 1.2%

Decrease the average annual Average 2004-2006 deforestation rate reduced to 0.6%

4% deforestation rate Nationally protected areas % o f land 1.9% TBD area - -- -

Human and material security - 97% 47%

82%3 39.5%

1 book per 3 students

~ r imarv net enrolment rate' Increase in primary school completion rate' Number of textbooks per primary school student

0.9

HIV prevalence rate in sex workers', 2

TBD

80%

28.5%

n.a.

85.8%

28%

n.a.

75.14 DTP3 vaccination rate of children below 1 year' Skilled attendance at birth in Centre SantC Base (CSB) and Centre Hosaitalier de District (CHDl) '

26.1%4

=7 30% 0.44~ Utilization rate in CSB',6

Reduction in child underweight rate (MDG indicator) '

0.57 43% (1997) 35%

20.8%

Note: ' These are indicators that are common \

Percentage of people with access to safe drinking water I

h the EU's budget support operation (PARP) and the level of ir 1

:atom and objectives are based on the revised numbers produced by the Govemment for the P A h in May 2005. 'Annual survey will be conducted starting with 2005. TBD means 'to be determined'. '2003 refers to school year 2002/2003; 2004 refers to school year 2003/2004 and so on.

'Based on Anthropometric surveys by INSTAT for 2004 and 2007. Based on 94% o f health facilities reporting.

Total number o f curative outpatient visits out of the total population; ' Targets for 2005 and 2006 to be updated.

22

STRATEGIC AXIS 1: IMPROVING GOVERNANCE

53. PRSC 2 will continue to support the first strategic axis o f the PRSP, and consolidate reforms initiated under PRSC 1, in public finance, anti-corruption and strengthening the judiciary. Assistance by the Bank will also focus on deepening reforms in the areas o f customs, decentralization, and capacity building. The reform program i s based on strong analytical underpinnings, in particular the recently completed PER. The Governance and Institutional Development Project (PGDI), which became effective in March 2004, i s providing technical assistance for the implementation o f these reforms.

A. PUBLIC EXPENDITURE MANAGEMENT

54. The budget i s the Government’s main instrument for implementing i t s development strategy. However, weak budget and expenditure management has been a main characteristic o f the Madagascar system for many years. The recently completed PER identified the following key issues that continue to hamper effective budget preparation and execution:

0

0

0

0

Budgetary allocations are not yet fully aligned with PRSPpriorities. The 2004 and 2005 budgets are broadly in line with PRSP priorities - allocations for primary education increased by 39 percent and for primary health care by around 15 percent over the period 1997-2004. Public resources allocated to the transport sector increased by annually 18 percent on average over the past five years. In line with government policy to withdraw from productive sectors allocations in particular for energy, agriculture and environment fe l l substantively - from 33 percent o f non-interest expenditures in 1997 to 26 percent in 2004. At the same time, the distribution o f budgetary allocations to sectors i s not yet in line with the administration’s intention to “bring Government closer to the people”. The central Government maintains control over the bulk o f budgetary resources; only 3 to 4 percent o f the national budget i s managed by the communes.

Budget preparation faces significant challenges. These are: (i) a lack o f reliable macroeconomic and fiscal parameters guiding the preparation process; (ii) little involvement o f sector ministries in the preparation process, (iii) no systematic mechanism to discuss budgetary disputes--inter-governmental consultation about the budget i s limited to budgetary conferences; and (iv) strategic discussion and decision-making on fiscal and budgetary policies at the Cabinet level i s limited and ad-hoc. In addition, the gap between revenue forecasts and revenue inflows i s substantial: revenues had to be adjusted downwards by 22 percent in 2001 and 44 percent in 2002. The main problems include lack o f a clear methodology and lack o f capacity in the relevant departments to accurately project inflows.

The problem of separate recurrent and capital budgets. Although a consolidated budget i s presented to Parliament, the Government i s st i l l operating on a dual budget system with different procedures, timelines and institutional responsibilities for recurrent and investment expenditures. This dual budget system reinforces the inconsistencies between investment and (non-salary) recurrent expenditures.

Budget execution rates need to be closely monitored. Budget execution rates have deteriorated since the end o f the 1990s from 96 percent in 1998 to 75 percent in 2001, mainly because o f weak revenue collection and budget implementation problems. Estimates for the 2003 budget execution show a 92 percent execution rate, which would indicate that Government’s efforts to streamline the execution process have begun to bear fruit. HIPC funds (representing 6 percent o f the Government’s budget in 2003) which were executed based on simplified procedures reached an execution rate o f 99 percent.

23

Budget execution problems, notably o f capital expenditures, are mainly caused by cumbersome and complex disbursement procedures.

Budget execution is hampered by administrative bottlenecks. As processing payments in Madagascar i s complex with around 11 different stages that each requires a formal approval, “simplified procedures” to release funds are frequently applied. These procedures should, however, be reserved for exceptional cases. In addition, shortcomings in the procurement and control system increase the administration’s transaction costs.

A flawed system ofJinanciaf monitoring. Key information i s not available, in particular execution data on investment projects financed by donors. Since 2000 the social sectors (education and health) have produced regular budget execution reports. In 2003, additional reports were prepared by the ministries o f agriculture, justice, water and forest, and public works to fulfill a Government commitment in the HIPC context. There i s no systematic reconciliation process between the Treasury and the Central Bank. As a result o f these deficiencies, the Treasury faces difficulties in closing the annual accounts within the statutory timeframe and the Auditor General i s not able to validate these accounts as required by the law. Over the past two years, the treasury accounting system was strengthened to improve the closing o f Government accounts in a timely manner. As a result the final accounts for the years 1997 to 2000 and 2002 have been sent for review to the Auditor General. The accounts for the years 200 1 and 2003 are expected to be submitted in 2005.

The need to transform the budget into a management instrument. The budget i s not yet seen as a reliable planning instrument because actual releases typically vary substantially from the allocated amount. As a consequence, the budget i s not used as a management instrument that guides the implementation o f policies and programs. There i s also no effective monitoring and evaluation mechanism in place that systematically tracks implementation o f Govemment policies and programs.

Reform Program

55. The Government has prepared a Priority Action Plan for public finance reforms for 2005 which incorporates some key recommendations of the PER. This sustains the Government’s operationalization of i t s public expenditure reform program, in the priority action plan for 2004, which was developed in conjunction with all key donors and validated in early 2004. Since the medium term reform program i s wide in scope, the priority action plan i s an important step towards prioritizing and sequencing public finance reforms. The plan builds on the findings and recommendations o f previous analytical work and i s closely linked to the annual business plan o f the Ministry o f Finance which was f i rs t developed in 2003. In 2004, the donors and the Government also set up a round table to joint ly monitor the implementation o f the reforms as well as to discuss problems, solutions and necessary technical assistance. For the World Bank, as noted above, this technical assistance i s provided through the PGDI, whose main focus i s to strengthen the existing system o f public finance in Madagascar.

56. To better benchmark the implementation of the public finance reform program, an extended set o f indicators, developed by the Joint Secretariat on Public Expenditure Management and Financial Accountability (PEFA-Secretariat), was introduced in early 2005. Madagascar i s one of the pilot countries for the introduction o f these indicators which ultimately aim at harmonizing public finance reform indicators used by multilateral and bilateral development partners. The Government has made a self-assessment on the basis o f these indicators. I t i s anticipated that the Govemment will fully apply these indicators in the year 2006.

24

57. The PRSC process i s supporting the Government public reform program in a sequenced way, al l o f which are key steps in the implementation o f the priority action plan. The realization under PRSC 2, which builds on the reforms started under PRSC 1 include:

(i) Co-ordination of the Reform Program

a e

e

The Government implemented satisfactorily the priority action plan for 2004 (see Table 9). The Government developed a priority action plan for 2005 to sustain the reforms started in 2004. The co-ordination committee (Cellule de Suivi et de Coordination des Rdformes des Finances Publiques) established in the Ministry o f Finance to co-ordinate, monitor and evaluate reforms i s operational.

(ii) Enhancing Budget Formuiation

The 2005 L o i des Finances allocates a higher share of resources to key PRSP priorities (education, health, nutrition, transport, rural water supply), but there are reductions in the allocations to justice. In the Loi des Finances 2005, the allocations to the Ministry o f Education increased from 18.3 percent o f the budget in 2004 to 20.9 percent in 2005; for Ministry o f Health from 6.3 to 7.8 percent and for the transport sector from 13.3 to 22.1 percent. A new calendar for the budget preparation for the year 2005 was introduced, which advanced the timetable for the preparation of the budget. The objective i s to strengthen the involvement o f the sector ministries in the budget preparation process. Program budgets were introduced for all ministries with the budget year 2005, a year ahead of schedule. The sector ministries were required to align budgetary allocations with policy objectives. These budgets were prepared for a three year period to ensure a medium-term perspective o f budgetary allocations. The new system intends to improve the presentation o f the budget and i t s alignment with policy priorities o f the government as specified in the PRSP. The introduction o f program budgets posed a significant challenge for the administration - the finalization o f the budget document was delayed because o f difficulties in implementing the new system. Experience from other countries indicates that these reforms will take time to yield the intended results; they should be complemented by a systematic program o f training and capacity building which aims at establishing or enhancing relevant capacities in line ministries. The reform agenda ahead includes further improvement in the allocations to priority sectors, and enhancing strategic decision-making during the budget formulation process. In line with the recommendations o f the PER, the Government i s considering (i) introducing a Budget Framework Paper, which outlines - early in the budget preparation process - the macroeconomic framework under which the budget i s being developed; (ii) enhancing the role o f Cabinet by systematically ensuring strategic decision-making at the different stages o f the budget preparation process, (iii) strengthening the participation o f line ministries based on an effective planning and consultation process, and (iv) refocusing budgetary conferences on policy objectives, prioritization o f needs within the hard budget constraints and results achieved on the bases o f resources allocated. To accommodate these changes, further adjustments to the calendar for the preparation o f the annual budget are under review.

(iii) Strengthening budget execution

0 The Treasury i s implementing the recommendations of an independent audit which was conducted in 2003. In 2004/2005 treasury accounts were updated and the final accounts (Comptes des gestions) for the year 2000 and 2002 have been submitted to the Auditor General. The accounts for 2003 will be submitted by June 2005, and for 2001 in December 2005. Significant

25

investments in training and capacity building have improved efficiency and quality o f the treasury operations.

Table 9: Key Policy and Institutional Reforms in Governance since July 2004

Other Govemance Areas Anti-Corruption

Justice

customs

Note: n l i s l i s t includes some

4rea Public Financial Management

I Actions taken by the Government since July 2004

Improved customs clearance procedures.

Made operational independent Anti-Corruption Agency (BIANCO) in October 2004. Prepared and passed Anti-cormption law, including key implementation decrees. New regulation for declaration of assets to improve compliance rate (as of mid-May 2005, 60% o f public and elected officials required to fill declarations had done so). Prepared and passed anti-money laundering legislation. Submitted to Parliament law regulating political parties and their financing. Conducted independent audit of land titling system. Prepared and passed law regulating commercial enterprises. Prepared and passed law rationalizing civil and commercial court procedures. Set up two model courts (TPI Antananarivo and Ambatolampy). Reduced backlog of cases in Antananarivo from 22,000 in 2002 to almost zero. Prepared customs strategy and action plan. Merged customs tax and import duty into single customs duty. Eliminated customs duty credit (cridit de droit). Mandated payment of customs duty through banking system. Abolished immunity of customs agents from enquiries and prosecution. Rotated 430 customs agents in 2004/2005. Made operational automated data processing system (SYDONIA++) in Tamatave.

prior actions for PRSC 2

jverall implementation

Budget Formulation

Budget Execution

Procurement

Accountability

Results- focushlonitoring

Satisfactorily implemented 2004 Priority Action Plan for public finance reforms. Developed 2005 Priority Action Plan for public finance reforms. Strengthened reform coordination in MEFB. Allocated greater share of resources to PRSP priority sectors in 2005 budget relative to 2004. Introduced program budgets in 2005 with a medium-term perspective and better link between sector priorities and budgets. Strengthened capacity of sector ministries. Simplified expenditure management process and strengthened budget execution capacity of key spending ministries. Made fully operational the transitional integrated financial management system in Tamatave; and expected to be operational in Antananarivo and four additional provincial treasuries shortly. Prepared most of the implementing rules and regulations for new Procurement Code. Prepared standard bidding documents. Established Procurement Oversight Institution.

Submitted final accounts for 2000 and 2002 to the Chambre des Comptes. Loi de Rkglement for 1998 voted by Parliament Loi de Rkglement for 1999 sent to MEFB by Chambre des Comptes for onward transmission to Parliament. Loi de R6glement for 2000 examined by Chambre des Comptes and sent to MEFB for onward transmission to Parliament. Established results framework (as outlined in Politique Ginirule de I’Etut) for the Administration and for each ministry. Conducted indicative PEFA o f public financial management system in 2005.

The development o f an integrated financial management system, which will encompass a budget preparation sub-system as well as budget execution and control sub-systems, i s ongoing. The new system will be deployed to the entire country; it will cover al l treasuries and integrate the expenditure

26

management operations at the deconcentrated levels o f Government. As the implementation o f the integrated financial management system will take several years, the Government has decided to put in place, with World Bank support, an interim core accounting system which was developed in the provincial treasury o f Tamatave. The system i s fully operational in Tamatave, and will be operational in the main treasury office in Antananarivo, and four additional treasuries (Mahajanga, Antsiranana, Toliara, Fianarantsoa) by August 2005. The installation has been delayed due to problems with the equipment. This interim system covers 80 percent o f the treasury operations. The Treasury has also improved i ts internal control system by strengthening the operational efficiency o f the Brigade de Trtsor. Implementation rules and regulations and standard bidding documents (SBDs) are presently being prepared for the new Procurement Code adopted by Parliament in 2004. Most o f the implementation documents and SBDs, and are expected to be completed by June 2005, but the process o f validation and adoption will take place after that. The new Procurement law, which i s l ine with international best practice, incorporates the findings and recommendations o f the CPAR o f the year 2003. There has been a delay with the preparation o f the implementation decrees and standard bidding documents mainly due to difficulties in finding a suitable consultant. The work on the institutional framework for the new procurement code has commenced and the decree establishing the new procurement oversight institution was issued in early May 2005. In view o f the implementation delays the new procurement code i s l ikely to be fully applied only towards early 2006 after the training for the ministerial staff i s completed in applying the new code and accompanying regulations. In the teams view, despite the delay, the reform i s well on track to being completed, and we propose to follow this in PRSC 3 with a trigger that the Procurement reform i s fully operational. With the fully functional procurement framework, we expect a transparent procurement system which includes inter alia, that the oversight mechanism i s able to measure the performance o f the national system and the performance o f implementing agencies in accordance with the new code, the appeal mechanism i s operational and bidders complaints are fairly and professional treated in a timely manner.

0 To improve debt management the Central Bank i s presently implementing a modem debt management system which should be operational in the second half o f 2005.

0

(iv) Strengthening Accountability Progress with regard to the improvement o f the intemal and external control functions has been mixed:

0 A General Inspectorate for Finances (IGF) was established in 2004, as the principal controller o f the Ministry o f Finance, in line with the recommendations o f the CFAA. Difficulties in recruiting adequate personnel have, however, delayed the commencement o f the work o f the IGF. But the internal control function has been ensured by the Inspection Gtntrale de 1’Etat (IGE) during this transition period. The internal control cadre o f the treasury (Brigade du Trtsor) was strengthened by recruiting additional staff and modernizing i ts operations. The Government i s in the process o f making the IGF fully operational. The oversight function o f Parliament has been further strengthened through capacity building and training o f the Public Finance Committee. The Auditor General has cleared the backlog o f accounts and prepared draft budget execution laws (“projet de loi de r2glement”) for the years 1998 until 2001. The 1998 law has been examined by Parliament, and 1999 will be submitted to Parliament shortly. For those from 2000 onwards, the final production was delayed due to difficulties in establishing the overall balance, as required by law. The decree and supporting balances were prepared in mid-May 2005, which has enabled the production o f the projet de loi de r2glement for 2000 and 200 1. The “catching up” meant that the laws for 2002 and 2003 have been delayed. It i s presently envisaged to finalize the examination o f the draft budget execution laws for 2002 and 2003 by December 2005.

