Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 39028

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR A PROPOSED CREDIT

IN THE AMOUNT OF SDR 26.3 MILLION (US$40 MILLION EQUIVALENT)

FOR A

FOURTH POVERTY REDUCTION SUPPORT CREDIT

TO

THE REPUBLIC OF MADAGASCAR

May 25,2007

Human Development 3 Southern Africa Country Department 1 Africa Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

AAA

ACM

ACTA ACORDS

AEPP

ADF AES

AFD AfDB

AGOA ANDEA APL APMF ARMP

AR ARV ASAMA ASH ATC ATT BCM BIANCO CAS CEM CFAA

CHD CISCO COMESA

CNN CPAR

CPI

CPIA

CSA CSB

CURRENCY EQUIVALENTS (Exchange Rate Effective as o f May 21,2007)

Currency Unit= Malagasy Ariary (MGA) US$1 .OO= 1838.24 MGA

WEIGHTS AND MEASURES Metric System

FISCAL YEAR

January 1- December 3 1

ABBREVIATIONS AND ACRONYMS

Analytical and Advisory Activities

Civil Aviation Agency

Africa-China Trading Association European Commission Development Fund Project Adduction d‘Eau Potable par Pompage (Drinking Water System) African Development Fund Alimentation en Eau dans le Sud (Water Supply in the South) French Development Agency African Development Bank

African Growth and Opportunity Act National Water Resource Agency Adjustable Project Loan Maritime Ports and River Agency Regulatory Agency for Public Procurement Road Authority Anti-retroviral Alternative Education Aquatic Surveillance Agency Agreements on Textiles and Clothing Land Transport Agency Central Bank o f Madagascar Independent Anti Corruption Bureau Country Assistance Strategy Country Economic Memorandum Country Financial Accountability Assessment Hospital at district level School District Agency Common Market for Eastern and Southern Africa National Nutrition Council Country Procurement Assessment Review Consumer Price Index

Country Policy and Institutional Assessment Agricultural Service Center Centre de Santd Base (Basic Health Center)

CSLCC

CSI

DEA DHS DPR DRDR DSA DTCP DTP

EDBM EASSY

EFA EITI EPRD EPZ ES/NAA

EU FANOME FDI FDL FID FRAM FSAP FTI FY GDP GEF

GOM GTZ GUIDE

HASYMA HIPC

HIV/AIDS

HR

ICA IDA

.. 11

Conseil Supe‘rieur de Lutte Contre la Corruption (Senior Advisory in the fight against Corruption) Comitd pour la Sauvegarde de I’lntdgritk (Committee for the Safeguard o f Integrity) Directorate of Water and Sanitation Demographic and Health Survey Development Policy Review Regional Directors for Regional Development Debt sustainability analysis Diphtheria, Tetanus, Pertussis and Polio Diphtheria, Tetanus and Polio

Economic Development Board of Madagascar Regional Communications Infrastructure Program Education for Al l Extractive Industries Transparency Initiative Revenues and Expenditures Plan Export Processing Zone Executive Secretary/ National AIDS Committee European Union Cost Recovery System Foreign Direct Investment Local Development Fund Community Development Fund Student-Parent Association Financial Sector Assessment Fast Track Initiative Fiscal Year Gross Domestic Product Global Environment Facility

Government of Madagascar German Technical Cooperation Agency One Stop Shop for Investment and Enterprise Development Cotton Company Highly Indebted Poor Countries

Human Immunodeficiency Virus/ Acquired Immune Deficiency Syndrome Human Resources

Investment Climate Assessment International Development Association

FOR OFFICIAL USE ONLY

IEG

IFC IG2P IMF

INSTAT

ITC JICA JDR JIRAMA LMD M&E MAP MDG MDRI MECIE

MEFB

MEM MFA MFB MFN MIGA

MINSANPF MOH MTEF NGO NPV OMNIS

ONE ONN

OPBP PARP

PASEC

PC

PCIME

PCG

PCR PDSS

Independent Evaluation Group

International Finance Corporation Integrated Growth Poles Project International Monetary Fund

National Institute for Statistics

Information Technology Japan International Cooperation Agency Joint Donor Report Electricity and Water Utility License Master Doctorate System Monitoring and Evaluation Madagascar Action Plan Millennium Development Goal Multilateral Debt Relief Initiative National Environment Impact Legislation Ministry o f Economy, Finance and Budget Ministry o f Energy and Mining Multi-Fiber Agreement Ministry o f Finance and Budget Most Favored Nation Status Agreement Multilateral Investment Guarantee Agency Ministry o f Health and Family Planning Ministry o f Health Medium Term Expenditures Framework Non-Government Organization Net Present Value National Office for Mines and Strategic Industries National Office of Environment OfJice National de Nutrition (National Office for Nutrition) Operational PolicyDank Policy Budget Support Program for Poverty Reduction International Surveys by Francophone Africa Rice Platform

Integrated Management o f Children Diseases Plan Comptable Gknkral (General Accounting Plan) Primary Completion Rate Plan de Diveloppement du Secteur Santd (Health Sector Development Plan)

PEFA

PER PETS PEV*+

PGDI

PNAEPA PNN PNAN PPP PRGF PRSC PRSP PSIA RMF RWS

RWSS

SADC SAPM SEECALINE SIGFP SIRAMA

SME SOREA STI SWAP SY TB

UAT UNDP

UN UNICEF

us

USAID

WASH

WB

WBI wss

Public Expenditure and Financial Accountability Public Expenditure Review Public Expenditure Tracking Survey Programme Elargi de Vaccination (Expanded Vaccination Program) Governance and Institutional Development Project National water supply and sanitation program National Nutrition Policy Nutrition Action Plan Public Private Partnerships Poverty Reduction and Growth Facility Poverty Reduction Support Credit Poverty Reduction Support Paper Poverty and Social Impact Analysis Road Maintenance Fund Rural Water and Sanitation

Rural Water and Sanitation Supply

Southern African Development Community National System of Protected Areas Nutrition Project Integrated Financial Management System Malagasy Sugar factory

Small and Medium Enterprise Water Regulatory Agency Sexually Transmitted Infections Sector Wide Approach School year Tuberculosis

Technical Support Unit United Nations Development Organization

United Nations United Nations Children’s Fund

United States

United States Agency for International Development Water, Sanitation and Hygiene Committee

World Bank

World Bank Institute Water Supply and Sanitation

Vice President: Obiageli Ezekwesili Country Director: Rima Reinikka Country Manager Robert Blake Sector Manager: Laura Frigenti Task Team Leader: Stefan0 Paternostro

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

THE REPUBLIC OF MADAGASCAR

FOURTH POVERTY REDUCTION SUPPORT CREDIT

TABLE OF CONTENTS

I . INTRODUCTION ................................................................................................................... 1

I1 . COUNTRY CONTEXT .......................................................................................................... 2

1 . 2 .

Recent Economic Developments in Madagascar ................................................................ 2 Macroeconomic Outlook and Debt Sustainability ............................................................... 5

I11 . THE GOVERNMENT PROGRAM AND PARTICIPATORY PROCESSES ...................... 9

IV . BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ............................................ 12 Link to the CAS ................................................................................................................. 12 Collaboration with the IMF and other Donors .................................................................. 12 Relationship to Other Bank Operations ............................................................................. 15 Lessons Learned and the First PRSC Series ...................................................................... 16 Analytical Underpinnings .................................................................................................. 21

1 . 2 . 3 . 4 . 5 .

V . THE PROPOSED NEW PRSC SERIES: PRSC4-PRSC6 .................................................... 24 . . A .

B . Overall Description ........................................................................................................ 24 The Program Supported by PRSC4 ............................................................................... 27

Governance ........................................................................................................................ 27 Public expenditure management .................................................................................... 27 Decentralization and Reduction o f Corruption., ............................................................ 30

Education ........................................................................................................................... 32 Health ................................................................................................................................. 33 Nutntion ............................................................................................................................. 35 Water and Sanitation ......................................................................................................... 36

V I . OPERATION IMPLEMENTATION .................................................................................... 38 Poverty and Social Impact ................................................................................................. 38 Environment Aspects ......................................................................................................... 38

. .

1 . 2 . 3 . 4 . 5 . 6 .

Implementation, Monitoring and Evaluation ..................................................................... 38 Fiduciary Aspects .............................................................................................................. 39

Risks and Mitigation .......................................................................................................... 40 Disbursement and Auditing ............................................................................................... 39 . . .

i v

Annexes

Annex 1 : Policy and Institutional Reform Matrix ......................................................................... 43 Annex 2: The Madagascar Action Plan Matrix: Selected Items ................................................... 51 Annex 3: A Preliminary Assessment o f the First PRSC Series ..................................................... 64 Annex 4: The World Bank support to the Growth Agenda ........................................................... 69 Annex 5: The Sector Wide Approach in Education. Health and Water ........................................ 75 Annex 6: Madagascar Joint World Bank IMF Debt Sustainability Analysis ................................ 78 Annex 7: Letter o f Development Policy ........................................................................................ 90 Annex 8: Country at a Glance ..................................................................................................... 100

Boxes

Box 1: Progress in Key Socio-Economic Indicators ....................................................................... 4 Box 2: The Madagascar Action Plan 2007-2012 ........................................................................... 10 Box 3: Good Practice Principles on Conditionality ....................................................................... 13 Box 4: Public Finance Reforms in Madagascar ............................................................................ 18 Box 5: Conflict o f Interest in Madagascar ..................................................................................... 31

Tables

Table 1: Base case sectoral Growth Rates 2004-2011 .................................................................... 6 Table 2: Selected macroeconomic indicators for the base case scenario. 2004-1 1 ......................... 7 Table 3: Total Financing 2005-2011 ............................................................................................... 8 Table 4: Madagascar External Debt Sustainability Indicators, 2005-2006 ..................................... 9 Table 5: Key Human Development Indicators .............................................................................. 20 Table 6: Key Analytical Underpinnings ........................................................................................ 23 Table 7: Status o f Indicative Triggers for PRSC 4 ........................................................................ 25 Table 8: Key reform public expenditure management reform activities since July 2006 ............. 28 Table 9: Key Intermediate Outputs o f the Nutrition Program ....................................................... 35 Table 10: Prior Actions for PRSC 4 and Indicative Triggers for PRSC 5 .................................... 37

~

The PRSC IV Credit was prepared by an IDA team consisting of: Stefan0 Paternostro (Task Team Leader). Benu Bidani. Nor0 Aina Andriamihaja (Macroeconomics); Guenter Heidenhof. Slaheddine Ben.Ha1ima. Emile Louis Rene Finateu. D . Randriamanampisoa. Gervais Rakotoarimanana. Sylvain Rambeloson. (Public expenditure management and governance); Sajitha Bashir. Patrick Ramanantoanina (Education); Mukesh Chawla and Anne-Claire Haye (Health); Montserrat Meiro- Lorenzo and Margaret Kajeckas (Nutrition); Christophe Prevost. Patrice Rakotoniaina (Rural water supply); Noroarisoa Rabefaniraka (Transport); Bienvenu Rajaonson (Environment); Sofia Bettencourt. Ziva Razafintsalama (Rural development); Nadine T . Poupart (Social protection); Ganesh Rasagam. Josiane Raveloarison (Integrated growth poles); Sarah Keener (PSIA); Jan Walliser (Advisor;); Herinjara Maria Ranohatra and Norosoa Andrianaivo (overall support); Gilles Marie Veuillot (Legal); and Wolfgang Chadab (Financial Arrangements) . Elisabeth Huybens (ECCU4) and Linda Van Gelder (AFTPM) are the peer reviewers .

This document has a restricted distribution and may be used by recipients on ly in the performance o f their off icial duties . I ts contents may not otherwise be disclosed without Wor ld Bank authorization .

V

CREDIT AND PROGRAM SUMMARY

REPUBLIC OF MADAGASCAR

FOURTH POVERTY REDUCTION SUPPORT CREDIT

Borrower

Implementing Agency

Amount

Terms

Tranching

Development Objectives and Description

The Republic o f Madagascar

Ministry o f Finance

SDR 26.3 mi l l ion (US$40 mi l l ion equivalent) credit

Standard IDA terms 40-year maturity

Single tranche operation

In l ine with the new Country Assistance Strategy for Madagascar, a series o f single tranche Poverty Reduction Support Credits (PRSCs), provided in the form o f budget support, i s envisaged to support implementation o f key components o f the new Madagascar PRSP called the Madagascar Action Plan (MAP). The focus o f the series i s centered on: (i) governance and budget management reform and (ii) improved systems for service delivery in education, health, nutrition, water and sanitation.

The new PRSC series wi l l continue to support the Government to implement i t s comprehensive governance reform program. A key priority wi l l be the consolidation o f the reforms initiated under the first PRSC series (PRSC 1 , 2 and 3), mainly to further refine the regulatory and institutional governance framework which has been developed since 2003, to close existing gaps, and to improve impact o f governance related activities. Additional support will be given to governance reforms, in particular governance challenges in selected entities such as the revenue agencies and in sensitive sectors such as the forestry and the mining sectors. Reforms in these areas wil l provide an important test for the efficiency and effectiveness o f the existing governance framework. Regarding basic service delivery, the objective o f the series i s to accompany the process o f institutional strengthening and quality improvements underway in the sectors. More specifically, the PRSCs will complement the Bank’s existing investment portfolio by reinforcing institutional rationalization and strengthening in nutrition and by supporting the implementation o f sector-wide approaches in health, education and water supply.

