International Monetary Fund (IMF) Executive Board Completes the Third Review Under the Extended Credit Facility, Approves $32.6 Million Disbursement, and Concludes the 2022 Article IV Consultation with the Republic of Madagascar
The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation  and completed the third review of the Extended Credit Facility (ECF) arrangement with the Republic of Madagascar. The completion of the review enables the disbursement of SDR 24.44 million (about US$32.6 million), usable for budget support, bringing Madagascar’s total disbursements under the arrangement to SDR 146.6 million (about US$195.5 million).
Since the last Article IV consultation in 2019, the Malagasy authorities have implemented several key policy recommendations, but ambitious reforms remain hampered by limited capacity and weak governance. In a context of lower global growth and high international prices, Madagascar’s growth is projected to stall at 4.2 percent in 2023 while annual average inflation would accelerate above 10 percent. Risks from the domestic political situation, low COVID-vaccination rates and adverse global developments cloud the outlook. On the upside, the implementation of the full reform agenda envisaged in the Plan Emergence Madagascar would have significant effects on productivity and growth.
Following the Executive Board discussion, Ms. Antoinette Sayeh, Deputy Managing Director and Acting Chair, made the following statement:
“In an adverse global environment and following a series of climate shocks, Madagascar’s performance under the Fund-supported program has been mixed. The implementation of structural reforms is gaining momentum but needs to continue.
The gradual fiscal consolidation envisaged in the 2023 budget is appropriate. Identifying adequate tax policy measures, such as rationalizing tax exemptions, will be key to create more fiscal space for social spending and public investment. A properly designed revision of the mining code and mining taxation reform could yield significant revenue while boosting growth and exports. Further efforts are needed to strengthen public investment management and improve spending efficiency.
Going forward, the full implementation of the agreement reached with oil distributors in December 2022 and the gradual implementation of an automatic fuel pricing mechanism would help to mitigate fiscal risks. Strengthening social safety nets to protect the most vulnerable households and boosting resilience to climate shocks are important steps. Restoring the financial situation of state-owned companies and improving their governance is essential to reduce the need for fiscal transfers.
The authorities should further their efforts to enhance budget credibility and fiscal transparency. Recently adopted public financial management reforms are expected to contribute to better budget execution in 2023. Measures to enhance the legal framework for public procurement contracts would be welcome. The consolidation of the Cour des Comptes’ autonomy will help improve external oversight of public finances. The effective enforcement of the anti-corruption framework is crucial to strengthen accountability and increase public trust in institutions.
The successful transition to interest rate targeting hinges on the central bank’s capacity to continue the modernization of its framework for monetary operations, macroeconomic forecasting, and policy analysis. The central bank should stand ready to further raise interest rates to contain inflationary pressures and limit its foreign exchange interventions to smoothing volatility and building external buffers. The adoption of a financial stability law would help to strengthen the regulatory and supervisory role of the central bank and further enhance financial stability.
Measures to build resilience to climate shocks, drawing on recommendations from the recent Climate Macroeconomic Assessment Program (CMAP) are important. Efforts to strengthen the emergency response capacity, increase agricultural productivity, improve infrastructure, and develop social safety nets would help to address food insecurity.”
Executive Board Assessment 
Executive Directors agreed with the thrust of the staff appraisal. They welcomed Madagascar’s progress on implementing reforms, although they noted the mixed performance under the Fund-supported program in a challenging environment. While the outlook remains favorable, growth has decelerated, and risks are to the downside. Directors encouraged continued commitment to policies that promote sustainable and inclusive growth and build resilience to shocks, including from climate change. They emphasized the importance of IMF capacity development to support reform implementation.
Directors agreed that a more gradual fiscal consolidation path was appropriate to help navigate a complex global and domestic environment. They emphasized the need to mobilize domestic revenue to finance higher social and investment spending, preferably by removing costly and distortionary tax exemptions. Noting the improvement in social spending execution in 2022, Directors encouraged continued efforts to modernize public financial management and improve budget execution and transparency. They underscored the importance of further steps to enhance the legal framework for public procurement contracts, including by requiring the identification of ultimate beneficial owners. Directors welcomed the settlement of cross-liabilities with oil distributors and urged strong efforts to restore the financial position of loss-making state-owned enterprises to further reduce fiscal risks.
Directors stressed the urgency of improving governance and accountability to improve trust in institutions. They underscored the importance of effective enforcement of the anti-corruption framework, including by providing adequate human and financial resources to anti-corruption agencies and upgrading the AML/CFT framework.
Directors encouraged the central bank to stand ready to further raise interest rates to contain inflationary pressures as needed. They recognized the progress in reforming the monetary policy framework to transition to interest rate targeting. Directors noted the steps taken to enhance financial stability and highlighted that the adoption of a financial stability law would help to strengthen the central bank’s regulatory and supervisory role and further enhance stability.
Directors welcomed efforts to build resilience to climate shocks, drawing on recommendations from the recent Climate Macroeconomic Assessment Program (CMAP). They agreed that improving food security would require strengthening the emergency response capacity, increasing agricultural productivity, improving infrastructure, and developing social safety nets.
It is expected that the next Article IV consultation with the Republic of Madagascar will be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.
 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board
 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing-up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm
Distributed by APO Group on behalf of International Monetary Fund (IMF).