0

0

27

(v) Results Focus: Introduction of basic performance management under way,

0 The Government has introduced a results matrix for all ministries and departments in 2005 (la Politique Gdnkrale de 1‘Etat pour 2005”) to monitor the implementation o f policies and programs. T h i s builds on the results orientation that the Government introduced in 2003, with business plans for al l line ministries which outline the work program for the respective year. Many business plans, however, lack realism and detailed costing; they also do not feed into the program budgets, which are prepared in a separate exercise. The results matrix for 2005 wil l be tracked on a regular basis, and implementation progress and bottlenecks wil l be discussed at the Cabinet level. As a next step, the Government intents to integrate the different activities into a coherent results-based management framework. Under such a system policy-related information i s systematically collected at all levels o f Government, consolidated by a well-functioning mechanism at the centre o f Government and scrutinized for potential follow-up. The system should generate regular reports about the status o f the implementation o f the Government program, which should be sent to Cabinet for discussion and strategic decision-making.

58. The indicative triggers for the PRSC 2 for public expenditure management include the satisfactory implementation of the priority action plan for 2004. The overall implementation of the priority action plan i s considered satisfactory as the majority of the intended reforms are well under way. The implementation status of the triggers for PRSC 2 are as follows:

0 Budget for 2005 allocates greater share o f resources to PRSP priority sectors relative to 2004, with adequate funding allocated to key priorities (such as education, health, nutrition) - this action has been accomplished. Transitional financial management system installed in four sites (Antsiranana, Fianarantsoa, Mahajanga, Toliara) -this action i s in progress and i s expected to be completed in August 2005. Progressive implementation o f the recommendations o f the independent audit o f the Treasury, in particular .

0

0

monthly accounts produced until the 15’ o f the following month in the treasuries that installed the transitional financial management system - this action has been accomplished for Tamatave, where the transitional financial management system if operational. final accounts for 2003 prepared by the Treasury -this action will be accomplished in June 2005

. 0 Implementing ru les and regulations for the new procurement code issued by Government - this

activity i s expected to be substantially accomplished by June 2005, with the production of these rules and regulations, but the stakeholder consultation for validation and adoption will be outstanding. Establish new Procurement Oversight Institution (“‘Autoritd de R&ulation des Marchb Publics”) - Completed. “Projet de lo i de rkglement” for 2002 and 2003 examined by Auditor General -this activity will be fully accomplished in December 2005.

0

0

59. T o sustain the public expenditure reforms, the indicative triggers for PRSC 3 include the satisfactory implementation of the 2005 Priority Action Plan, including, in particular the following reforms/outcomes:

0

0

Budget for 2006 allocates adequate resources to PRSP priority sectors. Monthly accounts produced by the 15’ o f the following month in the five regional treasuries and central treasury where the transitional financial management system i s fully operational.

28

New procurement code applied, Procurement Oversight Institution, procurement entities in the sector ministries, and the Appeal system operational.

Expected Results

60. At the end o f the PRSC 3, the expected results include: An increase in the number o f HIPC AAP benchmarks met from four in 2004 to six in 2005 to ten in 2006.

Budget Formulation: Budget preparation process adjusted to allow for better strategic decision making and implication o f the sector ministries, and ensure greater consistency between recurrent and investment budgets. This has been partially accomplished with a budget calendar which allows for more meaningful discussions between the MEFB and sector ministries. Preparation processes for the recurrent and the investment budgets aligned and integrated to improve consistency o f the budget. This i s outstanding. Deviation between planned and actual spending reduced by 50 percent between 2003 and 2006. This i s in process.

Budget Execution Treasury produces monthly accounts by the 15th o f the following month. Partially accomplished - this i s true in Toamasina where the transitory integrated financial management system i s fully operational. For the other treasuries, monthly accounts can be produced in 25 days. Treasury submits quarterly accounts no later than four weeks after the close o f the previous month. Treasury submits final accounts within the statutory timeframe to the Auditor General. Not yet accomplished.

e

e

Procurement e New Procurement Code in line with international standards. New Procurement Code passed by

Parliament in July 2004. Application decrees and SBDs are currently under preparation to fully operationalize code. Institutional framework put in place. Partially accomplished with establishment o f ARMP and some sectoral procurement units. Adequate capacity to implement new procurement regulations exists. Partially accomplished with commencement of capacity building program.

e

e

Strengthening Accountability e

e

Internal and external control functions (IGF, Brigade du TrCsor, Auditor General) significantly strengthened. Auditor General submits audited accounts to Parliament within the legal timeframe. Partially accomplished, with Auditor General clearing backlog of audited accounts.

B. FIGHTING CORRUPTION

61. There has been steady progress in the fight against corruption. In the Transparency International Corruption Perception Index o f 2004 Madagascar was ranked 82nd out o f 145 countries

29

(after no. 88 out o f 133 in 2003 and no. 98 out o f 102 in 2002). The new WBI governance indicators6 for 2004 confirm that Madagascar i s well above Sub-Saharan African average in al l examined areas, in particular the control o f corruption, regulatory quality as well as voice and accountability. The Government was elected on an anti-corruption platform, and has made it the cornerstone o f i t s PRSP. The Government sees corruption as one o f the main sources for the lack o f progress in the socio- economic development o f the country. The key issues include:

e Pervasive corruption in a number o f sectors (i.e. mining, judiciary) and public services (i.e. customs, medical services, traffic police), which severely affects overall efficiency and delivery o f services. The lack o f ethical standards in the public services with widespread non-application o f formal rules and regulations by public servants. Informal andor corrupt behavior remains by-and-large unpunished.

e

e

Reform Agenda

62. Reforms started under PRSC 1 have been deepened and extended, with important improvements in the regulatory framework for the fight against corruption. The Anti-Corruption Commission (Conseil Supirieur de Lutte Contre la Corruption, CSLCQ, which was established in 2002, to raise awareness about corruption, and co-ordinate all governance and anti-corruption efforts prepared a new general “anti-corruption law” which became effective in September 2004. Th is law aims to improve investigation and prosecution o f corruption cases as well as to establish the institutional framework for the fight against corruption. Based on the new law the government has adopted several implementation decrees since July 2004 including: (i) a new regulation for the declaration o f assets which intends to improve the compliance rate o f public and elected officials based on the experience with the initial decree of the year 20027 and (ii) the decree to establish the independent Anti-Comption Agency (with investigative authority), which will operationalize the Government’s anti-corruption strategy. In addition the government passed “anti money laundering” legislation. A new law regulating political parties and their financing has been submitted to Parliament. Other decrees that will be prepared in 2005/2006 include (i) a decree to regulate recruitment into the public sector’, and (ii) an application decree specifying the rules and regulations concerning conflict-of-interest issues.

63, The key instrument to fight corruption, the independent Anti-Corruption Agency (Bureau IndCpendant Anti-Corruption, BIANCO) became operational in October 2004. Since i t s inception BIANCO has focused on three areas (i) the examination o f corruption complaints (the office has received over 850 complaints, the majority o f which deal with land titling and the judiciary), (ii) prevention, in particular training and sensitization o f public servants o f the police, customs and land titling services. In this context, BIANCO has also provided support to manage several recruitment processes into the public sector; and (iii) further investigation. This includes the preparation o f independent audits o f public services (the audit o f the land titling service i s under way; a draft audit report has been submitted and i s awaiting validation). Two additional audits are planned for 2005/2006 - an audit o f customs and a review o f the mining sector. In addition, independent procurement reviews are planned for the “education for all program” and o f investment programs in the transport sector.

Govemance Research Indicators 1996-2004 ’ The experiences with the new decree are encouraging: in M a y 2005, about 60 percent o f the public and elected officials required (in total 4,328 individuals) have submitted their declaration o f assets. B IANCO i s presently considering various options to fiuther increase compliance. ’ The existing recruitment process i s a source o f significant Corruption. To address this problem, B IANCO has been providing advisory support to recruitment process in 2004/2005.

30

64. Moving ahead, in 2005/2006, the government intends to introduce the concept o f labeling of public services (“clean”/ “not clean”) ”), to pilot citizens’ report cards for suitable public services , as well as to conduct a baseline survey to assess the prevalence o f corruption in the public and the private sectors.

Expected results

65. 0

0

0

0

66.

The main results at the end o f PRSC 3, and their current status, include: Adopt sectoral anti-corruption strategies and begin implementation- this activity i s under way: a general anti-corruption strategy has been validated which includes the establishment o f an independent anti-corruption agency (BIANCO). Sectoral strategy will complement these activities. The regulatory framework for the fight against corruption improved - this activity i s under way; a new anti-corruption and money laundering legislation has already been passed; next steps include regulations concerning conflict-of-interest and public recruitment Independent audits and evaluations have been commissioned to address corruption in targeted sectors/public services - this activity i s under way. An anti-corruption survey confirms a reduction o f corruption in Madagascar - this activity i s planned for 2005/2006.

C. JUSTICE

Beginning in the mid-90sY Madagascar launched a vast legal and judicial reform program which included the consolidation and publication o f existing laws, review and modernization o f i t s business laws, training o f judges and court personnel, review o f judicial procedures and review o f the work environment o f judges. Among the most noteworthy achievements o f the program are the establishment o f the Ecole Nationale de la Magistrature (ENMG) and the new generation o f judges and court personnel that i t has produced, publication o f a complete set o f business laws which had previously been largely inaccessible, preparation and adoption o f several key pieces o f business laws and completion o f a comprehensive study o f the judicial process.

67. strategy. The main issues to be addressed include:

The Government has made judicial reform an important element o f i ts overall governance

Lack of credibility of the judiciary The credibility o f the judiciary has been seriously undermined by widespread corruption and inefficiencies. The judiciary i s one o f the main targets o f the newly created Anti-Corruption Commission. The new Government also put under investigation a number o f magistrates because o f corruption charges.

Low performance of the judiciary: T h i s i s due to procedural and institutional inefficiencies as well as lack o f performance orientation o f the existing staff. T h i s problem affects all areas o f the judiciary and has lead to a significant backlog o f cases, in particular at the lower courts. A key reason i s the lack o f service standards and evaluation methods to examine judicial work. In many areas the case load handled by magistrates and other personnel i s not in l ine with international standards. In areas that require specialization such as commercial proceedings not enough trained magistrates are available to deal with existing cases.

31

Reform Program

68. As noted in the PRSC 1 document, the Government has identified five broad priority areas which form the basis for i t s reform strategy: (i) fight against corruption, (ii) expedition o f proceedings, (iii) reform o f business laws, (iv) rehabilitation o f court and prison infrastructure, and (v) humanization o f detention facilities. The reforms intend to further deepen previous reforms and to consolidate the achievements, in particular in the areas o f training, capacity building and codification o f texts and regulations. The needs o f the private sector are a major consideration in the legal and judicial reform strategy.

69. The implementation of this strategy i s severely hampered by budgetary constraints; the year 2005 has seen a net reduction of the (already low) recurrent budget of the Ministry of Justice which raises concerns about feasibility and sustainability o f the government strategy.

70. PRSC 1 supported the development of the reform strategy which would form the basis for the implementation of the reform program. The implementation of this strategy has seen mixed results in 2004/2005. To improve efficiency o f the judiciary and simplify judicial proceedings, the Ministry o f Justice prepared new legislation, in particular a law regulating the affairs o f commercial enterprises (loi sur les sociktks commerciales), including an implementation decree, and a law rationalizing the procedures o f the civi l courts (loi sur les prockdures collectives). To address deficiencies at the level o f the commercial sections o f the courts a number o f magistrates were trained in commercial proceedings. The Ministry has also established “model courts” in Antananarivo and Ambatolampy which would serve as a reference for the reform o f other jurisdictions. To reduce the existing backlog o f cases (22,000 in Antananarivo alone) the government recruited a task-force; the work of this group has reduced the number o f open cases to almost zero in Antananarivo. The government program to reduce the backlog o f cases will be extended to other jurisdictions in the country.

71. The introduction of service standards, however, which i s seen as a key instrument to improve individual performance and the performance o f the jurisdiction has made little progress. At present, only for the lower courts service standards have been proposed and are awaiting validation. Standards for the higher courts are s t i l l outstanding. Key problems include resistance in the judiciary as well as lack o f reliable statistical data which could serve as the basis to systematically monitor and evaluate performance. In addition, the internal control o f the Ministry o f Justice remains weak and fragmented. Further technical assistance wi l l assist the Government to improve the statistical service as well as the efficiency o f the internal control cadre. Another area o f concern i s the fight against corruption in the judiciary: while the disciplinary commission in the Ministry o f Justice has begun to address corruption complaints and the Ministry o f Justice has asked for support o f the Anti-Corruption Agency, BIANCO, corruption remains a key problem in the judiciary. To address this problem the Government intends to improve operational efficiency o f the disciplinary commission as well as to strengthen self- regulation mechanisms in the different branches o f the judiciary.

Expected Results:

72. The expected results at the end o f PRSC 3 and their current status include the following:

0 Backlog o f pending court decisions reduced - this activity i s in progress. The year 2004/5 has seen a net reduction of the backlog of cases of about 22.000 in the capital. The program will be expanded in 2005/2006 to other lower courts.

32

0 Significant increase o f outputs in the judicial system with the introduction o f service standards - this activity i s under way; a study to establish service standards for the lower courts has been completed and i s awaiting implementation. Reduction o f corruption as confirmed by an independent anti-corruption survey - an anti-corruption survey i s planned for the year 2005/2006 Establish financial and administrative tribunals in the provinces - this activity i s well under way: in 2004/2005 the Government established these tribunals in 4 provinces; for the remaining 2 provinces this activity will be completed in 2005/2006.

0

0

D. CUSTOMS

73. Despite some progress in 2004/2005 customs reforms i s lagging behind expectations. Key problems include revenue generation significantly below projections as well as the perception that corruption has not yet been effectively addressed. In addition, service standards (i.e. time for the clearance o f shipments) are not systematically enforced. The poorly functioning customs service raises transactions costs and i s a constraint for the functioning o f the private sector.

Reform Program

74. There has been some progress in the functioning of customs since July 2004. Customs reforms are geared towards speeding up the clearance process, combat corruption and improve revenue collection. The Government has repeatedly stated i ts commitment to enhance the performance o f customs. An ambitious reform program to restructure customs services was developed in April 2003. I t s objective i s to build capacity (modernization, computerization, training and accountability) for the customs administration to fulfill i t s role as a transparent revenue collector and facilitator o f trade. A contract was signed with a private service provider to enhance the system o f pre-shipment inspections. I t i s envisaged that over the next three years, inspection rates will decrease from 100 percent to 10 percent, with inspections focused on high risk imports. A platform for a systematic dialogue with the private sector was established which serves as the basis to discuss reform progress.

75. The tariff system was simplified with the merger o f the customs and import duty in the 2005 Loi des Finances. The customs regulations were modernized, including the elimination o f the customs duties credit (crkdit de droit); instituting mandatory payments o f the customs duties through the banking system since April 2005; and abolishing the immunity o f customs agents from enquiries and prosecution. The customs administration i s also expanding the coverage o f i t s automated data processing system (SYDONIA) to improve operational efficiency. The new system has been installed in the main customs office in Tamatave in 2005. To accelerate customs clearance process a ‘one stop’ customs service (guichet unique) was established in Mahajanga and Diego Suarez; two additional ‘guichets’ will be established in Antananarivo and Tulear in 2005. According to statistics produced by the customs service the time for customs clearance o f containers has been reduced from an average o f 10 days in 2002 to about 48 hours in 2004 in the main customs office in Tamatave. To address corruption more effectively the customs directorate i s worlung closely with the Anti-Corruption Agency BIANCO with activities focusing primarily on training, sensitization as well as the application o f administrative sanctions (Le. regular rotation o f customs agents, in 2004/2005, 430 agents). These measures have led to a notable increase o f satisfaction among private sector operators.