The Country Financial Accountability Assessment (CFAA, 2003), the Country Procurement Assessment Report (CPAR, 2003), and the 2005 and 2007 Public Expenditure Review (PER) provide the analytical underpinnings for the public sector reform agenda o f the PRSC series. Updated annual analysis for the Education For All underpins the education reforms. Ongoing work in support o f the nascent health SWAP provides the foundations for the interventions in this sector.

vi

Project ID Number

The proposed operation i s the f i r s t PRSC o f the second series (PRSC 4,5 and 6) and wil l continue to contribute to Madagascar reaching its development goals as now reaffirmed in i t s MAP. The reforms supported will strengthen the institutional infrastructure needed to improve the public sector’s capacity to carry out i t s role more effectively. Improved delivery o f public services i s essential if the Government i s t o reach i t s goals for poverty reduction and improve the quality o f l i fe in Madagascar. The implementation o f this operation continues to be exposed to risks, many o f which were already identified in previous PRSC operations and in the CAS. The main r isks include: (i) vulnerability t o external shocks, particularly cyclones and changes in global commodity prices, such as o i l and rice; (ii) political risk which poses a continued threat in Madagascar given i t s history o f instability; (iii) maintaining a stable macroeconomic environment, which i s critical to the successful implementation o f the PRSC and i s a core area o f focus o f the MAP; (iv) the implementation o f public finance reforms poses challenges and risks which could negatively impact service delivery; and (v) capacity constraints present significant r isks to effective implementation o f reforms.

The Government and the Bank are undertaking several measures to mitigate these risks. The Bank has supported the Government to finalize a Risk Management and Social Protection Review to assess risk prevention and mitigation strategies, and it has modified the procedures for the IDA-supported Community Development Project to allow it to respond more rapidly to emergencies such as cyclones. Further analytical work i s on-going to strengthen Government capacity to respond to weather related shocks. On political issues, the aftermath o f the transparent and peacefully-conducted December 2006 Presidential elections underscores the relatively stable political situation. On the macroeconomic environment and overall governance, the Bank i s continuing to support reforms in the areas o f public financial management and capacity building through ongoing investment operations such as the Governance and Institutional Development project, the PRSC series, the AAA program and WBI capacity building support. The Bank wil l also continue to coordinate its support in these areas with the IMF in the framework o f the PRGF program. On capacity constraints, the donor community has intensified efforts at coordinating assistance programs, harmonizing disbursement and procurement procedures and developing common programmatic approaches around the MAP. The donor community i s also increasing i t s level o f technical assistance and support for capacity building. Overall, the Bank program continues to focus on transparency and anti-corruption issues, with the PRSC and the Governance and Institutional Development Project being the main instruments.

PO99420

vii

IDA PROGRAM DOCUMENT FOR A

PROPOSED FOURTH POVERTY REDUCTION SUPPORT CREDIT

TO

THE REPUBLIC OF MADAGASCAR

I. INTRODUCTION

1. Madagascar in the amount US$40 million. This operation i s the f i rs t o f a new series o f three PRSCs o f US$40 mi l l ion each to be disbursed as single tranche operations. It i s consistent with the Bank’s new Country Assistance Strategy (CAS) discussed at the Board o f Executive Directors on April 3,2007, to support the implementation o f the Government’s poverty reduction strategy as la id out in the Madagascar Act ion Plan (MAP). The objective o f the MAP i s t o promote rapid and sustainable development over the next five years in line with the Government’s national vision document (Madagascar Naturally) and the UN Millennium Development Goals (MDGs). To attain this objective, the MAP presents eight key commitments: (i) responsible governance; (ii) connected infrastructure; (iii) educational transformation; (iv) rural development and a green revolution; (v) health, family planning and the fight against HIV/AIDS; (vi) high growth economy; (vii) cherish the environment; and (viii) national solidarity.

This Program Document proposes a fourth Poverty Reduction Support Credit (PRSC) for

2. management and service delivery, and includes specific policy actions in these areas. In parallel, Bank support directly enhancing Madagascar’s growth potential i s concentrated in i t s significant portfolio o f ongoing IDA investment projects in infrastructure, environment, mining, rural development, the Integrated Growth Poles project, the Irrigation and Watershed Management project, and the Regional Telecommunications Project. Overall, the new CAS devotes a considerable amount o f IDA resources available for Madagascar to operations designed to continue investment and policy dialogue in the growth agenda.

The PRSC program for this series focuses explicitly on improving governance, budget

3. The implementation of the indicative triggers for PRSC 4 i s satisfactory. The program document reviews the progress made in the implementation o f the f irst PRSC series and outlines the lessons learned that were incorporated in the design o f the new series. It devotes particular emphasis to the areas o f focus o f PRSC support (governance, budget management and service delivery). The reform program supported under PRSC 4 continues to assist the consolidation o f reforms f i rst commenced with PRSC 1 in improving public expenditure management fostering decentralization, fighting corruption, and implementing the Education for All and nutrition programs. Support to reforms to expand access to safe drinking water and to accompany improvements in the health sector i s also envisioned.

4. partners. Donors are collaborating to support Madagascar in implementing the MAP by providing financial and technical support in a coordinated way. A partnership agreement (Cadre de Partenariat) was signed between the Government and the key budget support donors -European Union (EU), France (Agence Franpise de De‘veloppement and the French Co-operation), the African Development Bank and the World Bank to provide a framework and to lay out procedures and modalities for a multi-donor approach to budgetary support. T h i s Budget Group initiated joint-donor missions in October 2004 to review the implementation o f the Poverty Reduction Strategy Paper (PRSP)iMAP and supervise their respective budget support operations.

Budget support in Madagascar continues to advance in close collaboration with the other

1

5. stable. Fair and transparent elections were held in December with the incumbent President being re- elected with 55 percent o f the vote. A national referendum was held in April 2007 to amend the Constitution and change the administrative structure (amongst other changes, the provinces were eliminated in favor o f regions). This amendment was presented as necessary for MAP implementation and, despite a l ow participation rate, more than 75 percent approved the proposed changes. By September 2007, National Assembly elections w i l l be held, followed by local Government elections. On the whole, these major political developments have been positive and have not undermined the functioning o f the public sector. More recently, however, there have been public demonstrations in a few o f the main cities to protest the continuing crisis in the energy sector which has caused frequent black-outs in certain areas o f the country.

Following the presidential elections of December 2006 the political situation remains

11. COUNTRY CONTEXT

1. RECENT ECONOMIC DEVELOPMENTS IN MADAGASCAR

6. After the 2002 crisis GDP growth rebounded to 9.8 percent in 2003 from a 12.7 percent plunge a year before and continued to grow at an average rate of about 5 percent per year. Growth came largely through higher tourism receipts (tourism arrivals in 2005 were 21 percent higher than in 2004), improved performance in agriculture, especially higher rice production (rice productivity increased from 2.3 tons per hectare in 2003 to 2.6 in 2005), and continued public investments. In 2005 the economy grew at 4.6 percent despite a sharp increase in world petroleum prices, and a financial crisis at the state- owned electricity and water utility enterprise J IRAMA that disrupted economic activity through power cuts and tariff increases.

7. Economic growth in 2006 estimated at 4.9 percent, was driven by strong tertiary sector growth but agricultural growth was disappointing. Agricultural growth in 2006 was lower than in 2005, with production impacted negatively by shortfalls in rain and low world prices for key export commodities such as vanilla. The tertiary sector grew strongly by 7 percent, with public works, tourism transport, banking and the telecommunications sectors as the key growth sectors. The telecommunications sector has seen significant acceleration in 2005-6 through strong growth o f basic services subscribers and network expansion. Increased investments by the telecoms operators are linked to investments in the basic national backbone, enhanced certainty for mobile operators with the renewal o f their licenses, and increased competition. The sector i s expected to continue to grow with the expansion o f the national backbone and the installation o f the East African submarine cable. The tourism sector saw an increase o f 14 percent in tourism arrivals. The secondary sector grew at under 4 percent, with strong growth in the mining sector, linked to the ilmenite mining investment in Fort Dauphin, and for construction materials.

8. it was hit by six tropical storms/cyclones in the first four months of the year leading to exceptional rains in most parts o f the country, while a drought continued to affect the south of the country. These storms contributed to heavy flooding in populated and cultivated areas throughout the country, including the capital region, the northwest, west and southeast regions. Over 300,000 people were affected, the food security situation deteriorated, health r isks to the population increased, and public infrastructure was damaged. Early estimates o f the damage to the standing vanilla crop in the Sava region due to the cyclone Jaya have led to downward revisions f rom 1,600 tons o f vanilla exports to 1,000 tons this year, and there i s a l ikely impact on the rice harvest in the region as well.

Madagascar’s vulnerability to natural disasters was never more evident than in 2007, when

9. revised upward from 5.6 percent to 6.5 percent due to the recently confirmed nickel mining investment of around US$2.5 billion (or around 45 percent of GDP) over the next three years by Dynatech. This major investment has changed the medium-term macroeconomic framework (see next section). A key policy concern i s the impact o f the significant foreign direct investment (FDI) inflows on

2

Despite the adverse natural climatic conditions, the growth projection for 2007 has been

the exchange rate, and the policy responses to preserve competitiveness while maintaining macro- economic stability. The Government believes that the economy i s undergoing a permanent structural change, and intends to maintain their exchange rate regime o f a managed float wi th no predetermined path and allow the exchange rate to move to i t s new equilibrium. In their view, the exchange rate should stabilize, and the ongoing structural measures would help preserve competitiveness. The Government plans to monitor the situation closely and adjust their policy response if the economic circumstances warrant it.

10. Following a year of relative stability of the exchange rate in 2005, the ariary started appreciating since the last quarter o f 2006 and this has continued into the early part of 2007 with an appreciation o f around 10 percent against the U S dollar since the middle o f January 2007. This i s l inked to improved export performance (especially f rom the export processing zones and tourism) and greater investments l inked to the mining investments noted above. FDI as a share o f GDP increased from 1.7 percent in 2005 to 4.0 percent in 2006. Stronger exports, the greater FDI inflows, combined with decline in the world petroleum prices contributed to an improvement in the balance o f payments, with the overall current account balance (including grants) improving from -10.9 percent o f GDP in 2005 to -8.8 percent o f GDP in 2006. Foreign reserves increased to 3.0 months o f imports at year end in 2006. The guidelines adopted by the Central Bank (BCM) for intervention in the foreign exchange market, aimed at achieving i t s foreign assets objectives and dampening sharp swings that would create uncertainty, were broadly followed. The BCM has also received further technical assistance in exchange rate management f rom the International Monetary Fund (IMF) in 2006. The continuous inter-bank foreign exchange market with an electronic trading system i s functioning well, but, as noted above, the big mining investments wi l l continue to put pressure on the exchange rate and the Government wi l l need to pay particular attention to managing the macroeconomic effects to avoid Dutch disease.

Figure 1: Evolution of the Exchange Rate (2006-2007)

2800

2750

$ 2700 ‘C 3 2650

3 UJ 2600

2550

2500

Months

11. Inflation continued to decline, reaching 10.9 percent at the end of 2006 compared to 11.4 percent at year end in 2005. Rice prices have stabilized at around 900-1 000 Ar iaryk i lo for local rice between March and December 2006. World petroleum prices started to decrease during the last quarter o f 2006 leading to a decline in the domestic price o f gasoline, and the recent appreciation o f the nominal exchange rate also helped. The Government decreased the base rate f rom 16 percent to 12 percent in August 2006 and broad money increased by 25.6 percent year-on-year in December 2006. Year-on-year inflation at end-February 2007 was at 13.6 percent, due to a 13 percent increase in rice prices linked to a

3

temporary shortfall o f rice on the market, but rice prices have declined subsequently and inflation i s expected to be around 7.9 percent for the year 2007 (at year end).

Box 1: Progress in Key Socio-Economic Indicators.

Since 2002, Madagascar’s basic social indicators have improved dramatically albeit from a low base. Net primary enrollment rates are now above 90 percent, up from 70 percent in 2002. The country increased i ts literacy rate to 70 percent in 2005, above the 61 percent average for Sub-Saharan Africa, but only 60 percent o f children complete primary school, 15 percent complete lower secondary school, and only 5 percent complete upper secondary school. As more children complete primary education, the country wi l l need to respond to the growing demand for secondary education, which i s already pressuring existing capacity. Moreover, major inequalities exist by region and income groups, and the quality o f instruction i s poor at all levels.

