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Republic of Madagascar: Request for Disbursement Under the Rapid Credit Facility

Summary: EXECUTIVE SUMMARY Economic background and outlook. The Malagasy authorities managed to avert a macroeconomic crisis during a difficult period of political transition and economic uncertainty since 2009. However, these disruptions have constrained growth and fiscal revenue, leading to a sharp compression of public investment and social outlays, with serious social consequences. In addition to accumulating domestic payment arrears, budgetary subsidies for fuel, and energy more generally, have become costly and have been crowding out the room for other priority fiscal spending. About 90 percent of the population now lives below US$2 a day (adjusted for purchasing-power parity), making poverty a critical issue for Madagascar. Supported by large mining projects that are reaching commercial output, recovering rice production, and a less uncertain political environment, growth is projected to increase to 3 percent in 2014. However, the economy remains vulnerable with large balance of payments needs that could get in the way of a robust economic recovery if not addressed promptly. Key challenges. The government’s immediate objective for 2014 is to start to raise social and infrastructure spending back to more normal levels and create a solid foundation for faster and more inclusive growth and for poverty reduction. There are large balance of payments and fiscal gaps that need to be filled in order not to jeopardize an economic recovery. Key measures to be undertaken in 2014 include: • Improve tax and customs revenue collections. • Increase funding of priority public investment programs and social spending. • Stop the accumulation of new domestic arrears and clear existing arrears in a phased manner. • Address the issue of fuel price subsidies over time, while identifying mechanisms for supporting vulnerable groups. Against this background, the authorities are requesting a disbursement under the Rapid Credit Facility (RCF). They also see the RCF as a stepping stone for a possible future arrangement addressing Madagascar’s medium-term challenges and as a positive signal to development partners. Staff supports the authorities’ request for a disbursement under the RCF.