Since July 2004, the following reforms have been undertaken.

76. At the same time, revenue generation by the customs directorate remains fragile. In the f irst quarter o f the year 2005 customs was able to generate only 65 percent o f the revenues projected in the budget 2005 - main reasons include a lower than expected inflow o f merchandise but also continuing

33

governance problems in the customs directorate. To address existing problems the Government intends to further streamline customs operations as well as to intensify the collaboration with the pre-shipment agent and the port authorities.

77. Another key issue has been the lack o f a coherent vision for customs reforms, in particular the implication o f the private sector in customs operations. To address the Govemment has produced, with assistance from the World Customs Union, a reform strategy and action plan designed to improve revenue generation, introduce service standards and reduce corruption. The Government i s also considering introducing ‘Tradenet’ to improve revenue generation; a feasibility study wil l be launched in 2005.

78. The trigger under P R S C 2 for customs i s the adoption o f a time-bound action plan for the year 2005 and to begin implementation. This trigger was completed in June 2005 with the formal adoption o f the action plan. As mentioned above, implementation o f the reforms has been under way.

79. plan.

The indicative trigger for PRSC 3 i s the satisfactory implementation o f the customs action

E. DECENTRALIZATION

80. In 2004, the Government put in place the new regions which have become (together with the communes) the second operational level below the central government. The main functions o f the regions are to facilitate commune development and to represent the central government. The new legal framework for the regions also stipulates that the deconcentrated services o f the central government report to the regional chiefs. These chiefs were selected on a competitive basis and nominated by the President. As a f irst step the regions were required to prepare Regional Development Plans: these plans were validated for the majority o f the regions by the relevant stakeholders in early 2005. A training plan for the regional chiefs and their s ta f f has been developed which focuses on development planning, public financial management and monitoring and evaluation. A first training seminar was organized in April 2005.

81. Public finances in Madagascar are heavily centralized with about 95% o f revenues and expenditures managed by central authorities. Financial capacities at the communal and regional levels are constrained by insufficient and poorly targeted transfers and a regulatory framework that leaves the collection o f most local revenues in the hands o f inefficient deconcentrated state agents. Budgetary allocations to the communes in the 2005 budget have remained at the 2004 level which i s not in line with the Govemment commitment to increase resources allocated and managed by the communes. Government reforms are under way to strengthen revenue collection as the communal levels. I t i s also envisaged to intensify the collaboration between specific sectors (Le. health, education), the regions and the communes in view o f increasing communal service delivery.

82. Under the PRSC reform program, the Government i s proposing to address these shortcoming through three major interventions: (i) reforming the transfer system and formula and scaling up o f pilot experiences with decentralized tax collection; (ii) establishing a local development f h d that will provide block-grants to communes for local investments and capacity building; (iii) reinforcing communal capacities and create synergies between communes by supporting the creation o f inter-communal associations and regional training and resource centers. Future PRSCs will continue to support and deepen our dialogue in this area.

83. The indicative trigger for P R S C 3 i s the increase o f resource allocations for the communes.

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Expected Results:

84. The expected results at the end PRSC 3 include the following:

0 Resource allocations to the communes have increased - this activity has not been accomplished.

0 Review the system o f fiscal transfers to communes - this activity has been partially accomplished: a proposal for the adjustment o f the transfer (ESW) was prepared by the World Bank in 2003/2004 and validated by the Government but i s awaiting implementation A local development fund has been set up to provide investment and capacity building support to the national level - this activity i s in process; a baseline study for the establishment o f the fund which outlines different design options was prepared in May 2005; discussions about these options are ongoing.

0

F. TRAINING AND CAPACITY BUILDING

85. The implementation of the governance reform program will require substantial investments in training and capacity building, in particular in the areas o f public financial management, planning, change management and monitoring and evaluation. In collaboration with the World Bank, the Government i s implementing an innovative capacity building and change management strategy that consists o f the following elements:

a Cabinet retreats focus on better defining the overall vision and implementation strategy. In 2004, the f i rst retreat took place with participants from all over the world who commented on the Government strategy, as well as shared experiences and best practice. The results fi-om these events were used to refine the Government program. The second retreat focused on improving service delivery. A third retreat, held in May 2005, was designed to foster cross-sectoral collaboration within the government ministries, and included a focus on using a rapid results initiative to improve implementation (see below). The rice crisis motivated a focus on the entire rice chain, and included international best practice on price stabilization mechanisms.

a Leadership training for the senior management level within government i s aimed at strengthening consistency and cohesion of the core government leadership team (President, Prime Minister, Vice Prime Minister, Ministers and Permanent Secretaries) as well as to strengthen their ability to manage and direct rapid change. A series o f workshops in Madagascar and Canada were organized to improve the effectiveness o f the Government team and to share experience. Additional training i s programmed for 2005 to assist senior government officials in implementing complex changes. This program will be directed by a change management expert from Harvard University. Complementary leadership training will enhance the capacity o f the Regonal Chiefs.

Additional capacity building activities will target the middle management in the public sector to improve overall performance orientation and the link between political decision making and administrative implementation. The basis for the training will be the new results framework developed by the Presidency (‘Politique Gdndrale de I’Etat 7.

a T o improve cross-sectoral collaboration and the focus on tangible results the Government has decided to build on the experiences with “rapid results” in other countries. A first exercise, launched in early 2005, i s focusing on the production, importation and distribution o f rice. Cross- sectoral teams have been created who worked out ‘rapid results action plans’ which were presented to

a

35

Cabinet. The team are supported by international experts for the ‘rapid results’ methodology. I t i s envisaged to use this approach also in other areas.

To better institutionalize the comprehensive changes in the area of public finance the Ministry of Economy, Finance and Budget (MEFB) has set up a task force that organizes professional training for the public finance personnel at the central and deconcentrated levels of Government. The training will primarily focus on the big spending ministries (education, transport, health) and will comprise planning and execution o f expenditures as well as monitoring and evaluation. First training sessions have been conducted for the Ministries o f education and health. I t i s anticipated to further deepen public financial management capacity over the course o f the year 2005.

In parallel the Government i s strengthening quality and effectiveness of local training institutions, in particular in high priority areas such as development planning, public financial management and monitoring and evaluation. The two professional training institutions for the public sector (Centre National de Formation Administrative, CNFA, and Ecole Nationale de 1 ’Administration Malgache, ENAM) have received substantive support to modernize their curricula and equipment as well as to improve quality and quantity o f their trainers.

Expected Results:

86. The expected results at the end o f PRSC 3 include the following:

0 Effectiveness o f the Govemment leadership team enhanced; consistency between political decision malung and administrative implementation improved - this activity has been partially achieved; additional activities are planned for 2005 and 2006. Capacity in critical areas in core government services strengthened - training and capacity building in the areas of public financial management, development planning, change management and monitoring and evaluation i s ongoing. Capacity and quality o f local training institutions improved - this activity i s ongoing; it i s anticipated that capacity and quality o f ENAM and CNFA will be significantly strengthened by the end of 2005.

0

0

STRATEGIC AXIS 2: BROAD BASED GROWTH

87. The Bank’s support for the second strategic axis o f the PRSP on broad-based growth includes a significant portfolio o f investment lending, and policy dialogue. But the first three PRSCs do not include any specific policy actions as triggers. The engagement in these areas will be deepened under h tu re PRSCs, starting with PRSC 4, and implementation o f these reforms continues to also be supported through investment lending operations. As noted in the PRSC 1 Program Document, the Bank’s support for the growth pillar i s also provided through our significant investment lending operations in private sector development; transport, rural development and environment (see Table 7).

A. PRIVATE SECTOR DEVELOPMENT

88. The PRSP emphasizes the importance of creating an investment climate that i s conducive for private-sector led growth, and some steps have been taken in 2004 to improve the investment climate, to implement public-private partnerships (PPP), and to improve co-ordination o f policies and to give voice to the private sector and c iv i l society, more broadly. GUIDE, the one-stop shop for enterprise creation, has continued to perform well and facilitates setting up enterprises, with the time needed to set up an enterprise reduced to just 3 days in 2004. As noted before, the reform o f public enterprises has

36

advanced since July 2004 with the privatization o f the cotton company, and management contracts for operating the energy and sugar companies.

89. Reforms in the energy sector have advanced in 2004, but much remains to be done, and the energy situation i s critical. As noted before, the energy company JIRAMA, has been put under management contract since February 2004. The energy sector strategy was prepared in late 2004 and aims at liberalizing the sector by enhancing competition in the medium term through the breakdown o f electricity provision (production, transport and distribution) and regulation o f activities. The Government has set up a supervisory and regulatory agency L 'Ofice de Rdgulation de Electricitd (ORE) to regulate and monitor activities in the energy sector. The Fonds National de 1 'Electricitd (FNE), set up to support rural electrification by providing subsidies to rural electrification providers, i s also operational. The Agence pour le Ddveloppement de 1 'Electr$cation Rurale (ADER) has been created to promote service provision, including rural electrification by the private sector, supervise and finance rural electrification through the FNE, and monitor the environmental impact o f projects. About 150 rural electrification plants are expected to be completed on an annual basis.

90. There has also been some progress in improving prospects for the key export-oriented driving sectors for growth. The tourism sector, which has grown strongly in 2004, will benefit from an investment from a French company ACCOR which will invest in several hotels in Madagascar. The development o f the rkserves foncidres touristiques, clusters where investment in ecotourism and resorts, i s expected to start in 2005. The shrimp sector which i s an important earner o f foreign exchange, has introduced a certification system in December 2004 for Madagascar shrimp certifying that i t follows good environmental practices.

91. The Bank i s conducting an Investment Climate Assessment (ICA) and Financial Sector Assessment (FSAP) in FY05 which will further help in formulating and refining the strategy in these areas to underpin future reforms.

B. TRANSPORT

92. The transport sector, and in particular, the roads program plays a key role in Madagascar's growth and poverty alleviation strategy. As noted before, remoteness i s associated with poverty, and improving access i s critical for many aspects - enhancing productivity in rural areas, improving access to social services and expanded access to markets. Three decades o f inappropriate sector policies have led to serious deterioration o f the country's transport infrastructure. I t i s estimated that from 1970 onwards the country lost on average 1,000 kilometers o f roads per year due to lack o f maintenance, or the loss and deterioration o f over 80 percent o f the network over the last 30 years. In April 2000, after almost ten years o f sector dialogue and very l i t t le lending, the country adopted a comprehensive transport sector policy which aims at (i) focusing the Government's role on strategic planning, sector oversight and coordination; (ii) creating agencies for sub-sector management and regulatory functions that are jointly controlled by the public and private sectors and gradually user- financed; (iii) divesting operational activities to the private sector, through privatization and concessioning arrangements; (iv) developing the local private sector for works design and execution; and (v) rehabilitating transport infrastructure to appropriate levels and ensuring their maintenance thereafter.

Reform Program

93. After the 2002 crisis, the Government launched an ambitious road rehabilitation and maintenance program (2003 - 2008) with the objective to rehabilitate or provide periodic maintenance for approximately 2,000 km per year. Since 2003, nearly 2000 km o f national roads have been improved increasing the percentage o f the national road network in fair and good condition from 49 percent in 2003 to 61 percent in 2004. For rural roads, the least cost design, such as spot improvements for basic access, was not systematically applied to rehabilitate roads with low traffic, leading to

37

significantly higher costs per km, and reducing by one-third the length o f rural roads that could be improved. Hence, only 900 km have been rehabilitated in 2004. To rationalize the management o f the rural roads, the Ministry o f Public Works and Transport (MTPT) i s developing a technical design approach for rural road improvements according to the specific levels o f service needed for each type o f rural road. In 2004, the Road Maintenance Fund (RMF) contracted for the maintenance o f 7,300 km, which utilized 70 percent o f the funding. Of the remaining 30 percent, 20 percent was allocated to routine maintenance o f rural roads and 10 percent to emergency works.

94. There has been delay in setting up the autonomous sub-sector agencies. The Maritime, Ports and River Agency (APMF) has been operational since October 2004 and i ts board has been able to install a measure o f independency. The appointment o f the agency’s key personnel, however, i s st i l l incomplete. The Civil Aviation Agency (ACM), which has been operational since 2000, has been restructured based on an organizational audit, to be more efficient and to enhance the capacity o f the technical personnel. Laws creating the Roads Authority (AR) and the Land Transport Agency (ATT) were voted by the Parliament in December 2004. A workshop involving the main stakeholders was held in February 2005 to review the progress made in these institutional reforms and it i s expected that ATT will be operational by end o f 2005 and AR by mid-2006. In the meantime, since 2003, a National Roads Database has been developed which stores information on al l aspects o f the main road network as well as a computerized system for monitoring projects undertaken by the Ministry. A draft transport statistical yearbook was also produced in 2004.

95. In March 2005, the Vice Primature Office in charge of Economic Programs, Ministry of Transport, Public Works, and Regional Planning was dissolved, and two separate ministries were created: the Ministry o f Public Works and Transport and the Ministry o f Decentralization and Regional Planning. This reorganization seems appropriate and i s likely to provide a better focus for policy and planning. There i s concern, however, that this development and the associated personnel changes will bring further delays to the institutional reforms that were initiated in 2000.

96. The Government i s using public-private partnerships for managing the transport infrastructure. As noted before, Air Madagascar i s operating under a management contract and Northern Railway as a concession. The concessioning o f Southern Railways i s ongoing, and i s expected by end-2005. The main port o f Toamasina, which handles more that 80 percent o f the total traffic, has been restructured i ts container terminal i s being concessioned, with the help o f the IFC and it i s expected that the concession will be in place in July 2005. The Government i s also planning to concession 12 main airports.

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Table 10: Broad-Based Growth - K e y Policies

Broad based Growth Creating conditions for growth

Making growth inclusive

bte: Updates Table 7 in PF

World Bank Project Support

Integrated Growth Poles (FY06) Proposed Watershed Management Transport Public enterprise reform Proposed Energy project Proposed Multi-sector investment project

e Transport program Proposed Watershed management

e Integrated Growth Poles (FY06) Environment projects

e Rural development project e Microfmance project

Proposed Energy project

(irrigation)

C 1 Program Document.

Actions

Remove Administrative barriers (creation o f GUIDE) Increase Investment promotion Foster Dialogue with private sector (CAPE) to identify and remove bottlenecks Increase service delivery in telecom, transport (airports and ports), water and electricity, cotton and sugar production through the reform o f the public enterprises Improve Madagascar’s image through marketing campaigns, active participation in trade fairs Improve performance o f large-scale irrigation schemes through integrated package o f investments at watershed level. Address political r isks concerns through provision o f guarantees (ATI) Improve access to finance through provision o f leasing services, SME finance Improve trade l i n k s wi th strategic partners (Agreement on Textiles and Clothing (ATC), SADC and COMESA trade agreements)

Improve supply chains through rehabilitation o f national and regional roads Rehabilitation o f ports (Toamasina, Fort Dauphin)

Focus on decentralizing growth through creation o f growth poles around tourism, industrial zones and mining Improve productive assets o f poor rural households through matching grants for demand-driven agricultural investments. Capture economic benefits associated with natural resource conservation through investments in protected areas, natural forest protection and community management transfers.

Upgrading airports

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c. RURAL DEVELOPMENT AND ENVIRONMENT

97. Rural development and environment are critical elements of the Government’s strategy to fight poverty, since over four in five poor people live in rural areas. Agricultural productivity i s low and natural resource degradation i s widespread.