Child mortality rates have declined significantly, from 164 deaths per 1,000 live births in 1997 to 123 in 2004, and more women give birth in health centers than before. Immunization rates improved from 62 percent in 2002 to 87 percent in 2005, and chronic malnutrition rates decreased from 43 percent in 1997 to 35 percent in 2005. Rural access to safe drinking water also improved from 12 percent in 2003 to 16 percent in 2005. Madagascar’s health indicators are better than other African countries o f a similar income level, but they remain low, particularly among the rural population and the urban poor. For example, the 2004 maternal mortality ratio was below the Sub-Saharan Africa average o f 830 deaths per 100,000 live births, but it i s s t i l l very high at 469 (per 100,000 live births).

Poverty in Madagascar i s widespread. According to the 2005 household survey, more than two-thirds o f the population (68.7 percent) live below the poverty line. The poverty rate in rural areas i s significantly higher than in urban areas: while almost three-quarters (73.5 percent) o f the rural population i s poor, just over half (52 percent) o f the urban population i s poor. Poverty rates also differ by region, with the highest rates in the coastal regions o f the east and south, where over 80 percent o f the population i s poor. Poverty i s lowest around the capital Antananarivo. Between 2001 and 2005 poverty declined more rapidly in rural areas than in urban areas, in marked contrast to the 1997-2001 period, when the small decline in poverty was largely the result o f declining urban poverty. Growth in 1997-2001 was driven largely by the export processing zone sector, based in Antananarivo/Antsirabe, which improved job opportunities and reduced poverty in urban areas. The decline in poverty in rural areas between 2001 and 2005 i s linked to greater emphasis on rural development, accelerated implementation o f the roads program, and higher rice prices which gave incentives to rural farmers. Also, the economic shocks in 2004/05 (strong depreciation, high international oil and rice prices) may have affected the richer segments o f society more adversely.

12. The electricity parastatal’s (JIRAMA) structural and financial difficulties continue to impact the investment climate. A recovery plan i s being implemented, but the transition to a longer- term concession arrangement has been delayed. J I R A M A presented i t s financial recovery plan in January 2006 and received donor support for i t s implementation. As part o f the plan, J I R A M A had implemented significant tariff increases for electricity to bring tariffs more in line with production costs, but it i s s t i l l operating at a loss. Measures to improve the efficiency o f J IRAMA and to reduce the dependence on diesel generated electricity are also under implementation but progress has been slow. The Government i s committed to a longer-term public-private partnership solution in the form o f a concession for JIRAMA, for which IFC i s providing technical assistance, but a one-year track record o f no operating losses i s considered to be a pre-requisite for this longer term private management concession. This has delayed the launch o f the call for bids to 2009. Delays in implementing the recovery plan for J IRAMA wil l continue to pose a risk to growth and to the Government budget.

13. Tax revenue in 2006 was 10.7 percent of GDP but weaknesses in administration continue to hamper the Government’s ability to implement its budget smoothly. In 2006 the tax revenue to GDP ratio was 10.7 percent, a partial recovery f rom the decline to 10.1 percent in 2005 but down from the level o f 10.9 percent in 2004. Exonerations, exemptions and special regimes have continued to plague the tax and customs systems. The persistent problems in revenue mobilization have hindered the Government’s

4

ability to implement i t s ambitious poverty reduction strategy, with mid-year expenditure cuts implemented in 2006 to maintain overall fiscal discipline. The Government i s also implementing a customs reform program and, with the support o f the IMF and the World Bank, i s designing a comprehensive reform o f tax administration which i s expected to be finalized in time to be reflected in the 2008 Finance Law.

14. macro-economic impacts of the large investment flows, sustainable progress in restructuring JIRAMA and revenue mobilization remain key priorities. The Government i s committed to tackling these problems, and i s implementing a program under the Poverty Reduction and Growth Facility with the IMF since July 2006. The First Review o f the program was successfully concluded in December 2006, and the Second Review i s expected to be completed later this year.

Overall, the macroeconomic situation remains stable. Looking forward, managing the

2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY

15. and i s more resilient to shocks, having grown at around 5 percent per year. Madagascar i s investing in upgrading its infrastructure network, particularly roads. It i s encouraging greater public-private partnerships in infrastructure provision (energy, airports, ports, railways etc) and i s investing in educating its young, thereby solidifying further the foundations for growth. The new nickel mining investment project with its large upfront investments and subsequent export o f refined products, provide a major motor o f growth.

The post-2002 recovery has shown that the economy has diversified its sources of growth

16. rate o f about 8.0 percent over 2007-11 with mining, tourism, construction, and - most important for the poor - improved prospects in agriculture (Table 1). These growth projections are in line with the MAP goals o f attaining 7-1 0 percent growth in the medium term. Tourism i s expected to continue to grow, given the ongoing investments under the Integrated Growth Poles Project, private investment in hotels, and the increasing number o f tourists. Improving the backward linkages in the tourism sector, such as sourcing products from the local economy by hotels, i s a key aspect in the strategy for the sector. In mining, the ilmenite project financed by Rio Tinto in the Fort Dauphin region i s under way and the US$2.5 billion Ambatovy nickel mining project by Dynatech will be implemented starting in July 2007. Agriculture will continue benefiting from a range o f investments by Government and donors including improving the irrigation systems and the surrounding watersheds in four most promising sites and from additional support for agri-business development in five regions in the country with support from the Millennium Challenge Corporation. At the same time, the export processing zone sector i s going through a consolidation phase and i s not expected to grow in the short term. However, a hopeful s i g n that the sector can remain a source o f growth i s that textile exports have been stronger than expected because the industry i s diversifying and moving toward higher value-added products. But the future o f the export processing zones, in particular, i s linked to i t s ability to stay competitive, given the risks posed by the current trend o f appreciation o f the exchange rate.

The recently updated base case macroeconomic projections forecast an average growth

5

Table 1: Base case sectoral Growth Rates 2004-2011

Primary Sector Agriculture Livestock and Fisheries Forestry

Secondary Sector Agro-industry Extractive industry Energy Food Industry Drinks industry Tobacco industry Construction materials Export processing zone

Tertiary Sector Public works Transport o f merchandise Transport o f people Other Transport Telecommunications Commerce Banking Insurance Other services Public Administration

Banking services not imputed GDP at factor cost Indirect taxes

32.0 14.8 14.4 2.9

11.8 0.3 0.2 1.4 2.1 2.2 0.7 0.3 1.7

47.8 2.7 9.5 2.7 2.5 1.7

10.3 1.9 0.0

11.6 4.9

-2.3 89.2 10.8

100.0

3.1 3.5 3.3 0.0

6.6 0.0 7.7 6.0 3 .O 4.5 3 .O 7.9

25 .O

6.0 29.0

5.5 5.9 5.4 5 .O 3.4 5 .O 4.0 6.5 1.6

5 .O 5 .O 7.3 5.3

2.5 2.1 2.6 3.2 3.2 3.2 3.2 4.5 0.8 1 .o

3.0 0.0 4.4 2.5 0.0 0.5

-3.0 13.5 0.0

6.1 18.8 4.5 7.4 5.9 5.3 4.5 6.6 5.3 7.0 3.0

7.3 4.4 6.3 4.6

2.6 2.3 3.5 3.5 3.5 3.5 1.9 3.2 3.2 3.2 3.2 3.2 1 .o 1 .o 1 .o 1 .o 1.5 1.5

3.7 6.4 6.6 7.1 28.5 19.6 -12.5 6.0 6.0 6.0 6.0 6.0

9.1 10.5 11.5 31.6 801.3 73.8 4.4 5.6 5.6 5.6 5.6 5.6 0.0 7.3 8.3 8.3 8.3 8.3 9.3 11.0 10.0 10.0 10.0 10.0

11.6 3.6 4.6 4.6 4.6 4.6 19.3 15.9 16.9 13.0 12.0 11.0 0.0 0.0 0.0 0.0 0.0 0.0

7.1 8.9 10.0 10.2 9.7 9.6 22.5 22.8 18.1 18.0 14.0 14.0

8.7 9.5 11.1 11.0 10.0 10.0 3.1 9.8 11.4 11.4 11.4 11.4 6.8 7.8 9.4 9.4 9.4 9.4

12.0 10.8 10.8 10.8 10.8 10.8 4.4 7.3 8.9 8.9 8.9 8.9

14.2 8.9 7.6 7.6 7.6 7.6 10.6 6.0 6.0 6.0 6.0 6.0 5.5 7.9 9.5 9.5 9.5 9.5 2.1 2.5 4.1 5.6 5.6 4.2

14.2 8.2 8.2 8.2 8.2 7.6 4.7 6.4 7.3 7.6 10.1 9.3 6.2 6.7 6.7 6.7 6.7 6.7 4.9 6.5 7.3 7.5 9.8 9.0 Real GDP growth ~

Sources: Ministry of Economy, Finance and Budget and Fund staff estimates and projections April 2007; Sectors do not add up to 100 since sectors with small shares have been excluded. 1 Republic of Madagascar--Staff Report for the Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Activation of the Trade Integration Mechanism (EBS/06/87, 07/0706).

17. Investment needed to generate this growth will average 28.6 percent o f GDP, driven mainly by an increase in private investment, which i s expected to be over 19 percent o f GDP during 2007-2011 (see Table 2). Investment levels in 2007-2009 average over 30 percent due to the nickel mining investment, but subsequent levels o f investment slow down to around 24 percent. Exports are projected to increase by 19 percent a year over the same period, but increase at rates o f over 25 percent once the nickel exports commence in 2010. The overall investment climate i s expected to be facilitated by the new investment code and the newly established Economic Development Board o f Madagascar. Emphasis on governance through more transparent issuance o f licenses, the creation o f a fair playing field-free o f political interference-and access to land should facilitate further investments in mining, tourism, manufacturing, and ago-industry. Continued investments in rural transport and irrigation infrastructure by Government and donors should increase rural incomes. Tax reform i s also planned for the next year, including simplifying the tax system and administration and raising revenues while

6

facilitating investment. Overall, these reforms are expected to lay the foundations to improve the investment climate, attract investment more generally, and contribute to diversifying exports, and achieving broad based growth that translates into poverty reduction.

Table 2: Selected macroeconomic indicators for the base case scenario, 2004-11 (% o f GDP unless otherwise noted)

Real GDP growth Consumer Price Index (end o f period) Consumer Price Index (period average)

Investment Government Non-Government

Central Government Account Total Revenue (excluding grants) o f which: Tax revenue

Grants

Total Expenditure Current Expenditure Capital Expenditure

5.3 4.6 4.9 6.5 7.3 7.5 9.8 9.0 27.3 11.4 10.9 7.9 6.0 5.0 5.0 5.0 14.0 18.4 10.8 9.8 7.1 5.5 5.0 5.0

24.3 22.5 24.8 29.2 33.9 31.7 23.8 24.5 12.5 10.3 10.3 10.0 9.2 9.2 8.8 8.6 11.8 12.3 14.5 19.2 24.7 22.5 14.9 15.9

12.0 10.9 11.2 11.1 11.6 12.1 12.6 13.0 10.9 10.1 10.7 10.9 11.4 11.9 12.4 12.8 8.2 5.7 48.0 5.0 3.5 3.4 3.3 3.2

25.1 21.2 21.4 21.5 19.4 19.5 19.7 19.8 12.6 11.0 11.1 11.5 10.2 10.4 10.9 11.2 12.5 10.3 10.3 10.0 9.2 9.2 8.8 8.6

Domestic Balance -2.3 -2.2 -2.0 -2.5 -1.3 -1.2 -1.2 -1.2 Overall balance (commitment basis, excluding grants) -13.9 -10.1 -10.5 -10.6 -7.8 -7.5 -7.1 -6.8 Overall balance (commitment basis, including grants) -5.7 -4.3 37.5 -5.6 -4.3 -4.0 -3.8 -3.5

Trade balance Exports f.0.b. Imports c.a.f.

Current Account (excluding grants) Current Account (including grants)

22.9 17.0 17.7 14.5 12.8 12.4 27.3 28.4 38.8 33.9 32.5 33.7 33.6 30.2 25.1 25.0

-12.9 -12.1 -10.0 -18.2 -21.3 -19.6 -9.0 -9.1 -9.1 -10.9 -8.8 -17.5 -20.9 -19.2 -8.7 -8.7

8.0 5.8 6.5

28.6 9.2

19.4

12.1 11.9 3.7

20.0 10.8 9.2

-1.5 -8.0 -4.2

19.1 29.5

-15.4 -15.0

Gross official reserves (in months of imports o f GNFS) 2.8 2.9 3.0 2.7 2.7 2.9 3.5 3.5 3.1

Sources: Ministry of Economy, Finance and Budget and Fund staff estimates and projections April 2007

18. The extent to which growth translates into poverty reduction, will depend critically on the success of the Government’s efforts to implement its overall MAP strategy and in particular rural development. Given that over 7 in 10 Malagasy live in rural areas and 74 percent o f the rural population i s poor, improving agricultural productivity remains vital. In addition, the extent to which the expected high growth in mining wi l l translate into poverty reduction w i l l depend inter alia on the degree o f backward linkages to the local economy associated with mining activities and on the ability o f the Government to use the additional revenues generated by the sector to effectively deliver services and additional investments that improve the living conditions o f the population. Another key challenge w i l l be the Government’s ability to mobilize resources (both revenues and development assistance).

