Republic of Madagascar: Economic Development Document
International Monetary Fund.
IMF Staff Country Reports
Economic Development Documents are prepared by member countries in broad consultation with stakeholders and development partners. They describe countries' macroeconomic, structural, and social policies in support of growth and poverty reduction, as well as associated external financing needs and major sources of financing. This document on Madagascar is being made available on the IMF website by agreement of the member country as a service to users of the IMF website. Dear Madam Managing
... r, I am pleased to provide you with the attached Economic Development Document (EDD), which was prepared to support and facilitate the implementation of our National Development Plan (PND) in a changing environment. We expect that this document will also serve to fulfill the requirements in this area associated with completion of the First Review of our ECF-supported program. The EDD describes the underlying causes of poverty in Madagascar, among them the weak economic performance observed in the past several decades; the inadequate inclusiveness of economic growth; the predominance of the subsistence economy at the expense of the money economy, due to the inaccessibility of areas in which production occurs; persistent inflation; the erosion of purchasing power, which has altered the structure of the household consumption basket; and the limited coverage of the social protection system. It focuses primarily on the strategy for poverty reduction and social inclusion, which is predicated on the attainment of strong, sustainable and inclusive growth. Our strategy, as outlined in the EDD, is based on complementary approaches to poverty reduction and social inclusion that include macroeconomic, sectoral, and structural aspects. The strategy also ensures the soundness of the financial system and its contribution to development financing. It furthermore identifies certain sectors -in particular, infrastructure, energy, water and sanitation, and social protection -as national priorities. Moreover, the DDE is also intended to reflect the linkages between our poverty reduction strategy and the economic and financial program supported by the International Monetary Fund. To this end, it includes an implementation plan for the strategy that ensures consistency with the period covered by the Fund-supported economic and financial program. The DDE also complements the PND, and supports the implementation of the PND in areas that have positive and direct impacts on poverty reduction: increased revenue, efficient allocation of public resources, monetary regulation and inflation control, access to bank financing, rural development, regional integration, resilience to natural disasters, and expansion of the social protection system. We look forward to collaborating with the IMF to achieve the objectives described in this document. Please accept, Madam Managing Director, the assurances of my highest regard. General Herilanto Raveloharison Minister of Economy and Planning ©International Monetary Fund. Not for Redistribution Madagascar Economic Development Paper ii EXECUTIVE SUMMARY The Economic Development Paper (DDE) describes the strategy adopted by the government to reverse the trend of modest economic performance, deteriorating social conditions, and persistent poverty observed in recent years. The strategy addresses the underlying causes of poverty mentioned above: modest economic performance over the past several decades, inadequately inclusive economic growth, the predominance of the subsistence economy at the expense of the money economy, reflecting the isolation of production areas; land tenure problems and deterioration of hydro-agricultural infrastructure; economic dualism, a cause of economic disjunction; persistent inflation and the erosion of purchasing power; limited coverage of the social protection system; an inefficient financial system that limits access to financing; persistent governance problems; underdeveloped sanitation infrastructure; the adverse impacts of climate change; and repeated political crises. The strategy adopts an approach that combines macroeconomic, sectoral, and structural elements that produce positive, direct impacts for poverty reduction. 1. The chief aim of the fiscal policy is to increase revenue and rationalize budget expenditure in order to provide ample margins to finance priority spending, specifically social and infrastructure spending. The priorities are, first, to expand the tax base and continuing reform of tax and customs administration, and second, to eliminate the causes of inefficient public expenditure and underfunding of the retirement and pension funds, and the planned reform of the national public institutions (EPN). 2. The monetary policy is given the role of regulating domestic liquidity in order to normalize trends in economic activities and achieve the inflation targets of less than 10.0 percent. The policy is essentially based on monetary aggregate targeting, chiefly through the use of indirect instruments such as liquidity absorption auctions (AON) and liquidity injection auctions (AOP). The exchange regime is based on the free float of the local currency on a continuous market. The analytic framework for the monetary policy (analysis of results and impacts) will be improved through enhancement of the forecasting model; a communication mechanism will be established at the Central Bank of Madagascar (BFM) to inform the market of the effects and impacts of the policy. 3. The financial system is underdeveloped. The banking system's poor performance reflects an excessive aversion to risk: it caters to a select customer base, limiting itself to safe, profitable products, and refrains from such risky transaction as medium-and long-term financing. It must nonetheless address the challenges linked to development imperatives: competition within the sector; diversification of financial products; and expanded access for economic agents; particularly SMEs; customer protection; and sector resilience. 4. The agricultural policy is based on the continuation of land tenure reform, the use of intensive and extensive farming methods, maintenance and renovation of hydro-agricultural infrastructures, and intensified technical and financial support for agricultural training and research centers. 5. For the social sectors (health and education), emphasis will be placed on quality and improved access to educational and health services. The key objectives for education are to increase enrollment in parallel with improving and expanding educational infrastructure and raising the quality of instruction; for health, the objectives are to expand health coverage with the goal of universal coverage. 6. The social protection system will be expanded to the social sectors as well as vulnerable farmers to improve their resilience in the face of natural disasters. 7. The rates of access to drinking water and sanitation infrastructure are low, with coverage of less than half the population in 2015 because investment failed to keep up with demographic pressures. ©International Monetary Fund. Not for Redistribution RightsLink Copyright Clearance Center ® Madagascar Economic Development Paper iii 8. Local initiatives, promoted by outreach actions, should be combined with efforts to mobilize resources. 9. Deterioration of communication and surface transportation infrastructures is pervasive, as seen in the steady decline in the number of accessible communes over the year. The strategy here is based on integrating areas of potential production, especially the rehabilitation of rural roads, by restoring the financial capacity of the Highway Maintenance Fund (FER). 10. The energy policy includes the continued reform of the water and electric utility (JIRAMA) and a gradual shift toward renewable energies, i.e., hydropower, wind, solar, and biomass. The strategy for the shift is financed mainly by taxes. 11. To strengthen resilience to the risk of natural disasters, the strategy is based on three areas of effort: strengthening the capacities of local communities and the National Bureau of Risk and Disaster Management (BNGRC), development of the early warning system, and the establishment of financial mechanisms to respond to emergencies. 12. Governance and institutional strengthening rely on anti-corruption measures, notably the promulgation of the anti-corruption law, the proposed law for recovery of proceeds of illegal activity, and the planned creation of related organizational structures: local anti-corruption centers (PAC) and the agency in charge of asset recovery.