98. The main elements of the Government’s rural development sector strategy reform agenda adopted under the Rural Development Policy letter recognizes the need for approaches to provide integrated solutions to multiple problems simultaneously (e.g. through growth poles, value chains etc). The strategy aims to address four main challenges: (i) improving food security and food production, in particular rice productivity through improved

applied research to produce locally produced high yielding rice varieties; scaling up communal village granaries to facilitate access to working capital; appropriate management o f rice import tariffs and taxes to balance producer and consumer interests sustainable intensijkation and diversifzcation of agricultural production through rural roads, agricultural technology, land property rights and water management improving the value-added of natural resources as providers of extractive products and environmental services through putting in place a comprehensive forest zoning plan, establishing a transparent, competitive system for the allocation o f long-term concessions to technically qualified companies; extending the current ban on the provision o f logging permits until the new licensing system i s operational; improving governance in the forest sector by simplifylng the framework o f exploitation and taxation, strengthening o f the field presence o f the Water and Forests Department, and collaborating with the Ministry o f Finance on improving forest tax regulations and tax collection; and scaling-up forest management transfers to communities while assuring adequate long-term support and monitoring; and making the sector institutional framework more effective and efJicient by linking the Action Plan for Rural Development (PADR) and NEAP to a national and regional land use planning process to facilitate an integrated approach towards public sector investments at the regional level aimed at optimizing synergy between sector-specific interventions.

(ii)

(iii)

(iv)

99. In the vision, Madagascar Naturellement, there i s a renewed focus on rural development. The year 2005 has been declared the “Year o f Rural Development” by the President o f Madagascar, with the intended objective o f self-sufficiency in rice production by the end o f the year. The initial objective o f increasing rice yields by 8 percent annually has been increased to 13 percent per year. In 2004, despite the losses associated with the cyclones, agricultural growth was 3.5 percent, significantly higher than the 1.3 percent in 2003. Rice policy was a dominant policy issue in Madagascar since mid-2004. In early

’ 2004, the reduction in the rice production due to the cyclone, the sharp depreciation in the local currency and an increase in the international price o f rice contributed to price increases. Early announcements o f state intervention in case o f a steep increase in the price o f rice created uncertainty among private sector importers. Rice imports in the f i rst half o f the year in 2004 were only 59,000 tons as compared to 150,000 tons in 2003 during the same period. The shortage in rice with high prices triggered a Government facilitated rice import operation with selected private operators with this rice sold to consumers at 3,500 FMGkg. Finally, in March 2004 rice prices have started to decline with the harvest coming in. In 2005, as noted before, rice tariffs were reduced to 10 percent, given the higher international prices o f rice and the depreciation in the exchange rate, which provided added protection for local producers. The Government i s focusing on the entire rice value chain and intends to improve access to agricultural inputs, revitalize the seed multiplication centers and rehabilitate the irrigation schemes in high potential agricultural areas.

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Reform Program

100. The implementation of the Government’s institutional reform program for the Ministry has commenced since i ts adoption in June 2004 and i s aimed at supporting the decentralization process and improving the quality o f services. In this connection, the re-assignment o f staff and budget towards the regions has begun. The 2005 budget for goods and services for the Ministry has been re-aligned, and 80 percent i s allocated to the newly established regonal divisions and 20 percent to the Central ministry.

101. The Government has developed i t s Land Policy Letter which was validated by a wide range of stakeholders in February 2005. The Government’s objective i s to put in place a land rights registration system based on the principles o f (i) decentralization o f the land administration to the lowest level o f local government; and (ii) designing and implementing policy reforms following a process o f piloting and learning by doing. Pilot activities are underway in two areas (guichet foncier communal in the Lac Alaotra and skcurisation fonciire in the Haut Bassin du Mandrare). The Bank i s undertaking AAA on Land and Property Rights Review which will serve as an input to the National Land Tenure Program.

The Government adopted this letter on May 3, 2005.

102. The implementation issues for making the maintenance fund for irrigation schemes (Fonds d’Entretien des Rbseaux Hydro Agricoles, F E R H A ) which was established in September 2003 fully operational are being addressed. A Task Force i s finalizing the operations manual for FERHA. A national workshop on the maintenance o f irrigation schemes was held in April 2004. Financing mechanisms for funding FERHA are under discussion, and will be finalized as part o f the preparation for the Watershed Management Project.

103. The competitive research fund (Fonds CompbtitiJs de Recherche Appliqube, FCRA) established by decree in June 2004, i s operational. I t i s being managed by an autonomous body made up o f a wide range o f stakeholders (Ministry representatives, producer organizations, private sector and universities). This committee has selected 30 proposals, based on a request for proposals in the second hal f o f 2004, for financing before December 2005.

104. The locust early warning system (LEWS) has been developed and implementation has commenced. The National Locus Control Center has been restructured and a capacity building program for the sta f f and local governments, and rural communities i s under implementation. A rural radio program i s also being piloted in selected communities at risk to facilitate communication. The program i s well on track to being fully operational by end-2005.

105. The Government has continued to implement the National Environment Action Plan (NEAP) in 2004. The Government has sustained and improved the forest exploitation adjudication system, by publishing the status o f forest exploitation permits for the years 2002, 2003, and 2004 in the newspapers once every quarter during 2004. Mining and forest exploitation has been prohibited in sensitive areas. Fire monitoring committees have been created and are operational at commune level, allowing the forest service to know the status o f bushfires per commune. The l i s t o f commune vertehouges i s now available and used as a daily tool within the Directorate General o f Water and Forests.

106. The decree making the Office Nationale pour 1’Environnement (ONE) the one-stop shop for enforcing the MECIE (National Environmental Impact) law was passed in February 2005. The one stop shop i s now operational and extension to regions i s under preparation. The Foundation for Protected Areas and Biodiversity (FPAB) was created in November 2004. The options to transfer tourist revenues for the operations and management o f protected areas i s under discussion by a committee set in 2005 up for making the environment financially sustainable.

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STRATEGIC A X I S 3: PROVIDING HUMAN AND MATERIAL SECURITY

107. The three PRSCs will support the Third Strategic A x i s o f the PRSP on human development through a sequenced and gradual process. PRSC 1 supported the implementation o f the Government’s Education for All (EFA) program and improved service delivery in nutrition. PRSC 2 has deepened the engagement by supporting policy and institutional reforms in health, rural water supply and social protection, and continues to consolidate the reforms started under PRSC 1,

A. EDUCATION

108. The PRSP commits the govemment to allocating 25 percent o f the domestic budget to education. In 2003, the Government prepared a Strategic Plan for the Reform and Development o f the Education Sector along with a detailed plan o f action for Education for All, which covers the first nine grades o f school (called “Education Fondamentale ”), with concrete proposals for achieving the target o f universal completion o f the primary cycle (grades 1-5). These documents, which were in line with PRSP priorities, were presented at a meeting o f the Friends o f Madagascar in October 2003, which was attended by donors, the leading representatives o f the Education Ministr ies as well as the Minister o f Finance and the Vice-Prime Minister.

Basic education i s an important priority of the Government.

109. Despite a relatively high gross enrolment ratio at the primary level, most children do not complete even the primary cycle. Insufficient provision o f schooling facilities (classrooms and teachers) i s a significant constraint on expanding access and improving quality. The average pupil-teacher ratio i s close to 60, but in poorer localities, the ratio rises to 70 or 80. The repetition rates in the primary cycle - around 30 percent - are among the highest in sub-Saharan Africa, leading to tremendous inefficiencies in the use o f scarce public resources. Less than 40 percent o f students who enter class 1 complete grade 5. Achievement levels in the primary cycle, as measured by student performance on standardized tests in language and mathematics, are low.

110. The inadequacy of teachers reflects both an absolute shortage as well as problems with a rational deployment of teachers (based on pupil numbers) and a high proportion o f teachers who are in administrative jobs in either the Central Ministry or in local education offices. Communities have responded to this shortage by hiring teachers at the school level; these teachers, however, are o f variable quality and there are no criteria for their recruitment.

11 1. In 2002, the government abolished all student charges for primary school. Free textbooks and pupil materials were also provided under the World Bank education project and were later financed by the domestic budget. Further, the Govemment extended financial contributions to communities for the hiring o f local teachers. This led to a tremendous surge in enrolments, not only in new entrants into class 1 but the retum o f children who had earlier dropped out or had never enrolled. T h i s unexpected surge in enrolments has compounded the problem o f rapidly expanding access while ensuring that quality improves.

112. In early 2004, the three ministries of Education were merged into a single Ministry in order to ensure that there was an overall strategic direction to the education sector and that sub-sectoral priorities and trade-offs could be undertaken with greater ease.

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Reform Program

113. The most dramatic progress has occurred in enrolments at the primary stage. Against an expected target o f about 2.89 mill ion students in 2003/04, an estimated 3.37 mil l ion students were enrolled. As a result, the net enrolment rate i s over 90 percent. This large increase was supported by the measures taken by the Government, such as the free supply o f textbooks and pupil materials, enhancements in the subsidies for community teachers and provision o f funds to schools, all o f which were financed by the enhanced allocations in the domestic budget supported by the PRSC.

114. However, progress on other indicators for the implementation of the EFA Plan has been relatively limited. There has been no significant reduction in the repetition rate, which continues to hover around 30 percent. The completion rate also continues to be low. Recent achievement surveys indicate either a stagnation or even a reduction in average achievement levels, compared to 1999. Th is partly reflects the fact that the effects o f recent reforms and measures will take some time to produce results on the ground.

115. Significant progress has been made in expanding schooling facilities but they fall short o f the targets set. About 1413 classrooms were constructed, against a target o f 2000; the 30 percent shortfall was due to difficulties in construction management, lack o f timely availability o f budgetary allocations and the rising unit cost caused by the devaluation o f the FMG and consequent increase in the price o f imported materials. The shortfall in the realization o f targets for teacher hiring are even larger. Only 50 percent o f the 1800 new planned teachers could be recruited. There has been no progress made in redeploying teachers from the areas with low pupil-teacher ratios to those with high pupil-teacher ratios. Recently, the Government has introduced measures to ensure that new recruits are assigned to a specific school in order to ensure that they do not move back to another region.

116. Measures have been taken to improve quality but more i s required: A major quality improvement program has been launched with the help o f UNICEF (Approche Pur les Competences), which includes training o f teachers, providing support in classrooms and the development o f teacher guides. A provisional training plan for pre-service and in-service training o f teachers has been prepared and about 5 percent o f the salary expenditure for 2005 has been budgeted for training. Revision o f the training curricula and o f rehabilitation o f training facilities has been undertaken. Nevertheless, there has been no significant progress on key issues identified in the EFA plan: training o f teachers in pedagogical methods for multi-grade teaching, or teaching in large groups, establishment o f a multi-year training plan, or improving the mastery o f the language of instruction by teachers. Although the Government has adopted in principle a measure to reduce repetition rates within the 2-year cycles o f the primary stage, the results are affected by the lack o f effective communication o f the new strategy to teachers and communities. The difficulties in redeploying teachers to bring down pupil-teacher ratios and the variable quality o f the community teachers are among the main factors which impede progress on quality. The proposal to raise the subsidies for community teachers to about 2.5 times per capita GDP, against the current level o f 0.7 o f per capita GDP (a level which i s too l ow to attract quality teachers), has also not been implemented due to lack o f availability o f the budget.

117. The Ministry has started to address the issue of improving management and implementation capacity. Following the merger o f the three Ministries, the Ministry has commissioned a study on the functional reorganization o f the Ministry. A study to develop a plan for the rationalization o f human resources within the Ministry has also been commissioned (this i s a PRSC 2 trigger as well). The Ministry i s also undertaking studies on strengthening the statistical capacity and on improving financial management and procurement capacity. Introduction o f information technology in the Ministry has begun with the appointment o f an ICT director in the Ministry, the supply o f computers to provincial offices and the development o f an intranet. Most o f the measures for improving management in key areas, such as

43

construction management, textbook management, and personnel management remain to be elaborated in detail.

1 18. Budget execution and budget preparation continue to face problems. Apart from the general problems o f budget execution (for example, an effective execution period o f 9 months), the problems o f the execution o f the 2004 budget were reflected in delayed payments for community teachers, caisses scolaires, and for construction. Final data on the execution o f the budget for 2004 are not yet available. The execution problems partly reflect overall budgetary constraints, which led to suspension o f commitments in mid-year, and also the lack o f budget execution capacity within the Ministry to prepare, monitor and modify quarterly cash flow and procurement plans. In line with the overall program o f the government, the Ministry has now adopted program budgets. The preparation o f the 2005 budget posed significant problems due to lack o f clarity about these program budgets and the difficulties o f coordination between the MENRS and the MEFB. Another issue i s the lack o f effective linkage between the medium term projections for educational expenditures, based on the strategic goals and objectives o f the Ministry, and the annual budget preparation, leading to shortfalls in the allocation o f resources for some key inputs.

119. Madagascar i s on the l i s t o f potential candidates to receive funding from the Education for All-Fast Track Initiative. In 2005, Madagascar i s expected to receive interim grant financing from the EFA-FTI Catalytic Fund, based on i t s updated EFA plan o f April 2005, which has been endorsed by the local donors (see next para).

120. The prior actions for education under PRSC 2 include:

0 The implementation of the EFA Plan i s sound as assessed by a joint-donor evaluation: As noted above, while there has been significant increase in enrolments, many o f the other expected results o f the plan have not been met, nor have many key strategies been implemented. The Government prepared a revised EFA plan in April 2005, taking into account the lessons learnt over the last two years, and submitted i t to the EFA FTI Catalytic Fund to access additional grant funds. The local donors have prepared a joint assessment o f this plan and i ts implementation over the last two years, using a tool prepared by the EFA-FTI. The assessment was undertaken in early May 2005. The overall assessment i s that the EFA plan i s sound, and that the Government i s adjusting i t s strategy appropriately to focus on quality and improving completion rates.

0 Preparation of HR rationalization study: The study on HR rationalization has been completed in March 2005. The issues that are to be addressed in this plan are highly contentious (for example, the redeployment o f teachers from administrative positions, a more rational deployment o f teachers across schools) and linked to overall reform o f the civi l service. Careful thought will have to be given to implement reforms in a participatory manner, involving teachers and communities, and perhaps piloting them in some areas.

121. The indicative trigger for PRSC 3 i s that the implementation of the EFA remains on track.

Expected Results

122. enrolment rate i s projected to be well over 90 percent.

The enrolment rates have increased beyond expectations, and the current primary net

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Attaining the EFA Goals Primary school completion rate

Net enrolment rate (%)

2002103 2003104 2004105 2005106 (actual) (actual) (objectives) (objectives)

38 47 53 60

82 97 97 97 (up from 70% in 2001102)

Percentage o f 6 year olds enrolled

Number o f textbooks per primary

in primary school

school student

B. NUTRITION

80 94 94 94 (up from 66% in 2001102)

n.a. 0.9 0.9 1 .o

123. Malnutrition rates remain high in Madagascar, but the negative trend since 1997 has been reversed. The results o f the anthropometric survey, conducted by INSTAT between May and August 2004 show a reduction in the national underweight malnutrition rates among children under five from 43 percent in 1997 to 35 percent in 2004. Stunting, or chronic malnutrition rates remain very high at 47.5 percent. Decreasing stunting takes long-term commitment and intensified attention towards pregnant women in order to reduce low birth weight. Impressive improvements have been made concerning exclusive breastfeeding o f children under six months (from 43 percent in 1997 to 67 percent in 2003/04 based on the DHS) and Vitamin A supplementation among children under five (from 4 percent to 76 percent over the same period). However, micronutrient deficiencies, especially iron-deficiency among young children remains very high, with more than two-thirds o f children under the age o f five suffering from anemia. In addition, seasonal short-term hunger among school-aged children has been highlighted as a major impediment to learning.

Textbooks distributed School and teacher k i t s distributed Classrooms constructed Teachers recruited and trained

124. The quality of nutrition services, integration of basic health services at the community-level, and strengthening of the referral system for severely malnourished children, has improved in recent years, but requires more attention to address the remaining challenges, iron deficiency anemia among young children, seasonal hunger - especially among school-aged children - and systematic nutrition surveillance.

3 mil l ion 6 mi l l ion 2 mi l l ion 2 mil l ion 3 mil l ion 1.2 mi l l ion 1.2 mil l ion 1.2 mil l ion

700 1500 2000 2000 600 600 2000 2000

125. The reversal of the negative trends and improvements in the nutrition situation in Madagascar are the results of strengthened capacity to develop policies, implement programs at the

Number o f FRAM teachers for 8,000 1 17,650 23,450

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22,950

Percentage o f repeaters 29 30 15 12

community level and improved quality o f nutrition services. Under Government leadership, all the nutrition partners have adopted a harmonized approach for community based nutrition activities, and a National Community Nutrition Program was developed and i s being piloted in 22 regions. Further progress though i s needed to consolidate capacity and coordinate within the key-sectors, such as health and agriculture. The National Council for Malnutrition and Office National de Nutrition (0") which represent all stakeholders in nutrition in Madagascar, are very well placed to take on these extra efforts.