7

Table 3: Total Financing 2005-2011

Financing 5.7 Foreign (net) 6.4

Drawings 7.1 Budget 1.8 Project 5.3

Change in external arrears 0.0 Amortization due -2.3

External debt relief 1.6

Domestic (net) -1 .o Banking system -2.6

o f which MDRI Account Non-banking System 1.3

Privatization receipts 0.2

Memorandum items: Nominal GDP (in billions of ariary) Resources freed by MDRI debt relief

8,156

Net domestic financing -1.4

4.3 3.8 4.5 1.6 2.9

-1.8 0.0 1.1

0.5 -1.1

1.2 0.4

10,095

0.8

-37.5 -35.1

4.0 1.4 2.6

-39.0 0.0 0.0

-2.5 -3 .O -2.8 0.6 0.0

11,781 0.6 0.4

5.6 4.3 4.4 0.8 3.6

-0.1 0.0 0.0

1.3 0.9 0.3 0.4 0.0

13,729 0.7 1.2

4.3 4.0 4.1 0.8 3.4

-0.1 0.0 0.0

0.3 0.0 0.3 0.3 0.0

15,677 0.7 0.3

4.0 3.8 3.9 0.8 3.2

-0.1 0.0 0.0

0.2 0.0 0.2 0.3 0.0

17,788 0.6 0.2

3.8 3.5 3.7 0.7 2.9

-0.1 0.0 0.0

0.3 0.0 0.2 0.3 0.0

20,488 0.6 0.3

3.5 3.3 3.5 0.7 2.7

-0.2 0.0 0.0

0.3 0.0 0.2 0.3 0.0

23,458 0.6 0.3

Net external aid’ 13.0 8.6 9.4 9.0 7.3 7.0 6.7 6.3

Sources: Ministry o f Finance and Budget and Fund staff estimates and projections, April 2007 Note: ’ After MDRI re l i e f from 2006 onwards. ’ Foreign grants and loans, less debt service (excluding MDRI capital transfers in 2006).

Debt Sustainability

19. US$4.8 billion at end-2003, to about US$3.5 billion at end-2005 and further to about US$1.6 billion at end-2006. Two major initiatives contributed to this result: the Enhanced Heavily Indebted Poor Country (HIPC) Debt Initiative concluded in October 2004 and the Multilateral Debt Relief Initiative (MDRI), supported by the International Monetary Fund, African Development Bank, and IDA.

Madagascar’s outstanding external debt has been reduced significantly-from about

20. according to the Bank’s Country and Policy Institutional Assessment (CPIA) Index. As a medium performer, the thresholds applied to Madagascar are: (i) 150 percent for N e t Present Value (NPV) o f debt- to-exports, (ii) 40 percent for the NPV o f debt-to-GDP and (iii) 250 percent for the NPV o f debt to fiscal revenues. The relevant debt service thresholds are (i) 20 percent o f exports and (ii) 30 percent o f revenues. The sustainability o f Madagascar’s debt is analyzed in relation to these thresholds.

Madagascar i s rated as a medium performer with regard to its policies and institutions

21. for growth and exports, linked to the new mining projects, have further improved the sustainability o f Madagascar’s debt outlook. The D S A shows that the key debt indicators f e l l sharply in 2006, with the MDRI debt r e l i e f (see Table 4). Under the baseline scenario, Madagascar’s external debt indicators remain wel l below the thresholds throughout the projection period. The baseline scenario i s built on the key medium-term macroeconomic assumptions outlined in the previous section, the implementation o f sound macroeconomic and structural policies and external financing through grants and concessional loans. Under the updated macro-economic scenario o f higher growth, led by mining sector exports, the

The joint Bank-Fund debt sustainability analysis (DSA) shows that the improved prospects

8

debt sustainability improves significantly. The NPV o f debt to GDP ratio and the NPV o f debt-to-exports stay well below the threshold over the projection period.

Table 4: Madagascar External Debt Sustainability Indicators, 2005-2006

). . . . . . Q

Percent

N P V o f debt-to-exports rat io N P V o f debt-to-GDP ratio N P V o f debt-to-fiscal revenue ratio Debt service-to-exports ratio Debt service-to-fiscal revenue ratio

134.3 38.7 150.0 35.8 11.5 40.0

215.0 64.2 250.0 8.4 3.5 20.0

16.3 8.0 30.0

MDRI debt re l ie f (in percent o f GDP) Source: IMF and Bank Staff estimates. ‘For a medium performer as defined by the Wor ld Bank Country and Policy Institutional Assessment (CPIA)

42.0

22. The sensitivity analysis shows that the external debt remains below the thresholds under alternative scenarios and even under the most extreme stress tests. Thus, Madagascar’s risk of debt distress i s low. Even under extreme stress tests, the external debt indicators remain below the threshold with the high levels o f growth and the mining exports generated after 2010 (see Annex 6). The current efforts to diversify the export base wil l help this even further. The financing scenario shows that Madagascar’s external debt indicators are sensitive to the terms o f the borrowing. The N P V o f debt-to- GDP and N P V o f debt-to-exports ratios increase steadily but remain below the threshold. This could lead to risks from new borrowing at less favorable terms than assumed in the baseline scenario. Overall, foreign assistance i s expected to remain important in macroeconomic management and poverty reduction in Madagascar. This includes assistance under the enhanced HIPC Debt Initiative and the Multilateral Debt Rel ief Initiative.

23. management. All the loans for which the Central Bank and the Ministry o f Finance were responsible have been entered into the new United Nation’s standard database system, and an integrated data management system wil l be established between the Central Bank and the Ministry o f Finance. In addition, the authorities have contacted relevant international agencies to build capacity o n debt analysis.

Debt Data Management. The authorities have undertaken steps to improve debt data

111. THE GOVERNMENT PROGRAM AND PARTICIPATORY PROCESSES

24. out an ambitious development plan for 2007-2012, was launched in November 2006. I t outlines the commitments, strategies and actions that are expected to ignite rapid growth and lead to the reduction o f poverty in line with the Government’s national vision document (Madagascar Naturally) and the MDGs. The M A P builds on the f irst PRSP prepared in 2003 and was elaborated in a participatory manner that included broad consultations in al l 22 regions o f Madagascar involving local and national Government representatives, private sector, NGOs, church groups, development partners and c iv i l society. Key monitoring indicators, most with baselines for 2005 and targets for 2012, have been selected to measure progress toward achieving the MAP’S identified challenges. In this respect, the MAP i s more results- oriented and prioritized than the PRSP.

The Madagascar Action Plan (MAP), the Government’s second-generation PRSP that lays

9

Box 2: The Madagascar Action Plan 2007-2012

f i e MAP i s a five-year plan that lays out the direction and priorities for Madagascar for the period 2007-2012. I t outlines eight strategic commitments with strategies and actions that will ignite rapid growth, lead to the reduction of poverty and ensure that the country develops in response to the challenges of globalization and in accordance with the national vision - Madagascar Vaturally - and the MDGs. The eight commitments o f the MAP are as follows:

Responsible Governance - the goal i s to create a Government that every citizen and the international community can trust and to build a civil service that will have integrity, be efficient and act totally professional in all i ts activities. The specific challenges o f this commitment are to: (i) provide sufficient security to protect people and property; (ii) strengthen the rule of law; (iii) reduce corruption; (iv) establish an efficient and effective Government budgetary process; (v) strengthen the provision of public services; (vi) decentralize the Government administration and (vii) become a learning nation.

Connected Infrastructure - this commitment emphasizes that infrastructure i s essential for the country to achieve rapid development, facilitate business and trade, enable communication and ensure that the standard of living and the access to resources and global knowledge improves for all. The challenges are to: (i) prioritize infrastructure development for key growth areas; (ii) efficiently move goods and people from one place to another; (iii) improve access to transport services nationwide; (iv) ensure accessible and adequate energy supply at affordable and competitive cost; (v) ensure efficient and affordable communication system; (vi) carry out better weather forecasting and warnings of potential disasters such as cyclones; and (substantially improve access to drinking water and sanitation.

Educational Transformation - t he goal i s to create an education system with world class standards in quality and effectiveness which provides Madagascar with the necessary human resources to become a competitive nation and a successful player in the world economy. This would be achieved through: (i) ensuring access of all children to developmental opportunities before official school entry; (ii) creating a successful primary education system; (iii) creating a successful lower secondary education system; (iv) improving upper secondary school and developing vocational training; (v) transforming higher education; (vi) ending illiteracy; and (vii) developing capacities and mindsets o f young people through sports and civic participation.

Rural Development and a Green Revolution -the MAP recognizes that dynamic rural development through increased agricultural production i s at the core of the Government’s endeavors and that better infrastructure and communication networks are essential to meet this goal. The specific activities are to: (i) secure land tenure; (ii) improve access to affordable rural financing; (iii) launch a sustainable green revolution; (iv) promote market oriented activities; (v) diversify rural activities; and (vi) increase the agricultural value-added and promote agri-business.

Health, Family Planning and the Fight Against HIV/AIDS - the challenge here i s to ensure that the Malgache people are healthy and can contribute productively to the development o f the country. Th is commitment focuses on: (i) providing quality health services to all; (ii) eradicating major diseases (malaria, TB, STIs); (iii) fighting HIV/AIDS; (iv) implementing a highly successful family planning strategy; (v) reducing infant mortality; (vi) reducing maternal and neonatal mortality; (vii) improving nutrition and food security; and (viii) providing safe water and widespread use of hygienic practices.

High Growth Economy - the goal i s to reach growth rates between 7-10% by 2012 through ensuring a diversified and strong private sector driven by local and international investment and trade. T h i s challenge naturally covers many activities focused on the following: (i) ensure a stable macroeconomic environment; (ii) increase foreign direct investment; (iii) promote full employment; (iv) reform the banking and financial system; (v) strengthen domestic enterprises, SMEs and handicraft industry; (vi) enhance international trade competitiveness; (vii) intensively develop the mining sector; (viii) intensively promote and develop the tourism sector; (ix) intensively exploit regional opportunities; and (x) through diplomacy, strengthen economic synergies.

Cherish the Environment - this commitment lays out the goal for Madagascar to become a world leader in the development and implementation o f environmental best practice, to become a green island and to cherish and protect its extraordinary environment. Local communities will be active participants and industries such as eco-tourism and organic agri-business will develop to minimize biodiversity damage and maximize benefits to the country and people. The activities focus on: (i) increasing the protected areas for the conservation of land, lake, marine and coastal biodiversity; (ii) reducing the natural resource degradation process; (iii) developing the environmental reflex at all levels; and (iv) strengthening the effectiveness of forest management.

National Solidarity - the goal i s to continue to forge a strong and unified national identity that promotes participation and partnership, allows people to be proud and to take full and shared responsibility for guiding the nation into the future. The specific challenges are to: (i) celebrate cultural diversity, understanding and respect; (ii) build social trust and promote civic participation; (iii) promote solidarity and pride; (iv) improve support for the very poor and vulnerable populations; and (v) promote gender equality and empowerment of women.

10

25. infrastructure; (iii) educational transformation; (iv) rural development and a green revolution; (v) health, family planning and the fight against HIV/AIDS; (vi) high growth economy; (vii) cherish the environment; and (viii) national solidarity (see B o x 2). For each commitment, the Government has identified key challenges, goals and strategies, priority projects and activities. The M A P also identifies six “breakthrough initiatives” or priority areas that require immediate attention: public finance reform; significant increase in investment to promote high growth; sowing the seeds o f a green revolution; transforming public security; implementing bold new measures for health and family planning; and transforming the judiciary. Annex 2 presents the detailed MAP matrix for the areas directly supported by this operation: responsible governance, educational transformation, and health, family planning and the fight against HIV/AIDS.

The MAP outlines eight strategic commitments: (i) responsible governance; (ii) connected

26. included representatives from the Presidency, the Prime Minister’s office, and the Ministry of Economy, Finance and Budget. The MAP was discussed in Parliament along with the draft 2007 Finance L a w which aligns the budget with the MAP commitments and presents medium-term expenditure projections for 2007-1 1. This link between the M A P and the national budget i s relatively strong although the Medium Term Expenditure Framework that underpins the MAP needs to be further substantiated. Consequently, the MAP places appropriate emphasis on the need to improve public financial management. As the JSAN (Joint Staff Advisory Note o f the MAP, discussed at Board on March 6,2007 - Report No. 38469-MG) noted, the priorities in this respect should include: (i) strengthening o f internal control mechanisms, in particular with regard to expenditure commitments; (ii) using the public finance integrated management information system (SIGFP) to monitor budget execution; (iii) simplifying the budget classification and the expenditure management framework; (iv) further strengthening capacity to prepare and execute the budget in priority ministries (education, health, infrastructure); (v) improve cash planning and management; and (vi) implementing the new Procurement Code.

