A laundry list of tasks

‘Despite its resilience, Madagascar is in a difficult situation’, says Marc Gérard of the IMF

By Olivier Caslin

Posted on February 19, 2021 15:27

Firefox_Screenshot_2021-02-19T10-47-11.833Z © Marc Gérard, IMF representative in Madagascar, took office in August 2018.
Marc Gérard, IMF representative in Madagascar, took office in August 2018.

The IMF’s representative in Madagascar since 2018, Marc Gérard, speaks to us about Madagascar Emergence Plan, depreciation of the Malagasy ariary, Covid-19 and Air Madagascar’s current situation.

The Extended Credit Facility (ECF) granted to the country in 2016 by the Fund was closed last year. It is now time to conduct negotiations on a new aid programme for the years 2021-2024, the allocation of which will be confirmed by the IMF before the end of March.

While the Madagascar Emergence Plan (MEP) is due to be unveiled in the coming weeks, Gérard reviews the Fund’s priorities in the country, between the urgency of dealing with the pandemic and the long-term agenda linked to Madagascar’s economic development.

We spoke to Marc Gérard to better understand the situation.

What is Madagascar’s economic situation since the pandemic erupted in March?

Marc Gérard: The country has been hit hard. The latest estimates predict a recession of at least 4%, even though growth of 5% was expected in early 2020. This deceleration is essentially due to external shocks, namely the halt in tourism and the sharp drop in trade, as well as the disruption of supply chains linked to the implementation of confinement measures. The economic crisis is severely affecting Malagasy people in a country where social safety nets are very thin.

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Nevertheless, Madagascar has shown great resilience. Its predominantly rural population has been able to fall back on subsistence farming, which has held up well despite a poor rice harvest.

Furthermore, the controlled depreciation of the Malagasy ariary has made it possible to limit the loss of competitiveness of exports, especially in the textile sector. Nevertheless, the situation is difficult – especially in the southern part of the country – where the drought of recent months is jeopardising the food security of hundreds of thousands of people and requires a strong economic policy.

What has been the role of international donors such as the IMF during this health crisis?

International financial institutions provided emergency financial assistance in 2020 corresponding to 4.5% of the country’s GDP, or nearly $620m [about €504.7m]. More than half of which was provided by the IMF, to compensate for the drastic drop in government revenue and to ensure the proper functioning of state services.

Provided without conditionalities [conditionality in international aid is the set of conditions demanded by the major international economic organisations in exchange for loans to developing countries], this financial assistance was invested in fiscal stimulus and emergency public health spending, including providing support to the private sector and preserving the social sectors – education and health.

Our last programme with Madagascar ended in early 2020. The IMF is now calling on the authorities to accelerate the implementation of support measures and improve transparency on the use of these funds. The country is invited to spend this money while keeping the receipts.

What measures have been put in place by the Malagasy authorities?

The government drew up a recovery plan from July onwards, while at the same time implementing some emergency measures such as distributing rice to the population and extending certain cash transfer programmes.

The Central Bank, for example, has created exceptional refinancing instruments to strengthen SMEs and support banking networks. Donor emergency assistance enabled it to disburse $155m to support the ariary, while maintaining import reserves for six months.

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However, the budget execution rate remains low, particularly for social spending – which in 2020 accounted for only 0.7% of GDP – and public investment.

With the pandemic, have the reform projects of public companies in great financial difficulty, such as the Jirama, had to be frozen?

Some processes have been slowed down due to the circumstances, but Jirama had already started renegotiating unbalanced contracts with its suppliers before the virus arrived and this is still the case today. In recent months, the operator has authorised bill rescheduling to give households a bit of breathing space and has been reviewing its tariffs to introduce more social equity.

As for Air Madagascar, who was already struggling at the beginning of the year, its situation has not improved with the pandemic. The current context which has interrupted international air travel represents however an opportunity to reform the company around an ambitious but realistic business plan. Therefore limiting the amount of public funds injected into this company which are needed for other social emergencies.

The issue of financial resources and thus the budgetary independence of the state is a subject of great interest to the IMF. What is the situation?

The situation remains worrying. There is an urgent need to improve the collection of various taxes and customs duties, undermined due to the informal nature of the country’s economy and by serious governance problems.

The tax burden is structurally very low and has reached its lowest level since 2012 at around 9% of GDP, preventing the state from fulfilling its basic social missions and making the necessary public investments.

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In the current context, the mobilisation of public revenues remains a major objective in the recently published EMP.

And what does the IMF expect from this EMP?

A real prioritisation and cost-benefit analysis of projects according to their impact on the country’s growth and development, particularly around basic infrastructure as well as health and education, in order to make a perceptible difference on the ground.

The Fund has just completed negotiations with the government on a new support programme, which Washington has yet to endorse. What are the priorities?

This credit facility provides for the disbursement of $320m over 40 months, including a first allocation of $70m if the agreement is ratified by headquarters by the end of March. The agreement has been drawn up around shared objectives and on the basis of a realistic macroeconomic framework, with a projected growth rate of 3.2% in 2021 that would gradually increase thereafter.

Among the agreement’s priorities are increasing public revenue, significantly increasing social spending and improving budget transparency in order to restore confidence among donors, investors and the population.

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The programme also envisages further restructuring of state-owned enterprises such as the Jirama to free up fiscal space for public investment, as well as reforms by the Central Bank to enhance the effectiveness of monetary policy.

Finally, the government has made strong commitments in the area of governance, by establishing anti-corruption bodies as provided for by law.

Does Madagascar have the financial means to deal with the situation while ensuring its long-term development?

There is no contradiction between the two objectives. Improving the population’s living conditions by preserving purchasing power and increasing social budgets and public investment will help establish a domestic market capable of supporting the activity of the local private sector and in the long term, strengthen the economy’s growth potential.

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Fighting corruption and improving the business climate will help attract the private investment that the country needs to ensure its development.

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