Reform Program

126. The Government i s highly committed to continuing the reduction of malnutrition as evidenced by the adoption of the first National Nutrition Policy in April of 2004 under PRSC 1 and the creation of the National Council for Malnutrition (C") and its secretariat, the Office NutionuE de Nutrition (0") in November 2004 to lead the implementation o f the Nutrition Policy and programs. A National Nutrition Action Plan was developed over the last months o f 2004 and technically validated in March 2005. The Government o f Madagascar and Parliament also demonstrated very strong political commitment by approving a US$23 mill ion budget for nutrition programs in 2005; this i s significantly higher than in earlier years.

127. Significant progress has been made in the fight against malnutrition, with continued support from the Government to 3600 nutrition sites in 2004, reaching over 650,000 children under the age of 3 for growth promotion and counseling services. Impact survey data shows significant decreases in severe and moderate underweight malnutrition rates in the program areas, with an improvement o f 43 percent in the moderately underweight rate in the Seecaline sites versus 32 percent in the non-Seecaline sites. Furthermore, a more detailed analysis o f the monitoring data o f the Seecaline project shows that the underweight rate improved on average between 18 percent and 40 percent during 1999-2002 in the Seecaline sites. Moreover, the sites which were exposed longer to the program have a differential advantage on the malnutrition rate (approximately 8.0 percentage points per additional year o f exposure to the program). As a result o f the demonstrated achievements o f 10-year investment in nutrition services at the community-level and the renewed political attention to the issue, extensions o f nutrition sites, integration o f basic health services and improved referral systems are being established under the ongoing programs supported through PRSC 1 and i s foreseen in future financing.

128. A comprehensive school nutrition and health program i s reaching almost 2 million school- aged children in the program areas and i s programmed to be extended nation-wide in the next years. Seasonal school-feeding programs are foreseen to address the short-term hunger problem during the lean period in food-insecure areas o f Madagascar.

129. The first two triggers for PRSC 2, the creation o f the National Council for Nutrition and the establishment o f i t s secretariat (Office National de Nutrition), were fulfil led in November 2004 (creation by decree). The coordinator o f the ONN was appointed in May 2005.

Expected Results

130. The main overall outcome i s a reduction in the child underweight rate o f 20 percent between 2004 and 2007, based on the results o f anthropometric surveys (2004 & 2007). In addition, the institutionalization o f nutrition and the development o f the National Community Nutrition Program would lead to sustained commitment and investment in nutrition for the long te rm at the national, regional and commune level (integration o f nutrition indicators in the Regional and Commune Development Plans).

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Table 12: Key Intermediate Outputs o f the Nutrition Program

Children (0-3 years) in 2001 2002 2003 2004 2005

344,000 493,000 625,300 650,000 812,000'

Coverage 19% No. o f nutrition workers 1947 and volunteers School children in de- 424,000 worming and iron- supplementation

Nofe:'Another 848,000 children aged 4 to 5 will be integrated in the program over 2005.

27% 33% 35% 42% 3 198 3608 3606 5550

25,000 28,000 28,800 38,850 1,382,000 1,326,000 1,500,000 1,815,000

C. HEALTH

Coverage (%)

13 1. Recent progress on several key outputs in child health' has significantly improved infant (mostly post-neonatal) and juvenile mortality rates. Despite the absence o f a formal health sector policy document, constant changes in organization and personnel within the Ministry o f Health and Family Planning (MoH), and insufficient medical specialists and paramedical staff, the sector continues to implement a number o f effective interventions while promoting several promising public-private initiatives. Under M o H direction, for example, based on the Demographic and Health Survey (DHS) between 1997 and 2003104, the vaccination rate for DTC3 increased from 46 to 61 percent. By highly subsidizing the price o f insecticides, impregnated bed nets and home treatment for malaria in children and by complementing delivery through public health services with an effective social marketing program through the private sector, prevention and care for malaria have been made available nationwide at an affordable price. For example, financial accessibility o f bed nets greatly improved, resulting in almost no difference between the four lowest quintiles in bed net ownership". However, as has been demonstrated elsewhere" I M C I (integrated management o f child illnesses) has remained limited to a few pilot sites without providing convincing evidence o f i t s effectiveness.

16 50 48 52 60

132. Safe motherhood remained largely unaffected over the last years-the maternal mortality ratio (MMR) was 489 and 469 respectively in 1997 and 2003/04--jeopardizing the likelihood that Madagascar will reach this MDG by 2015. While antenatal care increased 77 percent to 80 percent and the presence o f skil led staff at birth has increased from 47 percent to 54 percent over the same period, the lack of progress o f health care at first referral level, in particular at the district hospital level, serving the large majority o f the rural population, precluded any improvement in maternal care. Deaths due to abortion contributed significantly to the MMR (40 percent in rural areas, and approximately 52 percent in Antananarivo), and better family planning interventions would considerably improve maternal health.

Between 1997 and 2004 (DHS 1997 and DHS 2003-2004), the immunization rate increased from 46% to 61% and the modern contraceptive prevalence rate increased from 9.7% to 18.3%; a national measles campaign covering approx. 7 millions children and youths took place in October 2004, vitamin A distribution campaigns take place bi- annually nationwide; 360,000 permanently impregnated bed nets and more than one mi l l ion home treatment for malaria in children under five were sold at a highly subsidized price. lo Percentages among 4 lowest quintiles, DHS 2003 " re f multi country evaluation IMCI

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133. Control of malaria, tuberculosis and leprosy made significant progress due mainly to increased availability o f resources. Indoor sprayings with insecticide combined with implementation of a sophisticated surveillance system” in recent years has helped contain the number o f malaria cases to a minimum on the highlands. Intermittent Presumptive Therapy with Fansidar in pregnant women was scaled up last year. Social marketing of highly subsidized permanently impregnated bed nets increased mother and child prevention in the coastal regions. Furthermore, social marketing o f highly subsidized permanently impregnated bed nets and o f pre-dosed pre-packed chloroquine for home treatment increased mother and child protection against malaria in the coastal endemic regions. Diagnosis and treatment o f tuberculosis improved with the expansion o f DOTS (directly observed therapy system) and increased drug availability nationwide.

134. Although variable, control of other transmissible diseases (schistosomiasis, plague and filariasis) i s lagging behind. Whi le mass treatment o f hyperendemic villages for schistosomiasis with Praziquantel was initiated as early as 1997, the MOH was not able to decentralize the capacity to organize these mass treatments at district level. Despite major advances in the diagnosis o f plague through the development o f a specific rapid field test, the number o f deaths due to plague did not decrease, and only major progress in urban sanitation will improve the situation. Regarding filariasis, the M o H i s s t i l l considering which strategy to use to scale up i t s control.

135. With 0.93 percent of HIV positive pregnant women nationwide, the HIV/AIDS epidemic i s close to generalization, necessitating major Government and partner efforts to contain the epidemic. While occurring later than most o f i t s neighbors, the Madagascar epidemic has increased sharply. The population i s at higher risk due mainly to the very high sexually transmitted infection (STI) prevalence rate. Highly subsidized pre-packed pre-dosed STI treatment k i t s are sold through social marketing through both the public and private sectors, allowing to effectively cover all areas. Since the establishment o f the ComitC National de Lutte contre le Sida (CNLS) to implement the MAP, numerous activities (information, education and communication, peer education, mass media communication, cinemobiles in villages, etc.). However, while knowledge o f HIV/AIDS satisfactorily progressed from 1997 to 2003J04 (from 69 percent to 79 percent for women, and to 88 percent for men), behavior change has lagged behind among high-risk groups in hot spot areas as well as among the general population.

136. While the quality of basic health care i s acceptable, the health system performs poorly at hospital level, limiting referral to urban areas and only then when i t i s not further compounded by financial barriers. Population coverage (<5km) i s l imited to 60 percent o f the country. Further, approximately 25 percent o f health facilities in covered areas suffer from inadequate medical and paramedical staff (~nderstaffing/absenteeism)’~. While quality issues at the periphery pertain mainly to staffs lack o f sk i l l s (only 32.3 percent o f health providers measured the respiratory frequency in children with acute respiratory infection with no difference public and private provider^'^), quality o f services at hospital level i s affected by the lack o f proper medical specialists, lack o f equipment, o f maintenance, of proper drugs and consumables, etc.”

Reform Program

137. Over the past year, the health sector, a number o f initiatives are underway to prepare the health sector to transition to programmatic support. These have been summarized in a recent health

‘’ Detection o f epidemics using malaria rapid tests wi th Lo t Quality Assurance Sampling (LQAS). l3 EEEFS: Study o f the efficiency and equity o f health facilities, INSTAT 2003. l4 EEEFS: Study o f the efficiency and equity o f health facilities, INSTAT 2003. l5 Out of 32 district hospitals only 3 meet a set o f minimum criteria to be fully functional.

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sector note, and include the following. In 2003, technical assistance was provided to strengthen district- level planning and budgeting capabilities, and two international NGOs have provided hands-on support over two budgeting exercises. Since October 2004, the Bank has (along with the technical assistance) provided additional financing for the health districts, approximately doubling the existing recurrent expenditure budget. In addition, UNICEF i s progressively introducing Marginal Bottleneck Budgeting at the district level and will cover about 50 percent o f the districts by the end o f the calendar year. The sector has also benefited from a significant amount o f analytical work, including the efficiency and equity in health facilities study in 2003 during the gratuity period (which will be repeated in a few months after more than one year implementation of the new cost-recovery scheme) and the DHS 2003-2004. A health sector MTEF has been prepared within the context o f the Government’s public finance reforms, and two important studies (a national health accounts and a human resources study will begin in 2005 and be completed by the end o f the calendar year.

138. Health service delivery will be improved both at peripheral and hospital levels in order to help reach the MDGs. Mother and child health should benefit from: (i) a more equitable repartition o f health manpower between urban and rural areas; and (ii) further increase in effective preventive interventions (increased immunization and oral re-hydration therapyI6 coverage, introduction o f community based treatment of acute respiratory infections (ART) with antibiotics, zinc supplementation, etc.). Regarding safe motherhood, significant progress should be expected through the strengthening o f the regional hospitals (in addition to the 6 provincial hospitals 16 district hospitals will be upgraded as regional hospitals) and the installation o f 38 ambulance in referral hospitals connected to large scale radio communication network (currently under installation). The already improved contraceptive prevalence rate should benefit from the creation o f a Secretariat ExCcutif for Family Planning which will prioritize the 24 percent women categorized as unmet needs for contraception. Furthermore, the M O H will launch the delivery o f a revolutionary contraceptive i m ~ l a n t ’ ~ , which i s much more easily inserted and removed than Norplant and which can be targeted to the poorest women, for whom payments for oral or injectable contraceptives constitute a barrier, even if the cost i s minor. The number o f treatment centers for tuberculosis will be dramatically increased in order to improve compliance with treatment and to reduce the proportion o f lost to treatment.

139. Madagascar’s efforts to provide services to the poor have been based on increasing the availability of quality services and ensuring the financial accessibility of these services. With respect to availability, in addition to the ongoing program o f infrastructure rehabilitation, the Ministry has taken steps to formalize a benefit package for staff working in remote/difficult locations in order to provide incentives for physicians, who were redeployed in rural health centers in 1998, and other staff to remain in their posts. Adequate supply o f drugs was restored with the reintroduction o f cost recovery in January 2004 (after a period o f free distribution during the 2002 crisis), and the 35 percent markup on generic drugs i s among the lowest in Africa. However, this low level o f mark-up does not leave much room for additional resources to improve quality (incentives, etc.) and will be probably reconsidered after the current crisis i s over. While the Government has succeeded in maintaining low drug prices through subsidies to compensate for the high devaluation during 2004, i t will have to carefully manage the restoration o f prices reflecting drugs’ real cost in the upcoming months. Moreover, a substantial number o f drugs and products (mainly the ones with the highest externalities) distributed in the public as well as in the private sector are highly subsidized’*. Given that drugs and consumables are cheap, free or highly subsidized at first contact level, health care i s affordable for most o f the people at the periphery, allowing

l6 Using the latest ORT package developed by UNICEF l7 Implanon l8 Vaccines, prenatal vitamins and malaria chemoprophylaxis, TB and leprosy drugs, malaria treatment for children; plague treatment, STI treatment kits, permanently impregnated bed nets, contraceptives.

49

for a relatively simple exemption system. In addition, special services have been organized for the poor in several areas, including free nutritional rehabilitation services for severely malnourished children and mothers in 35 hospitals nationwide (contracted out to NGOs).

140. Cost-recovery was reinitiated at health center level, but with accompanying exemption policy measures for the poor at this level. Despite the documented high prevalence o f poverty among the general population and the introduction o f payment mechanisms to assist those who have been identified as poor to have access to basic health services Cfonds d’dquite!, the small number o f persons who claim to be indigent indicates that there may be significant cultural barriers to identifying oneself publicly as poor or indigent. Similar measures are gradually being introduced in hospitals, given the impoverishing effects o f hospitalization, where most surgical and other consumables are not available and must be purchased in private outlets, ending up in unreasonably expensive bills. MOH has begun studying the creation o f equity funds at hospital level which could be complemented with a mutual insurance scheme where feasible.

141. The triggers for PRSC2 in health are: 0

0

updating o f the national policy on health - this was completed in June 2005. introduction o f Medium Term Expenditure Framework for the health sector commencing in CY 2005 as an element o f the Ministry’s budget preparation process: the MTEF would strengthen health sector planning and budgeting by estimating sectoral financial needs and resources over a three-year period; by fixing budget allocations for all budget holders based on strategic priorities; and establishing a process for systematic review o f proposed program activities - this has been completed.

D. RURAL WATER SUPPLY

142. The provision of drinking water services figures prominently in the PRSP as part o f the objective to promote Human Development in particular for the poor and i s among the top five priorities of the President agenda in “Madagascar Naturellement”. Water and sanitation are o f prime importance for the development o f Madagascar because o f their complementary role in preventing disease and reaching the Millennium Development Goals. Access to improved water supply and sanitation, accompanied by effective hygiene education, can be effective in improving both health and productivity, improving the quality o f l i fe and providing increased opportunities for education and employment, especially for women and girls.

143. In 2004, the access to safe drinking water was only 14 percent in rural areas and 66 percent in urban areas. Diarrhea i s the third cause o f morbidity and mortality in Madagascar. The active population lost 6 mil l ion work days per year, estimated at 50 bil l ion Ariary and primary students lost 3.5 mil l ion days o f school per year due to water borne diseases and an environment o f inadequate hygiene.

144. The likelihood of attaining the MDG, Le., providing 52 percent of the rural population and 77 percent of the urban population with access to potable water and sanitation by 2015, remains constrained by a couple of issues. First, sector investments are insufficient to overcome demographic growth. In 2003, for example, sector investments, which accounted for USD 12 million, provided 150,000 additional people with safe water, whereas the population has increased by more than 400,000 over the same period. Supply side interventions to meet the MDGs by 20 15 would require an total amount o f USD 60 mill ion a year. Second, the sustainability o f the service remains an area o f concern, in particular for water systems installed in small towns, where the service deteriorates after some years, due to inadequate management and no efficient cost recovery system. Third, sector execution capacity, including technical

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and operational capacity in the Ministry at central and provincial levels, as well as in NGO’s and the private sector, i s s t i l l limited.