The preparation of the MAP during 2006 was spearheaded by a steering committee, which

27. The institutional structure for managing the overall implementation of the MAP i s currently being strengthened. This involves developing action plans for key sectors that link the activities to the MAP goals, strengthening capacity to implement these plans and identifying intermediate indicators to monitor progress toward these goals. The costing o f the various components o f the MAP i s also underway, but the quality varies by sector. In some, such as education (in particular, primary education), environment, roads, governance and rural water, detailed costing exists. For other key programs, such as health, this costing i s being finalized as part o f the preparation o f the health sector plan. In certain other sectors, such as rural development, the costing needs further work which wil l be done in the context o f refining the sector strategies and programs. T w o key new institutions have also been put in place to support MAP implementation -the Economic Development Board o f Madagascar to facilitate and promote domestic and foreign investment and the National Leadership Inst i tu te o f Madagascar to build capacity in Government and other sectors o f society. Finally, a new monitoring and evaluation institutional system i s being developed to ensure a timely assessment o f progress in implementation.

28. country has available. To deal with this, the M A P places greater emphasis on donor coordination and proposes an annual Donors’ Conference and sector meetings to strengthen donor co-ordination and to better align assistance to the MAP goals. The critical elements o f meeting the resource challenge wil l include: (i) sustaining progress on domestic revenue mobilization and public financial management reforms; (ii) improving the investment climate, principally with regard to the legal, regulatory, and judicial system; and (iii) improving transparency and governance.

The MAP’S wide scope and ambitious goals will necessitate far greater resources than the

11

IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM

1. LINK TO THE CAS

29. The Bank’s support to the implementation of the MAP i s detailed in the FY07-11 CAS that was discussed by the Board on April 3,2007 (Report No. 38135MG). The new CAS builds on a solid base o f a well-performing IDA portfolio and an extensive body o f knowledge developed by the World Bank Group. The CAS i s designed to help achieve the MAP objectives and is organized around two pillars: the f i rst pillar concentrates on activities that wi l l help remove bottlenecks to investment and growth in rural and urban areas; the second pil lar brings together activities geared toward improving access to, and quality o f services. In addition, a critical crosscutting element i s improving governance and reducing corruption. The CAS consolidates the ongoing efforts in support o f the Government’s far- reaching program to improve governance. It seeks to extend progress in improving the legal and regulatory framework and focuses on critical implementation aspects o f the governance agenda in: (i) resource mobilization; (ii) public expenditure management; (iii) management o f natural and mineral resources; and (iv) decentralization. Table 1 in Annex 4 provides an overview o f the mix o f operations and AAA envisaged in support o f each o f the eight MAP commitments.

30. harmonization, Bank assistance to Madagascar i s aligned with that of other donors t o provide a package o f coordinated support around the Government’s MAP. The CAS preparation was closely coordinated with other partners to facilitate maximum harmonization, such as the European Union, 1 ’Agence Frangaise de Dbveloppement, the African Development Bank, and the Mi l lennium Challenge Corporation.

I n line with the Government’s request and consistent with the Paris Declaration on

3 1. CAS encompasses the new PRSC series to provide US$40 mi l l ion a year in budget support for the next three years, in line with the distribution o f available financing between budget support and investment operations and consistent with the experience in the implementation o f the f i rs t PRSC series, described in detail below, and the fragile macroeconomic environment. The new PRSC series wi l l focus on selected critical issues in line with the second pillar o f the CAS, improving access and quality o f services, and the cross cutting theme o f improving governance. The CAS proposes that budget support be scaled up gradually to encompass other sectors in tandem with improvements in the public finance system. The PRSC series i s also wel l aligned with the Bank’s good practice principles on conditionality: (i) ownership; (ii) harmonization; (iii) customization to country circumstances; (iv) criticality o f actions; and (v) transparency and predictability (see B o x 3).

The new PRSC series i s fully consistent with the CAS. The lending program envisaged in the

2. COLLABORATION WITH THE IMF AND OTHER DONORS

Coordination with the IMF

32. institutions conduct regular jo in t assessments o f the PRSP (now MAP) implementation and also work closely together on: (i) analysis and reforms in public financial management; (ii) other governance reforms, including customs and tax reform; (iii) trade and (iv) financial sector reform. Joint policy advice i s given on budgetary procedures, including expenditure execution, and the functioning o f internal and external budget controls. In addition, IDA and the IMF will continue to help the Government better align the allocation o f resources with M A P priorities, improve budget execution, implement new procurement legislation, and measure the impact o f public resource use. Periodic PEFA assessments wi l l monitor progress. The Bank and the Fund are supporting implementation o f the recommendations o f the 2005 FSAP. The dialogue focuses on supporting the financial sector strategy framework and helping scale up and expand support to the financial sector by preparing a sector-wide approach with other donors.

The Bank closely collaborates and coordinates activities with the IMF. The staffs o f the two

12

Box 3: Good Practice Principles on Conditionality

Principle 1: Reinforce Ownership

The proposed operation i s an integral part o f the new Bank CAS to support the MAP. The MAP i s an unprecedented effort from Government to show commitment and ownership to a clear set o f reforms which was developed in a highly consultative fashion and presented to parliament along with the 2007 budget. Accordingly, the 2007 budget law i s already starting to align the budget to the MAP objectives. The policy actions supported by this PRSC series are consistent with the MAP matrix. This operation, as well as the overall Government program, has been informed by an extensive body o f analytical work. Key outputs include the two PERs (FY05 and FY07), the procurement audits (FY07), the PEFA report (FY06) a corruption survey (FY06) the CFAA (FY03) and CPAR (FY03) Overall background i s provided by one DPR (FY05) and an on-going CEM plus a continued effort on poverty analysis either by the Bank or by the authorities themselves. The various pieces have either been produced with Government (as in the case o f the latest PER) or extensively discussed with stakeholders and partners to feed in the policy debate.

Principle 2: Agree up front with the Government and otherfinancialpartners on a coordinated accountability framework

The overall MAP matrix has been endorsed by al l donors in Madagascar and represents the framework of reference for all future donor support. Accordingly the PRSC matrix has been developed with Government in line with the overall MAP matrix and it will be revised once Government completes the elaboration of its more detailed results framework for MAP implementation which donors have in principle agreed to follow. Budget support i s highly coordinated among donors with a partnership agreement (Cadre de Partenariat) signed between the Government and the key budget support donors: -European Union (EU), France (Agence Franpise de Dkveloppement, and the French Co-operation), the African Development Bank and the World Bank- to provide a framework and to lay out procedures and modalities for a multi-donor approach to budgetary support.

Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances

Consistent with the new CAS, the matrix for the proposed operation focuses on a subset o f the MAP strategies on public finance reform, decentralization, the fight against corruption and enhanced delivery o f basic services (education, health, nutrition and access to water and sanitation). Learning from prior experience, the choice o f actions i s consistent with a more focused prioritization o f activities and a more gradual pace o f reform. Consistent with county circumstances, the CAS presents a new balance between budget support and investment operations. Budget support will be gradually increased once Government systems are adequately strengthened. All the reform areas are an integral part o f the Government program and are in line with the overall perception of priorities for the success o f the MAP.

Principle 4: Choose only actions critical for achieving results as conditions for disbursement

Consistent with the practice already developed in the first PRSC series, prior actions and conditions have been first proposed by Government and then finalized through a process o f extensive consultations with the Ministry o f Finance and relevant sector ministries. For this operation and the whole second PRSC series the chosen actions are consistent with the MAP matrix and have been chosen precisely for their criticality to the success o f the MAP objectives. The policy matrix for PRSC 4 consists o f 10 prior actions and no benchmarks; 19 benchmarks and 10 indicative triggers have been developed for PRSC 5 and 18 benchmarks and 10 indicative triggers are envisioned for PRSC 6.

Principle 5: Conduct transparent progress reviews conducive to predictable andperformance-basedfinancial support

The supervision o f the PRSC i s conducted within the context o f joint donor budget support reviews agreed with Government twice a year. Donors have already agreed to tailor joint reviews consistent with the MAP results framework once this will be completed by Government. Bank budget support i s not yet fully aligned with the budget cycle. Starting from the next operation (PRSC 5) additional efforts will be made to meet the request o f the Government and deliver budget support in the second quarter o f the calendar year (April-June 2008). The amounts for the whole PRSC series (US$40 million for each operation) have been clearly specified in the CAS and communicated to Government and are reconfirmed prior to the elaboration o f each annual budget law.

13

33. with Madagascar to its Board in July 2006. With the support o f the PRGF, the Government i s implementing measures to continue to adequately manage a fragile macroeconomic environment. The staffs o f IDA and IMF wil l continue to coordinate the content o f the PRSC and PRGF to ensure that the instruments complement one another. In general, the structural and social benchmarks wil l be covered by the PRSC, while the PRGF wil l cover macroeconomic issues.

The IMF presented its new Poverty Reduction and Growth Facility (PRGF) arrangement

Collaboration with other Multilateral and Bilateral Donors

34. providing financial and technical support in a coordinated way. A partnership agreement (Cadre de Partenariat) was signed between the Government and the key budget support donors -European Union (EU), France (Agence Franqaise de De‘veloppement, and the French Co-operation), the African Development Bank and the Wor ld Bank - to provide a framework and to lay out procedures and modalities for a multi-donor approach to budgetary support. This Budget Support Group initiated joint- donor missions in October 2004 to review the implementation o f the PRSP and supervise their respective budget support operations. This i s part o f the overall effort to harmonize assistance and reduce transaction costs for the Government. Since then, joint donor missions have been held twice a year - in April and September/October o f each year.

The donors are collaborating to support Madagascar in implementing the MAP, by

35. I n the joint supervision missions, common areas of support with the EU’s program of budget support (Programme d’Appui Budgitaire h la Reduction de la Pauvrett!, PAW) include the public sector reform agenda, education and health. The support to the public expenditure reform agenda i s coordinated in line with the Government’s Priority Act ion Plan. The Government has convened meetings periodically with the main donors to inform them o f progress on implementation. Key reforms in public financial management and fighting corruption are being supported by financing f rom IDA together with technical assistance from the EC, German Technical Cooperation Agency (GTZ) and the French Cooperation. Donor coordination around implementing customs reforms has also improved.

36. The Ministry o f Education (MENRS) has continued to lead the dialogue with donors in the education sector. The Fast Track Initiative (FTI) process with the Education For All (EFA) National plan has strengthened the Ministry further in this role and has given a focus to the Donor Group which includes UNICEF, French Co-operation, AfDB, AFD, Japan, U S A I D and the Wor ld Bank (see Annex 5). Regular donor meetings are organized and through this, a deeper sharing o f information on appraisal missions, technical assistance and studies. Whilst there are diverse support mechanisms, donors take a holistic approach and are concerned about the progress o f the EFA Plan overall as wel l as individual projects.

37. The Ministry of Health i s initiating a sector wide approach. The recently completed sector development strategy i s the f i rst building block o f a Sector Wide Approach Project (SWAP) in the health sector and constitutes the organizing principle for donor coordination and harmonization (see Annex 5). In addition, support for H IV /A IDS i s already structured around a sector wide approach with a l l donors’ programs aligned wi th the Government strategy.

38. I n other sectors, the level of cooperation varies depending on the sector and the donors involved. There i s strong coordination o f donor support in the transport, water and environmental sectors with the program o f reforms and investment addressed jo int ly by donors. There i s s t i l l a way to go to improve coordination in agricultural and rural development but the MAP i s helping to organize donor interventions in a more effective way.

39. Capacity constraints hamper Madagascar’s ability to achieve its development objectives. The donor community i s supporting Madagascar in strengthening capacity, through a range o f technical assistance grants and training initiatives designed to enhance the implementation o f the MAP (the key donors involved include the Wor ld Bank, European Union, UNDP, French Co-operation, the

14

African Development Bank, GTZ, and USAID). Donor coordination to support capacity building efforts, i s also being enhanced through the round table for public expenditure management reforms, and through the Budget Support Group.

3. RELATIONSHIP TO OTHER BANK OPERATIONS

40. lending, AAA and technical assistance. T o support the implementation o f the MAP, the CAS proposes a new balance o f investment operations and budget support along with technical assistance to strengthen Government systems and capacity. Overall, the CAS devotes a considerable amount o f IDA resources available for Madagascar to operations designed to continue investment and policy dialogue in the growth agenda. The PRSC series remains focused on key reforms in public finance management, governance and increased service delivery thus complementing a large portfolio in infrastructure, private sector development, rural development and environment. Consistent with county circumstances, budget support will be gradually increased once Government systems are adequately strengthened. Annex 4 reviews in greater detail the on-going operations and those planned over the CAS cycle that support Madagascar’s efforts to foster higher investment and remove bottlenecks to growth. K e y projects include: the Integrated Growth Poles Project; the Transport Infrastructure Project; the Rural Transport Project; the Rural Development Support Project; the Irrigation and Watershed Project, the Regional Telecommunications Project and the Environment Project. Of particular relevance, also in light o f the recent economic developments, are the Power and Water Sector restructuring Project, which devotes specific attention to support Government in addressing the J IRAMA persistent crisis, and the Mineral Resource Governance Project, dedicated to strengthening the institutional framework o f the mining and extractive industries sector. The specific objectives o f the planned portfolio can be summarized as follows: (i) eliminate barriers to access domestic and international markets; (ii) improve access to finance and factor markets; (iii) reduce regulatory burden and foster competition and (iv) achieve sustainable development and minimize the impact o f shocks.

