Madagascar Remains at Moderate Risk of External Debt and Overall Public Debt Distress
Despite making progress on its economic reform program, Madagascar remains at moderate risk of external debt and overall public debt distress due to various challenges.
Economic Vulnerabilities
The country’s economy is still vulnerable to recurring COVID-19 outbreaks linked to new variants and low vaccination rates, which could negatively impact growth. Moreover, the threat of cyclones causing losses of real and human capital, disrupting trade, and lowering potential growth remains a significant concern.
Additionally, further increases in oil prices, particularly in light of recent geopolitical developments, would raise fuel and electricity production costs, weighing on government transfers and complicating reforms in the energy sector.
Program Performance
Implementation of the program has been broadly satisfactory, except for under-execution of social spending and some delays in structural reforms. The country met its June quantitative performance criteria (QPC) on central bank net domestic assets and net foreign assets as well as the domestic primary balance.
However, the indicative target on customs tax collection was met, while the IT on domestic tax collection was only slightly missed at end-June and did not cause a non-observance of the domestic primary deficit QPC. The IT on social spending was missed by almost half due to delays in commitment procedures for capital expenditures on social projects.
Structural Reforms
Delays in structural reforms have affected policy dialogue with donors, leading to reduced budget support from $273 million to $144 million in 2021. The presidential development program (Plan Emergence Madagascar) has not yet been released, and the implementation decree for the law on illicit asset recovery was adopted late.
Policy Discussions
Achieving the objectives of the Plan Emergence Madagascar will require significant investments in human capital and infrastructure, as well as strengthening governance and financial sector development. Policy discussions focused on four objectives:
- Creating fiscal space for growth-enhancing spending
- Reducing fiscal risks in the short and medium term
- Improving public financial management and governance
- Strengthening the monetary and financial policy framework
Fiscal Framework
Staff and authorities agreed on a revised fiscal framework for 2021 based on common macroeconomic assumptions, with the same domestic primary deficit of 2.5 percent of GDP as at program approval. The revised framework assumes less optimistic growth and lower revenue and capital spending, while preserving social spending.
The 2022 budget envisages a gradual reduction in the deficit compared to 2021, supported by measures to raise tax revenue by 24 percent. However, Madagascar’s economic outlook remains subject to significant risks, highlighting the need for continued reform efforts to address the country’s debt and fiscal challenges.