145. However, since 2002, a series o f actions were undertaken to improve the legal and institutional framework in the water and sanitation sector. Thirteen enforcement decrees o f the water law were adopted in 2003 as part o f the sector reform. The roles and responsibilities o f sector stakeholders are clear and well defined. Government, through the Ministry in charge o f water and sanitation plans and monitors all sector activities; ensure donors’ coordination and leads regular and broad stakeholders consultation processes, through the WASH (Water Sanitation and Hygiene) committee. A rural water supply and sanitation strategy was validated in 2003. The strategy i s based on the Demand Responsive Approach (DRA) concept, where communities make informed choices on the technology option, contribute to the capital cost with cash or in kind contributions and take responsibility for the operation and maintenance costs and receive adequate training to manage the water facilities. In addition to the water supply program, education hygiene and sanitation promotion are included as a package to achieve effective and sustained used o f improved water and sanitation services and hygiene practices. Finally, NGOs and the private sector are in charge o f the technical study, construction, community mobilization, maintenance and more recently in the management o f larger piped water systems.

Reform Program

146. First, the sector has developed a full set o f tools necessary to move toward a programmatic approach and to scale up investments. The MEM/DEA presented i t s “Water and Sanitation for All” program in February 2005 to the donor community. This strategy proposes a long term vision and clear objectives to reach the MDGs and solutions to increase sustainability o f the services and sector delivery capacity. The Directorate o f Water and Sanitation has elaborated i t s first program budget for the 2005- 2007 period. In addition, the RWSS sector has prepared a manual o f procedures, including technical norms and standards for water and sanitation sub-projects implementation and management, to be used by al l stakeholders. Finally the sector undertook in 2004 an exhaustive field inventory o f all water point facilities existing in the country, which will be used as the sector baseline for measuring sector progress and has set up a water points computerized database. The results o f the field inventory were validated in April 2005.

147. Second, the sector has implemented a new policy framework for ensuring more efficient management of water services, in particular in localities with a population above 1,000 inhabitants. Villages authorities or communes can contract, under a lease or management contract, the operations o f the water systems to private operators, promoting efficient pricing, and technical and commercial operations through transparent and competitive contracting processes. That new approach has been tested in 2005 in about 25 localities and will contribute to provide about 100,000 people with improved potable water services.

148. Third, in response to high priority for potable water supply in the PRSP, the Government has substantially increased domestic funding to the sector. The allocation for water supply tripled, from USD 1.5 mil l ion in 2004 to USD 4.5 mill ion in 2005, representing 38 percent o f the total allocations of the Directorate o f Water and Sanitation Program budget. The allocation to the Directorate o f Water and Sanitation increased by 40 percent between 2004 and 2005 that i s from USD 10.6 mil l ion in 2004 to USD 14.6 mil l ion in 2005. Expenditures towards rural areas account for 82 percent o f the 2005 Directorate o f Water and Sanitation Program budget. The 2005 program will provide 250,000 additional people with safe water.

149. PRSCZ will be instrumental in increasing sector delivery capacity and scaling up rural water supply infrastructure to increase access, affordability and sustainability of water supply and

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sanitation services in rural and semi-urban, in particular by: (i) improving sector programming and monitoring activities, through the Directorate o f Water and Sanitation Program budget and, annual govemmentNVASH members sector reviews and coordinated donors support in order to increase sector accountability, measuring progress in program implementation and getting information about value for money and (ii) by strengthening the operational and technical capacity o f the ministry in charge o f water and sanitation at the central and provincial levels to better plan, manage and monitor the implementation o f the “Water and Sanitation for All Program ”.

PRSC 2 Trigger

150. The indicative trigger was that the Directorate o f Water and Sanitation in Antananarivo and its decentralized departments in the six provinces are adequately staffed and equipped to implement successfully the proposed RWSS program “Water and Sanitation for AN”. The trigger has been mostly implemented. The Water and Sanitation for All strategy was produced in February 2005, and based on the results o f a study to reinforce capacity in the provincial offices, the equipment i s largely in place, and the recruitment i s ongoing for the personnel. Hence for the prior action for PRSC 2, the trigger has been slightly modified to reflect the current status.

Expected Results

15 1. PRSC are the following:

The main results expected by 2007 in the rural water and sanitation sector with the support o f the

- The sector wide approach i s in place. The program budget o f the Directorate o f Water and Sanitation i s the reference framework for strategic and operational programming and the monitoring and evaluation o f all sector activities. Investments to the sector have increased significantly.

- The ministry in charge o f Water and Sanitation at the central and provincial levels has the capacity to plan, manage and monitor the implementation o f the “Water and Sanitation for All Program”.

- Access to safe water will increase from 14 percent in 2004 to 20 percent in 2007 in rural and semi-urban area and about 1,000,000 additional people will be served over the three years program.

E. SOCIAL PROTECTION

152. Seventy percent of the population lives in poverty, 23 percent are acutely poor, and shocks are widespread. In terms o f natural disasters alone, more than 30 cyclones, 6 droughts and 2 famines have hit the island nation since about 1970. Madagascar’s on-going r i s k and vulnerability analysis finds that other shocks, including human disease, locust infestation and livestock disease, are widespread, if less visible than natural disasters.

153. Existing safety net programs are ill-adapted to effectively managing these risks. The current system o f safety nets has evolved in response to various crises. As a consequence, much o f today’s spending appears to be crisis-driven, to the detriment o f longer term strategic aims. Moreover, beneficiary groups have not been rigorously defined nor prioritized. Although social protection spending comes to approximately 7 percent o f Government expenditure (above-average for comparable countries), the lack o f a clear definition and prioritization o f vulnerable groups creates the r i s k that these resources

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will be spread across broad beneficiary populations, to little effect, rather than concentrated on the neediest groups. In order for Madagascar’s social protection resources to achieve maximum impact, a greater portion o f resources need to be invested further upstream, in r isk prevention and mitigation instruments; in a more coordinated fashion, with less overlap between different partners’ activities; and for the benefit o f well-defined, agreed-upon vulnerable groups.

154. In 2002, the Government created a Technical Committee on Social Protection (TCSP) to address the issues raised above, through development o f a comprehensive Risk Management and Social Protection (RMSP) Strategy. Though the TCSP has been effective in this role (the RMSP Strategy i s expected be completed in early FY06), i t i s not a permanent Government body, and i t s mandate does not extend to implementing the strategy nor undertaking social protection reforms. Madagascar now needs a permanent institutional framework for social protection, with a mandate to implement the RMSP Strategy, to lead social protection reforms, and to guide/coordinate future investments in the sector.

Reform Program

155. The T C S P i s in the process o f finalizing a Social Protection Policy Note, and the R M S P Strategy, The Policy and Strategy wi l l help Madagascar to set clear objectives, reform goals, and cost-effective interventions. They will be based on an assessment o f the priority areas o f vulnerability, and will take into account the need to balance short-term, risk-coping instruments with long-term, growth- enhancing social protection interventions. The Policy and Strategy pieces will provide the analysis necessary for social protection reforms envisioned under PRSC3.

156. The T C S P has also done initial research on the creation o f a permanent institutional framework for social protection. Because resources are over-invested in emergency management and response, i t i s critical that the mandate o f this social protection agency/committee/secretariat encompass management o f all welfare-harming risks, and not only highly visible natural disasters and other emergencies. The Government has recently created the “Cellule de Prevention et de Gestion des Urgences (CPGU) ” that includes a Steering Committee and an Executive Secretariat. Clarification about the mandate o f this new organization will decide whether a more specialized agency i s needed.

Results

0

0

Finalization and validation o f the Risk Management and Social Protection Strategy (early FY06) Creation o f permanent institutional framework for social protection (FY06) Implementation o f social protection reform program, and accompanying interventions (FY07)

STRENGTHENING MONITORING AND EVALUATION OF THE PRSP

157. The PRSP lays out the principles of the monitoring and evaluation system, the institutional framework, the objectives o f the system as well as the modality o f operations with civi l society and the donor community. The objectives o f the system are to monitor inputs, outputs and outcomes, and evaluate impacts. To date, the monitoring and evaluation system i s at an embryonic stage. Institutional responsibilities need greater clarity. The Secretariat Technique h 1 ’Ajustement (STA) does not have adequate capacity to meet i t s function o f coordinating the technical aspects o f PRSP preparation and monitoring. Capacity to monitor the implementation o f the PRSP needs to be strengthened at the sector ministry level also. The Institute o f Statistics (INSTAT), which i s the central agency o f the national statistical system, suffers from mismatch o f technical expertise, uncertain financial position, and limited analytical capacity. The Center for Economic Research Studies (CREAM), a research center o f MEFB, i s

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also weak. Building in-country analytical capacity to generate quality policy analysis and inform policy- makers’ decisions also remains a major challenge.

Reform Program

158. e

The PRSCs are supporting the following reforms: the development of a concrete plan for strengthening the monitoring and evaluation system. An Institutional Development Grant has just been approved to support this important activity. Madagascar will be a pilot country for a donor coordinated statistical capacity building technical assistance with the EU, DFID, PARIS 2 1 and the World Bank. The elements o f such a plan could include (a) strengthening the logical framework for the PRSP to link the combination o f projects, programs and policies to outputs and development outcomes. The data collection plan would be made consistent with this framework; (b) clarifying the institutional structure for monitoring and evaluation; (c) capacity building plan, for STA, INSTAT, and key sector ministries, to enable these institutions to undertake their functions; (d) further elaboration o f the Statistical Master Plan from INSTAT to the national statistical system to include a well developed capacity building plan, data collection system and medium-term financing plan to improve predictability o f resources and updating o f the legal and institutional framework for the National Statistical System to clarify mandates and responsibilities, and improve coordination and harmonization; and (e) a clear policy for open access to public information to strengthen government transparency and accountability, and to elicit the participation o f civi l society in monitoring PRSP implementation and especially service quality and delivery. T h i s would include, among others a protocol for open access to primary data.

survey (Enqugte Prioritaire aupr2s des Mdnages, EPM) in 2004 (comparable to the 2001 EPM survey), with a module on vulnerability was provided. Data collection has just been completed and analysis i s ongoing.

0 Support to the 2004 household survey: Technical assistance to support the new household

Poverty and Social Impact Analysis

159. The Government i s committed to undertaking poverty and social impact analysis (PSIA) o f key policy reforms. To inform the content o f this PRSC and to inform other critical policy issues, ex-ante poverty and social impact analysis has been undertaken in the past year. The areas include:

(i) Poverty and social impact analysis of the impact of changing rice tar&%. The changed economic environment o f 2004, with a sharply depreciating exchange rate and higher world prices o f rice, altered the balance between the interests o f rice producers and consumers. In 2003, rice tariffs were at 20 percent. Analysis showed that at the new exchange rate and world prices o f rice, the tariff could be reduced. This was done in the 2005 Loi des Finances with rice tariffs being reduced to 10 percent. Further analysis i s being undertaken to provide the Government policy options to manage future rice crises better. Analyzing the poverty and social impact of cost-recovery in the health sector: The participatory work on this issue i s commencing, and results are expected in the next six months. The work will focus on understanding the effectiveness o f current and proposed safety net mechanisms in targeting the poor for protection from health fees in both urban and rural areas, at the hospital and health post level through qualitative field work and analysis o f existing quantitative data. In addition, i t will seek to understand the evidence on the distributional impact o f reinstatement o f cost recovery, to develop a consensus among stakeholders (NGOs, ministry personnel etc.) on the appropriate role for a safety net mechanism.

(ii)

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(iii) Land tenure - Recognizing the importance o f a transparent and well-functioning property rights regime to meet the growing demand for formalization, reduce disputes and court cases, improve the investment climate, increase agricultural productivity among the rural poor, and promote good governance more broadly, the Government has made land tenure reform one o f i t s key priorities. New land legislation will be presented to parliament in July 2005, to be followed by a piloting phase (supported by the EU, FAO, France, FAD, the U S M C A program), to test community- driven and decentralized approaches to formal registration and conflict-resolution. A PSIA will complement these efforts by providing an ex-ante evaluation o f the impact o f land tenure securitization. The study will be based on a detailed farm-level survey specifically designed for this purpose, collected during April-May 2005 in the Lac Alaotra region, the most important rice- growing area o f Madagascar (and also the main focus o f the Watershed Management Project). Information was gathered from 1700 households on land productivity, investment, land documentation, conflicts and tenure insecurity. The study will compare outcomes - land values, investment, land conflicts, land leasing, and productivity - across titled and untitled plots to assess the economic and social costs o f tenure insecurity.

V. CREDIT IMPLEMENTATION AND R I S K S

A. CREDIT ADMINISTRATION

160. The key prior actions that have been completed prior to Board presentation o f PRSC 2 are shown in Table 13. While PRSC 3 i s designed to support the overall implementation o f a broad range o f reforms, there are a number o f core monitorable actions proposed as indicative triggers for PRSC 3. They wil l serve as the basis for the Bank to proceed with PRSC 3.

Disbursement, Reporting and Auditing Arrangements

161. The safeguard assessment carried out by the IMF identified some weaknesses in the B C M (Madagascar Central Bank) control environment, especially in the areas o f internal control and financial reporting. However, an agreed action plan with the B C M authorities have been developed to address them. The follow-up report issued in March 2005 by the IMF revealed real progress in the implementation o f this action plan. In addition, steady progress has also been noticed in the implementation o f the priority action plan for public finance reforms. As a result no additional fiduciary arrangements will be required.

162. The proposed credit will follow the Bank’s disbursement procedures for development policy support. Credit proceeds will be disbursed against satisfactory implementation o f the development policy program and not tied to any specific purchases or be subject to procurement requirements. Once the credit i s approved by the Board and becomes effective, the proceeds o f the credit will be disbursed in compliance with the stipulated single tranche release conditions. Once the Bank’s Board approves the credit and at the request o f the Borrower, IDA will disburse the proceeds o f the credit into an account designated by the Borrower that i s part o f the country foreign exchange reserves account at the Central Bank o f Madagascar. The Borrower shall ensure that upon the deposit o f the Credit into said account, an equivalent amount i s credited in the Borrower’s budget management system, in a manner acceptable to the Bank. The Borrower will report to the Bank on the amounts deposited in the foreign currency account and credited in local currency to the budget management system. If the proceeds o f the credit are used for ineligible purposes (i.e. to finance goods or services on the standard negative list), as defined in the Development Credit Agreement, IDA will require the Borrower to promptly upon notice from IDA, refund an amount equal to the amount o f said payment to IDA. Amounts refunded to the Bank upon such request shall be cancelled. The administration o f this credit will be the responsibility o f the Ministry o f

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Finance. IDA will have access to: i) the Auditor General (Chambre des comptes) audit report on public accounts and; ii) the annual financial statements o f the Central Bank audited in accordance with International Auditing Standards.

PRIOR ACTIONS FOR PRSC 2 TRIGGERS FOR PRSC 3 Governance Public Financial Management

Implementation o f the National Education for Al l (EFA) on track. Update national policy for health.

Budget Formulation

Implementation o f National EFA Plan on track.

Budget Execution

Procurement

Accountability

Decentralization ~~ ~

customs

Human and Material S Education

Health

Nutrition

Water Supply

Satisfactory implementation o f the 2004 Priority Action Plan for public financial management reforms.

Budget for 2005 allocates greater share o f resources to PRSP priority sectors relative to 2004, wi th adequate funding allocated to key priorities (such as education, health, nutrition). Monthly accounts produced by the 15" o f the following month in Tamatave, where the transitional financial management system i s fully operational.

Final accounts for 2003 prepared by the Treasury. Establish the new procurement oversight institution ("Autoritk de Rkgulation des Marches Publics")

Projet de l o i de Rkglement for 2002 and 2003 sent to the Auditor General.

Adopt a time-bound action plan for 2005 for customs reform and start implementation. writv

Satisfactory implementation o f Priority Action Plan for 2005.

Budget for 2006 allocates adequate resources to PRSP priority sectors.

Monthly accounts produced by the 15'h o f the following month in the five regional treasuries and central treasury where the transitional financial management system i s fully operational.

New Procurement Code applied, Procurement Oversight Institution, procurement entit ies in the sector ministries, and the Appeal system operational.

Increase resource allocation for the communes Satisfactory implementation o f customs action plan.