As articulated in the CAS, development policy lending will be complemented by investment

41. Overall, the PRSC continues to serve as a vehicle for policy dialogue in key priority reform areas. Since the inception o f budget support in 2003 the PRSC has been instrumental to enhanced policy dialogue in priority areas. This dialogue has been institutionalized through jo in t reviews with the Government and other donors and has centered on strengthening public sector capacity and accountability with a strong emphasis on improving financial management, transparency and expanding service delivery. Technical assistance i s provided through separate projects, most notably the Governance and Institutional Development Project. The Bank also has a significant program o f support in the human development sectors which supports improved service delivery through investment projects in health, nutrition, HIV/AIDS and through the engagement in the EFA.

42. Investment lending operations in health, nutrition and the EFA initiative are also harmonized with the PRSC focus on improved service delivery. The recently approved Sustainable Health System Development Project -May 2007-and the additional financing for the Nutrit ion Project, approved in November 2006, have been developed in close coordination with the design o f the new PRSC series. In addition, the PRSC i s also coordinated with the EFA initiative and the Catalytic Fund for education managed by the Wor ld Bank. In al l these areas the PRSC reinforces the emphasis that these operations have on the reform o f Government financial and institutional systems.

43. PRSC in close coordination with the on-going IDA-supported Mineral Resources Governance Project. The project, which benefited f rom additional financing o f US$8m in M a y 2007, covers the following five areas o f focus: (i) policy, legal and regulatory framework; (ii) institutional restructuring and strengthening o f the extractive industries public sector structure, particularly under the Ministry o f Mines; (iii) support to integration o f large-scale mining projects to regional development; (iv)

The increased relevance of the mining sector for the growth agenda i s supported by the

15

management o f potential conflicts between environmental protection and large-scale/small-scale mining; and (v) improved Government and management capacity o f small-scale mining activities. This project is developed in coordination with the Norwegian Government’s Oil for Development program, which supports the establishment o f a legal and regulatory framework and the institutional strengthening for the development o f the country’s petroleum resources.

44. Strong complementarities exist between the PRSC series and the Governance and Institutional Development Project. Since 2003 this project has been successfully assisting Government in: (i) rationalizing and modernizing budget and public expenditure management; (ii) improving accountability and transparency o f Government operations; and by (iii) strengthening the capacity o f public institutions to deal with complex change processes. These activities are clearly intertwined with the reform agenda set forward by the past and current PRSC series. Consequently the two operations are implemented in close coordination, with PGDI supporting specific activities in the areas o f focus o f the PRSC. Examples o f such activities include: the deployment o f an integrated financial management system to improve transparency and accountability o f Government operations, the strengthening o f internal and external controls, the design o f a new procedural and institutional framework for public procurement, comprehensive training and capacity building activities in the areas o f development planning, public financial management and procurement; as wel l as the development o f the regulatory and institutional framework to improve governance and to fight corruption. PGDI has been recently restructured and additional financing provided to the project to assist Government to develop a consistent monitoring & evaluation framework to support the MAP. Regarding governance issues and improving transparency and accountability in the mining sector, the PRSC series i s also aligned with the strategic focus o f the new Mineral Resources Governance Project, presented to the Board for additional financing in M a y 2007.

45. IMF program. Along with the activities supported by this operation for the reform o f the customs administration, other projects support Government in improving revenue mobilization. In particular, the PGDI i s currently assisting in the strengthening o f tax administration by supporting the simplification o f administrative procedures, financing the modernization o f tax offices, and improving the implementation o f capacity building activities. N e w AAA activities are being developed in coordination with the IMF to elaborate a comprehensive tax policy reform that would be supported by the second-phase P G D I project planned for FY09. Finally, the Mineral Resources Governance Project supports the development o f a new fiscal framework for the mining sector, including large scale investments to include adjustments to optimize fiscal revenues.

Revenue mobilization i s supported by various IDA projects and i s coordinated with the

4. LESSONS LEARNED AND THE FIRST PRSC SERIES

46. This PRSC series draws from lessons learned from the first PRSC series and the overall evaluation of the Bank’s program in the CAS Completion Report (for the FY04-06 period) and the Independent Evaluation Group (IEG) Country Assistance Evaluation Report (for the 1995-2005 period --IEG report No. 38213). A full Implementation Completion Report for the f irst PRSC series i s scheduled to be completed in FY08. Consistent with the previous PRSP, the program for the f i rs t three PRSCs (2004-2006) focused explicitly on the strategic axes o f governance and human development, and included specific policy actions in these areas. The objective o f the f i rst three PRSCs was to consolidate reforms underway in the public sector, fight corruption, improve public financial management, transparency and accountability, and improve service delivery in education, health, water supply and nutrition.

47. A preliminary assessment o f the first PRSC series shows that while overall program implementation i s satisfactory there are areas where progress has been mixed. Annex 3 provides an overview o f the current status o f the key expected results as envisioned at the time o f the f irst PRSC in the areas o f governance, the fight against corruption and human and maternal security. Overall, the

16

implementation o f the first two PRSCs took place during years o f unanticipated adverse macroeconomic shocks: 2004 was marked by a sharp depreciation o f the exchange rate and two back-to-back cyclones, which led to unforeseen expenditures and sharp inflation. 2005 was marked by high international o i l prices, and a structural and financial crisis in the energy parastatal JIRAMA, which led to unprogrammed budgetary outlays. The resulting pressures on the budget in both 2004 and 2005 had a clear adverse impact on the implementation o f the two PRSCs as Government was faced with the management o f diff icult events. On the resource side, the revenue collection was below expectation and donor aid flows were delayed. The Government had to adjust through a curtailment o f expenditures, including a freeze o f commitments in March 2005, a reduction in expenditures, and a shortened expenditure cycle. In addition to this overall budgetary constraint, l imited capacity for budget execution within the sector ministries was manifest and contributed to the execution delays observed in most sectors. Budget execution was further complicated with the transition in 2005 to the program budgets without adequate preparation or training o f ministry staff. More recently, the implementation o f PRSC 3 shows encouraging signs o f improvement in the budget process. The 2007 budget law i s more realistic and i s anchored in a sound macroeconomic framework for the base case scenario. Procedures have been put in place for the 2007 budget to be executed starting January 1'' as opposed to March for 2006. Concomitantly, the Ministry o f Finance and Budget i s taking a more active role in seeking proper implementation o f key reforms. For example, budget reports are to be produced in a timely fashion and discussed with l ine ministries, and additional training has been organized for the implementation o f the new procurement code.

48. dialogue under the f i rs t series o f PRSCs, the Government has improved overall coordination and harmonization o f public finance reforms, in particular through the development o f an annual action plan agreed upon with al l relevant development partners and through the establishment o f a reform coordination unit. This process has also greatly increased dialogue and interaction on goals, objectives and implementation challenges between the Ministry o f Finance and the sector ministries. Monthly meetings are presently organized to jo int ly review budget execution issues and to discuss technical assistance needs.

Public finance reforms have yielded a number of important results. Based on the policy

49. Significant progress has also been made to improve the regulatory and institutional framework that governs public financial management. Modern public finance regulations have been put in place and a strong link between the development strategy and the budget has been established. The budget preparation process was revamped to allow for more time to discuss the budget and i t s strategic priorities. A Medium-Term Expenditure Framework was introduced to provide a forward vision o f the budget. Budget execution was streamlined based on the introduction o f a modern computerized integrated financial management system. The new system has been deployed to al l six main treasuries and to key sector ministries. It allows for more transparent and accurate execution o f the budget and more timely budgetary reporting. In the context o f the introduction o f the new system, the Treasury Department has been significantly strengthened based on an organizational restructuring. An internal control service i s now operational in the Treasury Department (Brigade de TrCsor). In addition, the operational effectiveness o f other internal and external control mechanisms such as the General Inspection Directorate (Inspection GCnCrale de l'Etat), the Auditor General's Of ice, and the Finance Commissions o f Parliament have been strengthened.

50. T o improve the revenue generation at the level of the customs directorate and to reduce endemic corruption, a comprehensive customs reform action plan i s now under implementation. The implementation has made good progress: customs operations in key customs offices (e.g. Tamatave and Antananarivo) have been fundamentally reorganized and modernized based on the deployment o f an automated data processing system (SYDONIA++). Pre-shipment inspections by a private company have been introduced to improve transparency and reduce discretionary authority. The introduction o f the internationally recognized customs management system TRADENET i s imminent. The customs regulations have been modernized and the tar i f f structure has been simplified. In addition, the Government has embarked on a tax reform program. With assistance from the IMF, the Government i s

17

working on simplifying and rationalizing the tax system and minimizing tax exemptions. In parallel, tax administration reforms have been initiated to improve operational efficiency o f the tax directorate.

Box 4: Public Finance Reforms in Madagascar

The strength and weaknesses o f Madagascar's budget and expenditure management system have been subject to numerous studies over the last years. Initial reforms focused primarily on streamlining and rationalizing the rules and regulations governing public expenditure management, on capacity building and training and on integrating various administrative functions to improve efficiency and effectiveness. These reforms have been supported by the World Bank Public Management Capacity Building Project (PAIGEP I) which closed in December 2002. Some progress was made to simplify the expenditure process and computerize key elements o f the budget execution system. Based on a comprehensive reform o f the budget classification system and the introduction o f a new chart of accounts the quality, frequency, availability and timeliness o f budgetary and accounting information somewhat improved.

When the Government o f President Marc Ravolamanana came into power in 2002 it inherited a largely unfinished and non-prioritized agenda. While previous reforms had some impact, overall efficiency, transparency and accountability o f the public finance system remained low. The new Government identified public finance reforms as one o f i t s key priorities and provided new impetus to the agenda. In collaboration with the World Bank and other development partners the Government initially identified the following key priority areas: (i) the development and introduction o f an integrated financial management system for the central government to improve operational efficiency o f budget and expenditure management. (ii) the strengthening o f internal and external control mechanisms to improve oversight and enforce compliance, and (iii) the reform o f the public procurement system to ensure i t s conformity with international standards.

It soon became apparent that this agenda would not be sufficient to bring Madagascar's public finance system to international standards; additional reforms would be required to ensure that the public finance system could effectively support implementation o f the Government's development program. These additional reforms included: (i) a fundamental revision o f the budget preparation process to improve quality o f the annual budget and i t s consistency with the development strategy, (ii) a simplification o f the budget execution processes to reduce transaction costs, (iii) significant investments in training, capacity building and institutional development to enable sector ministries to institutionalize the reforms, and (iv) reforms o f the revenue agencies (customs, tax administration) to increase Government revenues and reduce barriers for private sector development.

Wh i le support to the public finance agenda under the old regime was largely uncoordinated, the new Government emphasized the need to harmonize the inputs from development partners. As the main instrument to achieve this, it developed an action plan for public finance reforms that i s agreed upon with all principal donors, and updated on an annual basis. The olan orovides the framework for all assistance to oublic finance reforms in Madagascar.

5 1. In the area of public procurement, new procurement regulations including implementing decrees and standard bidding documents have been developed which are in line with international standards. The institutional framework for public procurement has also been modernized, and a new procurement oversight authority (Autorite' de Re'gulation des Marche's Publics, ARIMP), including a new appeals system, was set up.

52. level of the sector ministries. Training and capacity building activities for the Ministry o f Finance and the sector ministries have focused on institutionalizing public finance and procurement reforms. The Ministry o f Budget and Finance which i s leading the comprehensive reform program has developed annual work plans which are agreed upon with a l l relevant development partners. A reform coordination unit has been established to monitor implementation o f the reform process. At the sector level greater attention i s now given to capacity needs, especially in financial management and procurement, and longer term vision for technical assistance for priority ministries. In education, for example, a two year technical assistance plan was prepared and is under implementation with the Ministry o f Education, with financing

18

Significant investments in training and capacity building improved execution rates at the

from the PGDI, to provide assistance in budget formulation, execution and policy advice. A similar plan has also been developed for nutrition and health. These activities have yielded positive results as evidenced by the 2006 Public Expenditure and Accountability Assessment (PEFA) which confirmed an improvement over the 2005 PEFA assessment.

