- Madagascar's growth is expected to remain stable at 4.2 percent in 2024, before accelerating to 4.6 percent in 2025.
- Ambitious policy reforms are needed to raise more fiscal revenue and make space for higher public investment and social expenditures, while preserving macroeconomic stability and limiting fiscal risks.
- Strengthening governance and accelerating reforms to bolster resilience to climate shocks and attract climate finance are key to deliver higher and more inclusive growth in the medium term.
Washington, DC: An International Monetary Fund (IMF) mission led by Frederic Lambert conducted discussions for the 2024 Article IV consultation and first reviews of the arrangements supported by the Extended Credit Facility (ECF) and the Resilience and Sustainability Facility (RSF) during September 30-October 11 in Antananarivo.
At the conclusion of the mission, Mr. Lambert issued the following statement:
"Madagascar's economy is stabilizing but facing persistent inflation. After 4.2 percent growth in 2023, economic activity remained steady in early 2024 despite a good rice harvest and a rebound in graphite mining. Inflation rose to 7.8 percent in August 2024, driven by energy and food prices. Poor road infrastructure and unreliable electricity continue to increase transport and production costs.
"Growth is projected to remain at 4.2 percent in 2024, and to accelerate to 4.6 percent in 2025. Average annual inflation is expected to decline to 7.2 percent in 2025, before gradually converging to 6 percent over the medium term. The current account deficit would stabilize under 5 percent of GDP.
"The primary fiscal deficit is expected to reach 2.7 percent of GDP in 2024, assuming no oil customs tax arrears. Despite the conclusion of two agreements in 2022 and 2023, some fuel distributors are withholding the payment of oil customs duties to force a settlement of their claims vis-à-vis the government, part of which are related to JIRAMA's fuel purchases. The absence of settlement with fuel distributors would require expenditure cuts to prevent an increase in the fiscal deficit.
"The outlook faces downside risks from regional conflicts, such as those in Gaza and Israel, and the ongoing war in Ukraine, which could disrupt trade, finance, and commodity prices. Domestically, Madagascar's water and electricity shortages, deteriorating infrastructure, and governance issues could fuel popular discontent. Climate shocks also threaten food price stability and security. In contrast, implementing the General State Policy (PGE) reforms could enhance productivity and growth.
"Increasing tax revenues to finance investment and social spending would help boost private sector-led and inclusive growth. The 2025 budget should include a combination of tax policy and administrative measures, including a reduction in tax expenditures by MGA 280 billion, to support the government's revenue objectives. Over the medium-term, a gradual removal of costly import tax and VAT exemptions should be considered as well as other reforms to expand the tax base. A comprehensive excise tax reform and a revision of personal income taxation towards more progressivity should be accompanied by reforms of the tax and customs administrations, including to improve tax audit transparency and the appeal process and expedite VAT credit refunds.
"Structural reforms are key to limiting fiscal risks. Transfers to JIRAMA should be budgeted and gradually reduced. The company's recovery plan, developed with World Bank's technical assistance, needs to be swiftly implemented with strong backing from the executive branch. Implementing an automatic fuel price adjustment mechanism is crucial to manage fiscal risks by adjusting pump prices monthly to reflect changes in market prices within a band of +/-200 ariary per liter. Negotiations with fuel distributors should resume to settle cross-liabilities within the 2024 budget, ensuring compliance with fiscal and para-fiscal obligations and settling government liabilities.
"While improving the selection, prioritization, and management of public investment projects is critical to enhance spending efficiency, reinforcing public financial management processes should improve budget execution and traceability. The approval of the budget law by Parliament should be sufficient to start the execution of spending or investment projects, without further authorization by the Council of Ministers or the Commitment Monitoring Bureau (BSE).
"Improving governance is key to delivering higher and more inclusive growth. The lack of transparency and predictability, and the suspicion of state capture by private interests are undermining private sector confidence and public trust in institutions, discouraging investment and development initiatives. Priorities include notably ensuring legal stability, avoiding retroactive regulations, enforcing existing laws, providing effective protection of property rights and enforcement of contracts, ensuring a level-playing field, and creating effective grievance redress mechanisms. The preparation of a new anticorruption strategy that will cover 2025-2030 is an opportunity to accelerate momentum in this field and the IMF will support the authorities' efforts with a Governance Diagnostic Assessment to be finalized in 2025.
"The central bank should stand ready to raise its policy rates to keep inflation on a downward path. It should continue to manage liquidity through open market operations and communicate more predictably and transparently about monetary policy and liquidity management to enhance credibility and accountability. Foreign exchange interventions should be limited to smoothing excess volatility and building external buffers, without resisting underlying market forces. Further development of the interbank market and strengthening of the interest rate channel of monetary policy will support the functioning of the new monetary policy operational framework. Safeguarding financial stability is crucial for the development of private credit markets.
"To support resilience, stronger social safety nets are essential. Establishing food banks can reduce food insecurity and support local food production. Expanding the single social registry with clear eligibility criteria will improve social assistance targeting. More resources are needed for education and health, with transparent and merit-based recruitment. Digitalization can boost financial inclusion and cash transfer programs.
"Building climate resilience should be a government priority. With support from the Resilience and Sustainability Facility and the World Bank Group-IMF Enhanced Cooperation Framework for Climate Action, Madagascar should develop a national climate finance strategy to attract climate related investments.
"The IMF team thanks the Malagasy authorities and other counterparts for candid and productive discussions. The discussions on the first reviews of the ECF and RSF arrangements will continue virtually in the coming weeks."