Introduction o f Medium Term Expenditure Framework for the health sector commencing in C Y 2005. Creation o f National Council for Nutrition and establishment o f the secretariat (Office National de Nutrition) and appointment o f i t s coordinator. The Directorate o f Water and Sanitation in Antananarivo and the six decentralized departments in the provinces have started to adequately staff and equip themselves to implement successfully the "Water for All"

The Ministry and i ts main partners begin implementation o f the recommendations o f the sector review in the program budget 2007-2009

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Implementation

163. The responsibility for implementing the PRSC program in Government rests with the Ministry of Economy, Finance and Budget. This represents a change since the Vice Prime Minister’s office was dissolved in March 2005. The Government has continued to take the lead in updating the program policy matrix, and the Ministry o f Economy, Finance and Budget coordinated inputs from all the relevant ministries to update the policy matrix.

B. ENVIRONMENTAL ASPECTS

164. The proposed PRSC 2 i s a development policy credit in support o f a broad program o f policy and institutional reforms, for which the environmental requirements o f OPBP 8.60 apply. The PRSC 2 program does not pose any significant environmental impacts. The Bank‘s overall strategy has focused on further strengthening o f the Government’s legislative and institutional capacity to address environment and natural resource management.

165. The Government o f Madagascar adopted the National Environment Action Plan (NEAP) in 1989 to give greater coherence to efforts to manage the natural environment. To this end, a Policy has been developed in order to mainstream environment within economic development. The Policy i s well defined in the Charter o f Environment published in December 1990 and modified in July 1997 and in the Environment Policy Letter adopted in August 2003. This Policy i s to be implemented throughout the NEAP designed for fifteen years in three phases. The institutional and regulatory framework have been put in place and implemented during the IDA supported Environment Project 1 through the publication o f the first MECIE Decree (National Environment Impact Legislation) in 1992. This legislation was revised in 1995, 1999 and finally in 2003 to integrate national natural resources management and economic growth strategies. The IDA supported Environment Project 2, included a focus on integrating the environment program into national development. Several sectoral policies have been developed and implemented.

166. The third environment project approved in April 2004 aims to consolidate the gains from the f i rst two phases. It aims to conserve and value the importance and quality o f the natural resources to allow sustainable economic growth and better quality o f life. Special emphasis i s placed on improving governance, particularly in the forestry sector through: (i) institutional reforms aimed at separating policy- making and regulatory functions from operational responsibilities; (ii) improvement o f the forest exploitation and adjudication system; and (iii) intensification o f tavy and bush-fire control measures. Th is would ensure an adequate coherence o f sector legislation with the environmental legal framework as reflected in both national legislation, as well as Madagascar’s participation in international conventions and treaties. In addition, the role o f national institutions in charge o f managing natural resources and environmental impact, mainly between the Ministry o f Environment and Water and Forest and the National Office o f Environment (ONE), has been clarified. This would ensure better management o f standards such as cost effectiveness, quality o f services, speed o f EA process. Among other decisions, i t has been agreed to establish a one stop shop in ONE for the evaluation o f EIAs and the issuance o f environmental permits. Moreover, decentralization o f legislation process i s underway with an important information campaign and a capacity building program. Finally, for the sake o f good governance and to provide a strong signal to the private sector, these institutions will aim to ensure that all public investments effectively comply with the existing legislation. The policy i s flexible and i t s implementation progressive. Sector investments, such as investments in water and sanitation will be carried out in line with an implementation framework and a manual o f procedures which takes into account the experience of IDA-financed projects (PAEPAR and FID) and the national environmental impact legislation. The manual o f procedures incorporates the environmental impact framework tested in the latter projects, which was found satisfactory.

.

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c. R I S K S

167. The main risks to the implementation of the poverty reduction strategy include:

First, Madagascar remains vulnerable to extemal shocks including cyclones and increase in intemational prices o f key commodities, such as o i l and rice, which regularly undermine growth and poverty reduction. The Bank i s finalizing a Risk and Social Protection Review to assess needed r i s k prevention and mitigation strategies for the extemal shocks Madagascar faces. The Bank has also modified procedures for i t s Community Development Project (FID IV) to allow the project to respond to emergencies rapidly. In addition, to contain the damage from cyclones, the construction o f schools, and re-construction o f damaged infrastructure i s anti-cyclonic. The Government has set up a Cellule de Prevention et de Gestion des Urgences (CPGU) to manage, co-ordinate and monitor programs to prevent crisis, and manage them better when they do occur. Finally, the Government has made rice an important policy focus, focusing on the entire rice value chain (production, distribution, marketing), and i s also looking at policy options to better stabilize prices. Second, political stability remains key for implementing the PRSP. The President’s popularity remains high, but with the next elections in 18 months from now (December 2006), short-term election objectives could dominate the policy agenda, potentially affecting the implementation o f the PRSP. The Bank i s focusing on transparency and trylng to change the culture o f granting ad hoc privileges through the govemance project and WBI capacity building support. The Bank i s assisting the Government achieve i ts development objectives, and has accelerated disbursements o f i t s portfolio starting FY03. Third, maintaining a stable macroeconomic environment remains critical, and managing the high inflation in the face o f continued high intemational prices could prove challenging and affect macro-economic and social stability. The IMF monitors the macro-economic program regularly. Fourth, slow progress in implementing public finance reforms could hamper service delivery. Budget execution has been unpredictable, with stop-and-go cycles. The unreliability o f revenue forecasting and delays in donor aid flows has meant that expenditures adjust to revenue shortfalls, thereby hampering effective budget execution. The Government has prioritized i t s policy actions in public finance, through the production o f annual Priority Action Plans, starting in 2004. The Government has also started implementing a customs reform plan. But, if progress on implementation o f these plans i s slow, the impact on poverty reduction would l ikely not materialize. To mitigate this risk the Bank i s continuing to support the reforms proposed in the areas o f public finance, budget programming, procurement, institutional development and capacity building. The Govemance technical assistance project i s the key operation in the Bank’s strategy that will allow Madagascar to increase i ts capacity to absorb extemal aid and use it effectively in the pursuit o f i t s PRSP objectives. In addition, ongoing operations will continue to put a heavy emphasis on institutional strengthening, training and capacity building. Fifth, the political leadership has a clear vision o f reform and i s strongly committed to moving the PRSP agenda forward. Yet, implementation o f these reforms relies on c iv i l servants at different levels. But implementing and delivering on the Government’s ambitious reform program could be l imited by weak capacity. As noted above, to mitigate this risk, the Bank i s supporting institutional strengthening, training and capacity building. Sixth; sustainable poverty reduction will depend on maintaining growth at high levels, attracting private investment into the labor-intensive manufacturing sector and into ago- businesses with spread effects to rural areas, as outlined in Madagascar Naturellement. The

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erosion o f trade preferences, and the expiration o f the MFA i s expected to impact the growth o f the textile sector in the EPZ. Failure to reestablish the confidence o f private sector investors in the Malagasy economy, which was affected by the political and economic crisis in 2002, would undermine the prospects for high growth and poverty reduction. As o f today, the FDI remains low at 1 percent o f GDP, half the value as in 2001. The perception o f conflict o f interest o f elected and public officials could negatively impact on the investment climate. Risk mitigation includes the acceleration o f reforms to improve competitiveness as outlined in the Integrated Framework report and active participation in trade negotiations (EU, WTO, regional), and assisting Madagascar in i t s quest to diversify i t s sources o f growth, as has been outlined in the recently completed Development Policy Review. The ongoing Investment Climate Assessment will provide recommendations on improving Madagascar’s competitiveness and the Bank will continue to assist the Government prioritize and implement reforms to improve the investment climate. The governance agenda continues to support enhanced accountability and transparency. Finally, as mentioned in the Joint Staff Assessment (JSA), Madagascar’s PRSP i s ambitious and i ts objectives can only be reached if: (i) key reforms take place; (ii) significant institutional strengthening occurs; (iii) if donors align their support to the PRSP; and (iv) if the required financial support form the donor community i s forthcoming. Several actions including the Government’s efforts to strengthen institutions and stay the course on key reforms will help mitigate this risk. In addition, as noted before, the donor community has already started to intensify i t s efforts at coordinating assistance programs, harmonizing disbursements and procurement procedures and developing common programmatic approaches centered around the PRSP. The donor community i s increasing i t s level o f financial aid to Madagascar, and i s also providing technical assistance and support for capacity building for sustainability. Co- ordination continues to be enhanced by focusing on implementation and results, using the PRSP monitoring framework.

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MADAGASCAR

SECOND POVERTY REDUCTION SUPPORT CREDIT

ANNEXES

Annex 1: Chairman’s Summing Up for Sixth Review under the PRGF Program ................................ 61 Annex 2: Policy and Institutional Reform Matrix ................................................................................. 63

Annex 4: Madagascar at a Glance ......................................................................................................... 86 Annex 5: MadagascarKey Economic Indicators .................................................................................. 93

Annex 3: Letter o f Government Policy ................................................................................................. 80

Annex 6: Monitoring Indicators Annex ................................................................................................ 95

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Annex 1: Chairman’s Summing Up for Sixth Review under the PRGF Program 05/11/2005 11:OS Fhx 202 623 5 3 2 1 S AFRICAN I Boo1 Dmvqlopd O a k 5111mlW - 1201 PM C u m t CLassbWn: FOR OFflCW. USE ONLY

User MNGCHOYHING

W c m OF TNTERNATIONAL MONETARY FUND AND FOR OFFICIAL USE ONLY

February 22,2005

The Acting Chair’s Summing Up Republic of MadagascarcSixth Review

Under the Poverty Reduction and Growth Facility Executive Board Meeting 05/16

February 18,2005

Executive Directors commended the Malagasy authorities for the broadly successM implementation in 2004 of their PRGF-supported economic program, despite th, = severe extmal shocks and capacity constraints. NolabIy, efforts to stabilize the exchange rate have proved successful, economic growth has been sustained, and fiscal discipline has been broadly maintained. Nevertheless, the economy remains fragilq and vulnerable to shocks. Directors underscored that the key policy challenges going forward will be to safeguard macroeconomic stability and to accelerate structural reforms with a view to diversifying the economy’s production base and strengthening i t s competitiveness.

Directors regetted the fiscal expenditure slippages that occurred at the end of the year, and noted with concern that innation had continued to increase Ihroughau~. 2004. Directon welcomed the authorities’ commitment to tighten fiscal and monetary policies to control inflationary pressures in 2005. They underscored that the planned fiscal strengthening wil l call for additional revenue mobilizntion efforts and strengthened budgetary execution add control. With regard to revenues, Directors highlighted the need to sigaXleadtly increae Madagascar’s relatively low revedue ratio. They welcomed the decision to rescind the remaining tax and tariff exemptions and postpone the reduction in the VAT rate, but stressed that continued efforts to strengthen tax administration aud broaden lhe base will be needed to build on the recent improvements in customs collection.

With regard to public expenditures, Directors welcomed the prudent policies envisaged for this year, and stressed the need to protect spending in the priority sectors for poverty reduction, in particular those central to the achievement of the Millennium Development Goals. Directors emphasized the importance of pressing ahead quickly with reforms ofthe public expenditure management system aimed at improving the q,uality and efficiency of public spending by addressing weaknesses in budget preparalion, expenditure control, and treasury operations.

the authorities’ objective o f a sharp reduction in inflation by the end of tfie year. However, the authorities should continue to monitor monetary conditions closely, and take prompt action as needed. Directors welcomed ongoing efforts to improve liquidity forecasting and management, but saw scape for further strengthening monekuy policy implemmtihon, in particular through the development of the central bank’s monetary policy inst”@. The

Directors considered that the proposed monetary stance for 2005 should help achieve

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Annex 3: Letter of Government Policy

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UNOFFICIAL TRANSLATION OF THE FRENCH ORIGINAL

Mr Paul Wolfowitz President The Wor ld Bank 1818 H Street NW Washington D C 20433, U S A

Dear Mr Wolfowitz,

1. The Republic of Madagascar developed i t s Poverty Reduction Strategy in the end o f July 2003 fol lowing a broad-based participatory process. The document was conveyed to your institution, as we l l as to the International Monetary Fund in August 2003, and approved by your Executive Board on November 14, 2003. This document was updated in a broad based participatory workshop which was held on June 2 and 3, 2005. The updating essentially aims, on the one hand, to take into account changes in the international environment and in the Malagasy economy and, o n the other hand, to integrate a longer term vision which was lacking in the previous document.

2. The strategic axes o f the Poverty Reduction Strategy Paper (PRSP) however remain the same and include: 1) restoring the Rule o f Law and good governance, 2) fostering and promoting a very broad-based economic growth, 3) fostering and promoting human and material security, as wel l as broadened social protection schemes. A three year implementation program o f the strategy is expected to reduce poverty to 68% by 2006.

3. PRSP implementation started in July 2003, and continued substantially throughout 2004, taking advantage o f the opportunity provided by the budgetary framework. Thus, the 2004 Budget was as much as possible aligned to the PRSP priorities and emphasized the support to actions envisioned to enhance governance and public finance management, education, health, and transport. The ultimate goal from these measures would be establishing an investment enabling climate and ensuring a better opportunity for enhancing service delivery to the population, and in particular to the poor.

4. In the area o f governance, 22 regions stipulated by the constitution were created to coordinate the actions by communes which would ensure broad based development, and to support them through developing better synergy. Such goals are pursued through the development and the implementation o f regional development plans, most o f which are currently being finalized.

5. In the same area, the fight against corruption has become more effective. The legislative and institutional framework has undergone dramatic change. Several new laws have been adopted by the Parliament. These are namely the “anti-corruption” law and the law relative to money laundering. A bill o n political parties relating to new rules o n their funding has been

86

submitted to Parliament for adoption. The Government has decreed several texts for implementing such laws. At the institutional level, the Independent Anti-Corruption Bureau (BIANCO) has been operational for six months. I t is, among others, in charge o f undertaking surveys and audits among sensitive public services, and conducts investigations starting from corruption related complaints which are addressed to them. BIANCO i s also in charge o f receiving asset declarations from elected and senior officials in the public administration.

6. For more transparency in the actions by the mining, fishery, and forest sectors, the Government i s publishing on a biannual basis the l i s t o f operating permit holders, as well as that o f fees collected from each operator. Within the Justice sector, anti-corruption strategies have been developed and implemented through strengthening internal control, in particular inspections in jurisdictions, and enforcing service standards in both c iv i l and commercial courts. In addition, as well as the 2004 promulgation o f the law instituting the Supreme Court, administrative and financial courts have been set up in the autonomous Provinces. The mission o f such courts i s to deal with litigations and disputes opposing the Administration and the non public sector.

7. With regard to public finance, the 2004 priority action plan for reforming public finance has been substantially implemented. Such a plan relates to enhancing revenues and streamlining the expenditure circuit. Details on the achievement o f both points are provided in paragraphs 7 and 8. Regarding revenues, the f i rs t goal in the Government i s to increase efficiency in tax administration; fifty (50) tax centers have been computerized. Under the same view, the software SYDONIA ++ i s installed and operational and a one stop shop i s working in some customs offices. Service standards which are aligned with the international standard are gradually being put in place.

8. With regard to expenditures, several important changes occurred during 2004 regarding public finance. Those changes brought innovation as regards to the budget chain and procedures. Following texts have been issued: (i) the organic law on public finance, (ii) the new procurement code, (iii) texts reorganizing the diverse control and verification bodies, (iv) texts merging the functions o f “sous ordonnateurs” (budget officers) and credit l ine managers. In addition, an Integrated Scheme for Managing Public Finance (SIGFP) i s put in place and partially operational. Such a scheme shall cover the operations on revenues and expenditures and integrate the customs administration, the tax administration, the Treasury, the Budget and the CDE. I t would enhance budget execution and monitoring. For the time being, only the Toamasina Treasury, where the system i s fully operational, can produce monthly accounts within less than 15 days following the end o f the month.

9. Considerable progress has been made in the preparation o f final accounts and Budget Execution Laws (“lois de rbglement”). Therefore, the draft 1999 Budget Execution Laws wil l be submitted to Parliament very soon. The draft Budget Execution Laws for 2000, 2001, 2002, and 2003 have been deposited at the Auditor General’s office. The Auditor General i s reviewing the drafl Budget Execution Laws for 2000, 2001, and 2002 and i s planning to send to the Government the draft reports on 2000 and 2001 by end o f June 2005. At such a pace the draft Budget Execution Laws for 2000, 2001, 2002, and 2003 wil l be ready for submission to Parliament by the end o f the year 2005. The 2003 Final Accounts wil l be submitted to the Auditor General’s office end o f June 2005.