53. To reduce corruption, the Government initiated a comprehensive governance reform program which went through numerous refinements. The f i rst phase o f the program (until early 2006) focused on establishing an effective regulatory and institutional framework to fight corruption and improve governance. In this context, an independent Anti-Corruption Commission (Conseil Supe‘rieur Lutte Contre la Corruption, CSLCC, later renamed Comite‘pour la Sauvegarde de l’lntbgritb, CSI) and an independent Anti-Corruption Bureau (Bureau Indbpendent Anti-Corruption, BIANCO) were set up and made operational. The Commission subsequently put forward a comprehensive anti-corruption legislation which includes a declaration o f assets o f public and elected officials, and regulations to improve both investigation and prosecution o f corruption cases. Additional activities o f the Commission focused on regulating the recruitment into the public sector which, under the previous regime, was a key source for corruption and conflict o f interest. The Commission also organized, with assistance from WBI, an anti-corruption survey to establish baseline data and to raise public awareness about the incidence o f corruption. In parallel, BIANCO investigated a significant number o f corruption cases and organized independent reviews or procurement audits in sensitive areas such as audits o f the land titling and customs agencies as well as procurement audits o f the transport and the education programs. Second generation governance reforms are ongoing. They focus on addressing conflict-of-interest o f public and elected officials, on further strengthening the regulatory framework, in particular whistleblower protection and the acknowledgement o f the watchdog function on non-Governmental organizations. The Government’s efforts to establish a comprehensive framework o f checks and balances that i s aimed at improving transparency and reducing the opportunities for corruption and conflict-of-interest, has paid o f f as evidenced by a continuous improvement in governance indicators since 2003.

54. systems, several of the key indicators for basic service delivery show significant improvements. In education, most o f the established targets have been achieved. The Ministry o f Education has increased i ts management capacity and has made progress in budget preparation and execution as well as implementing the new procurement code. Disparities, however, are s t i l l present across districts and overall quality improvement i s s t i l l an important challenge. In the health sector, infant and chi ld mortality have improved partly due to better delivery o f basic packages (vaccinations, vitamin A etc.). Maternal mortality, however, i s s t i l l progressing very slowly, and the whole health system s t i l l needs strengthening with respect to budget preparation and execution, implementation o f HR policy, procurement and revision o f i t s hospital strategy. In nutrition, the available evidence points to a continued improvement o f the situation on the ground and progress i s also registered in the institutional set up with the recent rationalization o f the National Nutrit ion Office (ONN). Finally, in rural water the Government continues to make significant progress in setting up the necessary building blocks to move to a programmatic approach and enhanced budget support for the sector. The overall implementation o f the national water supply and sanitation program (PNAEPA) has been satisfactory and has led to an improved availability o f water and sanitation services particularly in rural areas. Nevertheless, much higher volumes o f investment wil l be necessary to achieve the M A P and MDG objectives. Trends in key human development indicators are presented in Table 5.

Despite the persistent challenge for the public sector to mainstream efficient delivery

19

Table 5: Key Human Development Indicators

Primary net enrolment rate 93%) 97' 0 96% 97% pnmary school completion rate 45% 51'6 51% 60%

Number o f textbooks per primary I book per 3 0 9 0 9 0 9 school student students DTP3 vaccination rate o f children 85 8'10 75 1% 86 6% 93% below 1 year Skilled attendance at birth in 2 8% 26 1% 19 1% TBD Centre Sante Base (CSBj and Centre Hospitalier de Dismct

Utilization rate in CSBs 0 57 0 49 0 45 TBD Neonatal Monality 40 4 3 1 6 Infant Mortality 96 3 57 8

Maternal Mortality 488 469

rate

to safe dnnking water in rural areas hole For education 2003 refers to school year 2003 2004, 2004 refers to school year 2004 2005 and so on Utilization rate for CSBs i s measured as total

number o f curative outpatient visits out o f the total population Monality rates are expressed per 100,000 live binhs among the four years preceding the survey Underweight rates Based on Demographic and Health Surveys

(cHDI)129

Under 5 Mortality 159 2 93 9

Reduction in child underweight 48% 44%

Percentage o f people wth access 27 2% 29 5% 309.0 3 1 %

55. originally envisioned. Fol lowing init ial progress, advances in legal and judic ia l reforms have been slowing down. Similarly, some anti-corruption activities are proceeding slower than expected, in particular those that are focused o n addressing 'grand' corruption and conflict o f interest. Moreover, in public expenditure management significant challenges s t i l l persist, particularly in revenue management, budgetary reporting, control and execution. The main reasons include over-optimism at the design stage, insufficient prioritization o f actions, and under-estimation o f the capacity constraints and implementation lead times. This was particularly true for measures aimed at strengthening the procurement framework and the accountability and transparency o f budget execution. As additional issues and weaknesses surfaced over the course o f the implementation o f the first series o f PRSCs, the governance and public finance reform agendas have evolved accordingly. This has been particularly true for the significant training and capacity building needs in the area o f public financial management and procurement at the level o f the sector ministries which were seriously underestimated and required significant complementary investments in capacity building and technical assistance. Finally, a l l these issues have been further exacerbated by the init ial lack o f understanding o f the PRSC instrument in sectors accustomed to investment projects. For example, as o f the PRSC 1, the nutrition program transitioned to budget support, but although it has now resumed a good level o f service delivery, a credible institutional setting i s only just now beginning to materialize.

At the same time, reforms initiated in several areas need more time to consolidate than

56. the Independent Evaluation Group in July 2006. This evaluation provided relevant insights which have been taken into account in the design o f the second PRSC series insofar as they recommend: (i) limiting the role o f budget support until there i s a sustained improvement in collecting and managing public resources; and (ii) focusing governance interventions on a few critical areas.

Useful lessons have also been drawn from the Country Assistance Evaluation completed by

57. have been retained in designing the new series. These can be summarized as follows:

Moving forward, the experience with the first PRSC series has provided key lessons that

0 Budget support remains central to the Bank's assistance in Madagascar as it has proved an effective instrument in fostering a much more concerted focus on key issues such as public expenditure management and institutional capacity building;

20

Given the fragile macroeconomic environment and limited implementation capacity, the volume o f budget support in the overall Bank portfolio wi l l be modest until sustained improvements in these areas can be ascertained; Focus on fewer critical reforms particularly in the area o f public finance and governance. The Ministry o f Finance’s reform agenda i s wide-ranging, and the challenge remains greater prioritization and staying the course on implementing the reform program. Whi le fine-tuning and adjusting are critical elements o f a successful program, this needs to be balanced with the need to have stable procedures (changes each year complicate implementation); A l l ow for a more reasonable pace o f reform particularly in sensitive and diff icult areas and tailor the expected results accordingly; Accompany key reforms with continued technical support to priority ministries and agencies (e.g. Education, Health, Transport, DEA - Directorate o f Water and Sanitation - and ONN)

5. ANALYTICAL UNDERPINNINGS

58. policy dialogue and programmatic lending. Furthermore, analytical and advisory work has been conducted or i s planned beyond what was envisioned in the previous CAS to respond to Government needs. Recent key analytical reports completed include: the PEFA report, the new Public Expenditure review, which focuses inter alia o n health, nutrition and water and sanitation sectors and a study analyzing the prospects for Madagascar to attain the MDGs. Procurement audits in key sectors (health, education, and transport), along with an institutional assessment in nutrition, were part o f the Government activities connected to PRSC 4, and they inform the reform agenda. PRSC 4 also continues to benefit f rom the integrative Development Policy Review on Sustaining Growth for Enhanced Poverty Reduction (FY05) which i s now being revised by the work underpinning the new C E M scheduled for early FY08. The previous Public Expenditure Review (FY05), which provides recommendations on the public expenditure reform agenda and specific recommendations for the transport, education and environment sectors, also helped underpin the key reforms. The findings o f the Country Financial Accountability Assessment (CFAA, FY03) and the Country Procurement Assessment Review (CPAR, FY03), have also been critical in defining the reform program o f the Government. In addition, a large body o f analytical work contributes to inform the overall Government reform agenda. This includes the Investment Climate Assessment, the Financial Sector Assessment Program and the land tenure review -all completed in FY06, as well as the Local Development Fund (FDL) feasibility study led by the Government and on- going work on poverty analysis, labor markets and weather risk management.

An extensive program of analytical and advisory activities (AAA) underpins the Bank’s

59. To ensure adequate analytical input for the public finance and procurement reforms, the Government has agreed to a regular PEFA assessment. An initial p i lot assessment was conducted in 2005 by the Government in collaboration with the PEFA Secretariat. In 2006, an independent PEFA assessment was organized, which confirmed a slight improvement o f the performance o f the public finance and procurement systems. In total, 9 out o f 28 indicators were rated to be at an acceptable level. A new assessment i s scheduled for January 2008 and w i l l be repeated every two years. Additional analytical support i s being provided by a series o f programmatic Public Expenditure Reviews which are conducted jo int ly with the Government. These PERs build on the collaborative work under the 2005 Public Expenditure Review, which generated comprehensive discussions about the scope, focus and priorities o f public finance reforms. The PER 2006-7 i s the first exercise which i s organized jo int ly between the World Bank and the Government, and it focuses on health, nutrition and rural water.

60. To assess the status of the application of, and compliance with, the new procurement regulations the Government has agreed to organize regular (annual) procurement reviews. A first series o f reviews has just been completed for the Ministries o f health, education and transport. The findings o f these reviews are being used to identify reform bottlenecks and to adjust the ongoing training and capacity building program.

21

61. the work on public expenditure and procurement mentioned above, several sector studies inform the reform agenda in education and health. In education, the implementation o f the EFA plan has been supported by several analytical studies on primary education issues. A study on Language Policy has been completed by the Bank and the Norwegian cooperation to provide the Government with options for improving the language o f instruction. A study o n school construction has been conducted to provide inputs for a national strategy and for the harmonization o f donors’ construction projects. UNICEF completed the f i r s t phase o f the study on gender parity within the frame o f the United Nat ion Girls’ Initiative Education. The Bank and the GTZ undertook a study on the drop out at primary level and the potential for introducing conditional cash transfers. An analysis o f school nutrition has been commissioned by the World Food Program to support the development o f a national strategy on school nutrition. Preliminary results are also available f rom the expenditure tracking survey, identifying the scale o f leakages in the provision o f goods and financial resources from the center t o districts and schools. In health, the completion o f the National Health Accounts exercise, the efficiency and equity survey along with the recent finalization o f the quantitative HR plan, provide key analytical inputs to the Government sector program and to this operation. Preliminary results are also available f rom the analysis o f drug delivery to decentralized entit ies which identify leakages and delays in the distribution system. A new Anthropometric Survey, currently in process, and a Demographic Health Survey, planned for early 2008, wi l l provide an updated baseline for monitoring progress in the sector.

Sector specific studies in education and health underpin the reform agenda. In addition to

62. PSIA on health care and the poor. A poverty and social impact analysis (PSIA) carried out in 2006 highlighted the absence o f citizen involvement in monitoring service quality in health, as well as a lack o f empowerment o f local health committees, which represent a key focus o f community level involvement in the health system. Moreover, Madagascar’s numerous remote or difficult-to-access areas make it almost impossible to rely solely on top-down supervision to monitor the quality and performance o f the 2,240 health posts (Centres de Santd de Base - CSB). The PSIA found that poor quality o f services was one o f the two key factors limiting use o f public CSBs, the other being financial. In this context, health service quality could be improved if there were support for engaging local communities in the monitoring o f health quality, and if the accountability and transparency o f the relationship between the service providers and users was strengthened at the local level. A pi lot study i s currently testing and adapting a community score card to the health sector and i s expected to provide valuable lessons on how such mechanisms could be adapted and more systematically integrated into the health sector.

63. in 2004, a new institutional framework has been set up to mainstream nutrition activities in the Government program. Following the formulation o f the National Nutrit ion Policy (PNN) at the request o f parliament, the nutrition action plan for 2005-2009 (PNAN) was formulated by Government to operationalize the policy through the simultaneous implementation o f fourteen strategies. The MAP has now reprioritized and integrated the P N A N within i t s framework. ONN was established under the responsibility o f the Prime Ministry office to implement this plan in collaboration with other sector ministries such as health and education. The approach i s a fundamental change in nutrit ion policy as it transitions Government interventions f rom a classic project-type approach to an institutionalized framework for interventions. Following the first phase o f implementation, an institutional assessment was performed to further clarify and strengthen roles and competences. The results have been used by Government to clarify the institutional structure o f ONN and are being formalized in a new decree.

Nutrition institutional assessment. With the creation o f the National Nutr i t ion Office (ONN)

22

Table 6: Key Analytical Underpinnings

Area I Date I Remarks Overall Poverty Analysis

DPWCEM FY05-

I FY08

Investment Climate

CFAA I FY03 CPAR I FY03 Public Finance Management PEFA FY06

FY05- I PER 1 FY07

A formal Poverty Study was completed in FY02. In addition, I periodic updates- are produced by-INSTAT. A DPR on Sustaining Growth for Enhanced Poverty Reduction was

environment sectors. I and water and was conducted jointly with Government. I Audits o f implementation o f new procurement code in the ministries Procurement audits I FY07

I Review o f norms and standards I FY06 I Input in the formulation o f new norms under preparation. I

23

V. THE PROPOSED NEW PRSC SERIES: PRSC4-PRSC6

A. OVERALL DESCRIPTION

64. The main objective of the new PRSC series i s to support the implementation of the MAP. Consistent with the MAP, this PRSC cycle wi l l provide Government with an opportunity to consolidate reforms under way in the areas o f public finance, governance and basic service delivery. I t wi l l support efforts towards increased fiscal discipline, streamline and consolidate Government budget practices and improve transparency. It wi l l also continue to sustain efforts to improve the overall institutional setting for improved service delivery in education, health, nutrition, water and sanitation. These reforms are expected to be conducive to higher growth rates and faster poverty reduction. The second PRSC series wi l l be prepared and delivered more in line with the Government’s budget cycle, which runs from January l-December 3 1. As requested by the Minster o f Finance, the preferred timetable for approval o f the PRSC i s the second quarter o f the calendar year. Whi le PRSC 4 i s scheduled for early in the third quarter, efforts will be made to further align PRSC 5 and PRSC 6 with the desired timetable. Indicative triggers for future budget support have been selected accordingly.