87

10. The decree o n setting up the Authority for regulating Procurement was published and most implementing texts and the standard documents for implementing the new Procurement Code are finalized end o f June 2005. The new Code is expected to be fully operational by the beginning o f the year 2006.

1 1. A substantial increase in the budget allocated to the road sector reflects the intention by the Government to materialize its support to investment and to stimulate shared growth. Thus, due to a 20% increase in the budget to the transport sector, the accessible national road network has substantially increased and rural paths have been built or rehabilitated to enhance the movement o f people and o f goods. The works for rehabilitating and enhancing important ports (Toamasina, Mahajanga, and Toliary) are currently ongoing to reduce business transaction costs and enhance competitiveness. Finally, Nosy-Be and Antananarivo-Ivato airports have been enlarged to meet tourism sector needs.

12. Other economic reform measures can be summed up as follows : (i) pursuing the liberalization o f economic and trade activities through an adopted mechanism for setting the domestic o i l prices, (ii) promoting foreign direct investment and putting in place incentive tax and customs measures, (iii) identifying economic growth poles which integrate free zone enterprises, mining, fishery, tourism, and rural activities, (iv) adjusting the monetary pol icy and the exchange market to the development o f the context.

13. In the social sector, the main activities relate to implementing the Education For All (EFA) Plan through the provision o f school kits and manuals to al l primary education pupils, hiring teachers, training 1,900 teacher trainees and building 1,667 classrooms. In the health area, emphasis was put on streamlining the expenditures in the sector. Therefore the survey on the national health accounts has been launched while the implementation o f District Development Plans and Annual District Work Plans received support in 2004.

14. In the area o f water, nutrition and social protection, the main achievements for the year 2004 were on the study / building and rehabilitating o f water supply infrastructure (drilling, wells, . . .), the study / building and rehabilitating o f water conveyance infrastructure (tanks, pipelines, distribution pipes, pumps,. . .) and o n the operationalization o f the National Authority for Water and Sanitation (ANDEA).

15. Due to the implementation o f these reforms, public finance has been improved through increased tax revenues end enhanced expenditure execution. Tax pressure has moved from 10.0% in 2003 to 10.9% in 2004. Despite considerable shocks (cyclones, o i l price rise, depreciated rate o f the Malagasy Franc and a fairly high inflation) growth remained robust in 2004 with a 5.3% growth rate. Such growth originates namely from the high performance in free zone enterprises, and from the tourism sector, as we l l as from a strong increase in public investment.

16. For the 2005/2006 period, the second year for effective implementation o f PRSP, the Government intends to consolidate and refine the measures which have been already embarked upon, namely in the areas o f public finance, justice, and fight against corruption, development o f

88

private sector and o f social sector. Such measures will in the short term contribute to achieving a 6.3% growth for 2005 and 7% for 2006. As it is essentially derived through a noticeable increase in building and public works activities, such growth wil l double j o b creation in the sector. In the primary sector, the orientation o f the Government actions towards rural development will stimulate agricultural production, namely that o f rice through expanded cultivated areas or scaled up output. Such an economic growth should allow the Government to expect increase in tax revenues which would go from 1 1.4% in 2005 to 12.1 % in 2006. The budgetary deficit excluding grants is projected at 9.8% o f GDP in 2005 whereas the foreign current deficit will be about 8%.

17. Regarding public finance, the 2005 budget allocation was better aligned to the PRSP priori ty sectors. Therefore allocation toward these sectors continues to be strengthened, namely to Education (+25%), Health (+36%), and Transport (+78%). For nutrition, the Government approved a budget o f 25 mi l l ion dollars for the 2005 program, which accounts for considerable increase compared to the 2004 budget. The Government has launched the 2005 Priority Action Plan and is being implemented. SIGFP i s planned to be operational in provincial capitals in the 2“d semester o f 2005, and would allow real time monitoring o f the budget execution. Merging the credit l ine manager and “sous-ordonnateur” (budget officer) functions i s effective under the execution o f the 2005 budget in order to expedite and enhance the budget execution. The Government would grant particular attention to controlling public finance and strengthening the external control by the Parliament, the jurisdiction control by the Auditor General and the internal control through the operationalization o f the General Inspection o f Finance.

18. With support from WCO, the Government i s specifying its overall customs reform strategy. A priori ty action plan for the year 2005 i s being developed and will be validated by mid June 2005. This plan wil l strengthen the ongoing actions and focus o n three strategic axes: increasing customs revenues, enhancing customs service standards (in particular, reducing clearance period), and anti-comption efforts. In parallel the Government envisions important involvement by the private sector and wil l undertake a feasibility study for the “Tradenet” system.

19. The measures for encouraging private investment as o f the second semester o f 2005 wil l mostly be on developing the rural sector. They wil l focus o n putting in place new mechanisms for funding essential agriculture infrastructure such as hydro-agricultural networks. For encouraging investment and enhancing productivity in the agricultural sector, the Government wil l set up a new land tenure pol icy and a new extension service pol icy for farmers. The currently ongoing works on rural roads should facilitate the f low o f goods and access o f producers to more remunerating markets. Finally, the Government would grant particular attention to monitoring the setting up o f the integrated framework program for developing Madagascar integration into international trade.

20. In addition to consolidating actions in the education and health sub sectors, the government would deploy the Social Protection Strategy. In education, the technical works on the Plan for streamlining and managing human resources are completed. The consultant report including a proposal o f several scenarios i s currently available and the MENRS has to proceed to the second stage, i.e., establishing an implementation plan. In nutrition, the National Council for Nutr i t ion

89

(CNN) and the National Nutrition Office (0") were established in November 2004. ONN operationalization is wel l on track with the appointment o f its Coordinator.

2 1. Regarding health, the National Health Policy i s being revised and will be finalized by end o f June 2005. A Medium Term Expenditure Framework has been introduced in the 2005 budget. The future framework wil l better indicate the means to achieve the Mil lennium Development Goals (MDG). Regarding social protection, the 2005 budget is funding actions planned under a strategic framework.

22. For rural water supply, capacity building in the Directorate for Water and Sanitation (DEA) in Antananarivo and o f the six Provincial Directorates i s ongoing through provision o f equipment and adequate human resources. Aside from vehicle delivery planned in the end o f June 2005, al l other equipment have been delivered and assigned to the directorates involved. The decision o n the hiring o f staff is confirmed and staff would be deployed by end o f July 2005.

23. The Malagasy government i s determined to achieve its goal o f substantial poverty reduction planned in the PRSP. W e rely on the support o f the international community, and in particular f rom the International Development Association, to complement the resources needed for attaining this goal.

90

Annex 4: Madagascar at a Glance

(% of GDPJ Agriculture 35.3 23.8 29.2 28.8 Industry 13.0 9.7 15.3 16.0

Manufacturing 11.2 8.0 13.7 14.2 Services 51.7 66.5 55.5 55.2

Private consumption 86.2 89.8 81.9 81.4 General government consumption 9.8 6.9 9.2 9.2 Imports of goods and services 17.9 29.6 32.1 44.9

POVERTY and SOCIAL Madagascar

2004

GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

Average annual growth, I99844

Population (%) 2.9 Labor force (%J 3.2

Most recent estimate (latest year available, 1998-04) Poverty (% of population below national poverty line) Urban population (% of total population)

Infant mortality (per 1,000 live births) Chiid malnutrition (% of children under5) Access to an improved water source (% ofpopulation) Illiteracy (% ofpopulation age 153)

Population, mid-year (millions) 17.3 290 5.0

70 31 55 84 40 25 32

102 Male 104 Female 100

Life expectancy at birth (yearst

Gross primary enrollment (% of school-age population)

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1984 1994

GDP (US$ billions) 2.9 3.0 Gross domestic investmenffGDP 8.6 10.9 Exports of goods and serviceslGDP 13.3 22.0

Gross national savings/GDP 2.1 1.4

Current account balance/GDP -6.0 -9.4 Interest paymentdGDP 1.3 0.7 Total debtfGDP 73.0 138.3

Present value of debffGDP Present value of debffexports

Gross domestic savingslGDP 4.0 3.3

Total debt servicekxports 30.3 9.3

1984-94 199444 2003 (average annual growth) GDP 1.2 2.7 9.8 GDP per capita -1.5 -0.3 6.8 Exports of goods and services 4.0 0.7 45.4

Growth of Investment and GDP (%) loo

50

0

-GDI

Sub- Saharan

Afrlca

703 490 347

2.3 2.4

36 46

103

58 35 87 94 80

2003

5.5 17.9 23.1 8.9

13.0

-4.9 1.1

83.8 9.3

43.8 187.6

2004

5.3 2.6

-6.0

Low- Income

2,310 450

1,038

1.9 2.3

30 58 82 44 75 39 92 99 85

2004

4.4 24.4 29.9 9.4

15.9

-8.5 1.4

108.6 8.7

56.3 186.2

2004-08

6.5 4.0 9.3

Development diamond'

Life expectancy

I T GNI Gross Per primar) capita enrollmenl

Access to improved water source

Madagascar Low-income Q~OUD

Economic ratios.

Trade

i

Indebtedness

-Madagascar Low-income group

Madagascar at a Glance (continued) PRICES and GOVERNMENT FINANCE

Domestic prices I% change) Consumer prices Implicit GDP deflator

Government finance (% of GDP, includes current grants) Current revenue Current budget balance Overall surplusldeticit

TRADE

(US$ millionsf Total exports (fob)

Coffee Vanilla Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (1 995=100) Import price index (1995=100) Terms of trade (19951100)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ millions) Conversion rate (DEC, locallUS$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Official grants Official creditors Private creditors Foreign direct investment Portfolio equity

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

Composition of net resource flows

1984

10.3

15.1 8.1 1.7

1984

337 141 53 42

41 1 48 98 68

99 70

140

1984

390 513

-1 22

-132 77

-1 77

184 -7

68 576.8

1984

2,147 25

251

123 3 3

68 160

3 9 0

45 30 2

29 4

24

1994

39.1 41.7

9.1 -4.3

-1 1.2

1994

447 86 63

191 642 79 72

143

91 93 98

1994

653 874

-221

-146 90

-277

269 8

62 3.082.7

1994

4,096 14

1,021

65 5

13

116 56 -5 6 0

53 60 9

50 8

42

2003

-0.8 2.8

12.8 1.5

-6.8

2003

941 4

195 640

1,521 96

213 208

136 92

148

2003

1,261 1,752 -49 1

-80 303

-268

285 -1 7

397 6,191.6

2003

4,590 0

1,823

119 0

37

186 147

-8 13 0

90 195 24

171 13

158

2004

26.9 14.3

15.7 3.7

-5.8

2004

920 6

108 653

1,634 83

204 300

150 98

152

2004

1,304 1,956 -651

-81 364

-369

386 -1 7

467 9,354.1

2004

4,734 0

2,103

114 0

42

251 259 4 44 0

306 27

279 15

264

I Inflation 1

I -GDPdeflator -CPI 1

1.800 T

1,Bw 1,400 1,200 1,ooO

800 Bw 400 200

0 98 69 w 01 02 03

E Exports Imports

0 1

-2 3

-4

5 e 7

-8 8

F,07 G:231

0: 128 c:202

A - IBRD B - IDA D - Other multilateral F . Private C - IMF

E - Bilateral

G - Short-term

92

Annex 5: Madagascar Key Economic Indicators

Gross domestic producta 100 100 Agriculture 29 32 Industry 15 14 Services 57 54

Total Consumption 85 92 Gross domestic fixed investment 18 14

Government investment 7 5 Private investment 11 9

Exports (GNFS)b 29 16 Imports (GNFS) 32 23

Gross domestic savings 15 8 Gross national savingsc 17 8

Gross domestic product 4530 4397 Memorandum items

(US$ mil l ion at current prices) GNI per capita (US$, Atlas method) 260 230

Real annual growth rates (%, calculated from 1984 prices) Gross domestic product at market prices 6.0 -12.7 Gross Domestic Income 9.3 -13.6

Real annual per capita growth rates (%, calculated from 1984 prices) Gross domestic product at market prices Total consumption Private consumption

Exports (GNFS)b Merchandise FOB

Imports (GNFS)b Merchandise FOB

Resource balance N e t current transfers Current account balance

Net private foreign direct investment Long-term loans (net)

Balance of Payments (US$ millions)

Official Private

Other capital (net, incl. errors & ommissioi Change in reservesd

Memorandum items Resource balance (% o f GDP) Real annual growth rates ( YR84 prices)

Merchandise exports (FOB) Primary Manufactures

Merchandise imports (CIF)

3 .O 1.9 0.9

1317 965

1462 950

-146 146 -59

93 136 108 28

-72 -98

-3.2

-2.1 0.1

-4.6 14.4

-15.2 -10.1

-9.5

730 499

1029 620

-299 99

-27 1

9 85

149 -64 124 53

-6.8

-46.7 -23.9 -59.8 -26.7

93

100 29 15 55

91 18 8

10

23 32

9 13

5474

290

9.8 13.4

6.8 10.4 9.5

1261 94 1

1752 1131

303 -49 1

-268

13 146 147

-1 126 -17

-9.0

40.1 13.0 75.9 73.7

100 29 16 55

91 24 9

15

30 45

9 16

4359

300

5.3 6.1

2.6 -3.5 -3.7

1304 920

1956 1314

3 64 -65 1

-369

44 283 259 24 58

-17

-14.9

-11.0 -25.7 -11.9

0.5

100 28 16 56

88 25 11 14

30 43

12 17

494 1

290

6.4 5.3

3.9 -2.8 -3.0

1501 1062 2134 1457

342 -633

-380

74 313 182 131 38

-46

-12.8

59.7 75.6 49.4 2.9

100 27 16 56

87 25 11 14

30 41

13 18

5381

290

7.0 7.3

4.4 1.8

-0.7

1625 1132 2211 1498 -585 350

-322

81 337 148 189 36

-132

-10.9

2.5 -2.4 4.9 4.7

100 27 17 56

86 24 11 13

30 40

14 18

5819

310

6.3 6.3

3.7 2.2 1.9

1749 1229 23 17 1567

358 -568

-300

87 339 167 172 20

-147

-9.8

6.2 5.8 6.0 6.2

Annex 4: Madagascar Key Economic Indicators (continued)

Public finance (as YO of GDP at market prices)e Current revenues 11.6 Current expenditures 10.3 Current account surplus (+) or deficit (-) 1.3 Capital expenditure 8.1 Foreign financing 4.6

Monetary indicators M2/GDP 24.7 Growth o f M2 ("h) 24.4

19.1 total credit growth (%) Private sector credit growth I

Price indices( YRS4 =loo) Merchandise export price index 113.4 Merchandise import price index 108.8 Merchandise terms o f trade index 104.1 Real exchange rate (US$/LCU)f 57.8

Real interest rates Consumer price index (% change) GDP deflator (% change) 7.3

7.4

8.8 10.3 -1.5 5.3 5.0

26.2 7.1

-10.2

110.0 113.6 96.8 62.5

15.8 15.3

12.8 11.4 1.5 8.2 5.4

25.1 8.2

96.9

148.0 116.3 127.3 65.6

-0.8 2.8

15.7 11.9 3.7 9.5 7.0

24.3 16.4

-466.7

162.7 124.3 130.9 67.1

26.9 14.3

14.4 10.8 3.7

10.9 7.9

23.8 19.2

143.6

117.5 128.1 91.7 66.9

5.0 14.6

14.8 10.4 4.4

11.2 7.5

24.2 14.5

149.4

122.3 128.4 95.2 67.3

5 .o 4.9

15.1 10.7 4.4

10.7 6.7

24.9 14.5

128.8

125 .O 126.1 99.1 67.7

5.0 4.9

a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use o f IMF resources. e. Consolidated central government. f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.

94

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