65. This PRSC series aims at supporting the MAP on a strategic subset of objectives defined in the MAP under the following three commitments: (i) responsible governance; (ii) educational transformation and (iii) health, family planning and the fight against HIV/AIDS. An additional area o f focus i s also rural water supply, presented in the M A P under the commitment o f connected infrastructure. Capitalizing on the experience to date with the implementation o f the f i rst PRSC series, the new one has been designed with Government to focus on a smaller set o f priority activities and to continue to support the implementation o f key reforms. Consequently, the new PRSC series wi l l continue to support the Government to implement its comprehensive governance reform program. A key priority is the consolidation o f the reforms initiated under the f irst series, i.e. to further refine the regulatory and institutional governance framework, t o close existing gaps, and to improve the impact o f governance- related activities. Additional attention i s given to governance reforms, in particular governance challenges in selected entities such as the revenue agencies and in specific sensitive sectors such as forestry and mining. The recent economic developments, wi th an increased relevance o f the extractive sector (see section II), have given even more prominence to governance issues in extractive industries and prompted an additional focus on strengthening the efficiency and transparency in this area. The PRSC series wi l l complement the governance activities supported by the Mineral Resources Governance Project to strengthen the policy legal and regulatory framework o f the sector. On revenue mobilization issues, the series wi l l continue to support reforms in the customs administration. Dedicated AAA will complement the dialogue currently led by the IMF o n overall tax policy reform and wil l lead to concrete actions to improve tax policy for the end o f the series.

66. institutional strengthening and quality improvements underway in the sectors. More specifically, the PRSCs wil l complement the Bank’s existing investment portfolio by reinforcing the institutional rationalization process in nutrition and by supporting the implementation o f sector wide approaches in health, education and water supply currently under way.

Regarding basic service delivery, the objective of the series i s to accompany the process of

67. fully aligned with the MAP matrix. Prior actions for PRSC 4 and benchmarks and indicative triggers for PRSCs 5 and 6 have been selected with the Government on the basis o f (i) their importance in contributing a key constraint to the implementation o f the intended reform and (ii) their alignment with the MAP objectives. Indicators are also consistent with those presented in the MAP. However, for the time being the PRSC series foresees outcomes that are more conservative as the M A P presents a very ambitious progression path, predicated o n a high increase o f external financing which has yet to fully materialize. The Policy Matr ix may be updated as necessary once the Government completes i t s detailed results framework o f the MAP in the second hal f o f 2007.

The program matrix and results framework for the PRSC series presented in Annex 1 are

24

68. financial management a substantial improvement o f the whole budget process as measured by the newly established PEFA indicator system i s expected. The reform program would lead to an increase o f PEFA indictors rated ‘B” or above in al l the key areas: budget preparation and execution, budget reporting and internal and external controls. In addition, key expected results include: (i) improved alignment o f the budget with the MAP priorities; (ii) al l public institutions (ministries at central government level) execute their annual budgets through the integrated financial management system (SIGFP); (iii) at least 80 percent o f reviewed procurement processes in selected public institutions are assessed as conforming to the new procurement regulations (iv) reduced transaction time o f commitment control accelerates budget execution and (v) the Tax Directorate focuses on the collection o f fewer taxes under a streamlined tax regime and the customs directorate increases i t s efficiency. In the area o f decentralization the reform program i s expected to lead to a higher share o f resources available to local governments (at least 22 percent o f the budget). Regarding the fight against corruption the reform program i s expected to produce (i) an improvement o f the perception o f corruption amongst the population and c iv i l servants and (ii) reduced opportunities for corruption in extractive and natural resource industries. In the domain o f service delivery the results expected are in line with the sector wide programs supported by the series. Education results include continued improvements in primary school completion rates and repetition rates with particular attention to vulnerable districts. In addition the Ministry o f Education is expected to continue to reinforce i t s capacity and quality in financial management and procurement services and sustain budget execution rates o f above 90 percent. In health, skilled attendance at birth and basic consultation rates are expected to increase while the Ministry starts to implement a new HR policy, increases i t s budget allocation to districts, and maintains an execution rate o f above 90 percent. For nutrition, the series would lead to a full operationalization o f the institutional changes under way along with a continued reduction o f malnutrition rates. Finally, for water and sanitation, the increase in access to rural water and sanitation wi l l be accompanied by a strengthening o f public sector capacity at the regional level and an increased role o f the private sector in managing services.

The expected results at the end of the series include the following: in the area o f public

identical to the indicative trigger.

The final prior action i s

Table 7: Status o f Indicative Triggers for PRSC 4

for 2006 i s satisfactory as assessed by the joint donor reviews o f November 2006 and March 2007 Budget 2007 allocates 18.1 percent to

banagement

The final prior action i s identical to the indicative trigger.

The final prior action i s identical to the indicative trigger.

ormulation

The reports for the last quarter o f the year 2006 were submitted by the end o f January 2007 and discussed in February 2007. The findings and conclusions have been presented to Cabinet in March 2007.

Audits were completed in February 2007 in the ministries o f education, health transport. An action plan has been defined to support continued

xecution

I

rocurement I*

Satisfactory implementation o f Priority Action Plan for 2006. Budget for 2007 allocates adequate resources to PRSPMAP priority sectors. A l l sector ministries submit budget execution reports based on an economic classification to MEFB within four weeks after the end o f the reference period (every four months). Procurement Audits are carried out by or under the oversight o f the A M P in at least 3 key

identical to the indicative trigger.

education, 16.3 percent to infrastructure and 9 percent to health. This i s consistent with the MAP priorities.

25

lecentralization

,nti-corruption

ater Supply

Indicative PRSC4 triggers in PRSC3 Board Document

ministries (education, health, transport) to assess compliance with new rules and regulations. Government adopts new regulations on fiscal decentralization to be reflected by the 2007 Budget Law.

Develop and adopt conflict-of-interest regulations

Implementation o f National EFA Plan on track.

Prepare and validate the Health Sector Development Program (PDS S) . Elaborate nutrition sector institutional assessment, validate it, and implement its recommendations.

The Ministry and i ts main partners are implementing the recommendations o f 2006 joint donodGovemment sector review in the program budget 2007- 2009.

The final prior action i s identical to the indicative trigger.

Develop conflict-of- interest regulations

The final prior action i s identical to the indicative trigger.

The final prior action i s identical to the indicative trigger.

The final prior action i s identical to the indicative trigger.

The final prior action i s identical to the indicative trigger.

implementation o f the new procurement code.

Budget Law 2007 has increased the share o f certain taxes (impbt synthe'tique, impst foncier) in favour o f the communes. Formally the trigger was fulfilled, but the adopted regulations fall well short o f the originally envisaged scope of the reform, due to difficulties in conceptualizing and operationalizing a broader revision of the fiscal decentralization framework. Government has initiated the process to develop conflict o f interest regulations for the civil service. A decree has been drafted and implementation will commence in July-August in 4 pilot ministries. Following the results o f the pilot, regulations will be mainstreamed to al l public sector entities in 2008. This work took longer than expected because o f difficulties in determining the scope and focus o f the regulations. The adiusted

'he review o f the annual EFA report repared in April 2007, confirms that the ositive findings o f the October 2006 mid- :rm review: EFA plan implementation ontinues to be on track. 'he Ministry o f Health has completed the laboration o f the PDSS which has been alidated by the Cabinet.

'he institutional assessment o f ONN was ompleted in early March 2007 and alidated with the Prime Ministry. A ecree to formalize the main institutional hanges was issued on May 7,2007 iecree No. 397). The March 2007 joint donor review assessed progress in the implementation o f seven recommendations made in the 2006 review as fully satisfactory.

26

B. THE PROGRAM S U P P O R T E D BY P R S C 4

Governance

> PUBLIC EXPENDITURE MANAGEMENT

69. The institutionalization of the budgetary reforms introduced in 2005 continued to be the key focus of the Government’s public finance reforms over the year 2006. In 2005, the Government introduced simultaneously a Medium Term Expenditure Framework (MTEF) and a Program Budgeting system. The new framework i s meant to improve transparency, predictability and efficient use o f public resources. As mentioned before, the Government faced significant challenges in operationalizing these reforms at the sector ministry level. In addition, work on other reform areas such as public procurement and the modernization o f the customs directorate has been continuing. The reforms and their implementation status are summarized in Table 8 below.

70. While overall implementation progress of the reform program has been satisfactory, a number of challenges remain: 0 The fiscal framework for 2006 had to be revised because o f lower-than-expected revenues. Revenue performance in 2005 was only 88 percent o f programmed levels, significantly below target. Revenue performance improved for the year 2006 to 95 percent with fiscal revenue growing by 23.5 percent. The revenue to GDP ratio remains relatively l o w at 10.7 percent in 2006 (up from 10.1 percent in 2005). The realism o f the fiscal framework was further undermined by delays in the release o f budget support by development partners, mainly because o f uncertainties if the Government was able to meet the prerequisites and structural benchmarks for a new IMF program. Furthermore, significant in-year budgetary adjustment had to be made in favor o f the state energy company J I R A M A which further reduced the flexibil i ty o f the Government.

0 Overall budget execution rates have increased from 65 percent in 2005 to over 90 percent in 2006. The increase i s mainly due to the impressive implementation performance in the last trimester o f the budget year. Despite the high 2006 execution rate, some systemic issues s t i l l remain in ensuring the same level o f execution for the following years: Prior to 2006, the main reason for the l o w execution rate was difficulties at the level o f the sector ministries to operationalize the new budgetary framework (program budgets). This reform was hastily prepared with only l imited preparation time for the sector ministries. Over the course o f 2005 and 2006 the Government tried to address these issues through significant investments in training and capacity building as well as technical assistance curtailed to the specific needs o f the various sectors. Delays in the implementation o f the annual budget also contribute to lower execution rates. In 2005 and 2006 the budget execution started only in late March, which did not leave sufficient time to adequately execute the annual budget. However, for the budget year 2007 the investments in training and capacity building seem to pay o f f as execution has started earlier. Nevertheless, consolidation o f recent efforts in improving the budget execution calendar and training o f sector ministries remains necessary for the 2006 execution levels to be retained in the future.

0 Capacity to adequately prepare and execute the budget at the national and sub-national levels remains weak. The far-reaching changes in the budgetary framework continue to pose significant implementation difficulties for the administration. This situation i s further exacerbated by the parallel introduction o f other important reforms, in particular o f the public procurement system. To address existing deficits in conceptualizing and institutionalizing the various reforms, the Government has developed in close collaboration with local training institutions a comprehensive training and capacity building program. Whi le this program seems to have generated positive results in some sectors it wi l l take more time than init ially anticipated to bring the entire administration up to an adequate level.

27

Table 8: Key reform public expenditure management reform activities since July 2006

finance strengthened reforms To improve preparation o f the budget 2008 the preparation calendar has been adjusted

following the recommendations o f the PER 2005; the Ministry o f Finance and Budget has prepared a budget framework paper which has been presented to Cabinet in April 2007. Integrated financial management system was further consolidated and deployed to some sector ministries Internal control cadre o f the Treasury (Brigade de Trksor) further strengthened Independent audit o f the commitment control (ContrGZe des Dtpenses Engugkes) completed Comprehensive training and capacity building support to institutionalize public finance reforms at the level o f the sector ministries has continued Loi de RGglement 2004 submitted to Parliament in December 2006; annual accounts for 2005 submitted to the Auditor General in April 2007. Independent audits o f ministries o f education, health and transport conducted to assess compliance with new procurement regulations Capacity o f Procurement Oversight Authority further strengthened Website o f Procurement Oversight Authority operational with information about open tenders and results o f tendering processes Comprehensive training and capacity building continued to institutionalize procurement reforms in the ministries o f education, health, transport, agriculture and environment Customs reform action plan further implemented: customs code simplified and exonerations abolished. Customs operations modernized based on deployment o f SYDONIA++ and installation o f additional scanners in key customs offices (e.g. Tamatave, Antananarivo). New customs management system TRADENET has been installed in Tamatave. Tax reforms have been launched: tax policy discussions with the IMF are ongoing. Reforms to simplify and modernize tax administration have been initiated.

Procurement reforms

Revenue agency reform

71. work plan for the years 2006 and 2007. The plans reflect the finding o f the PEFA assessment which was conducted in 2006. M a i n focus o f the program wil l be the further consolidation o f the new budgetary framework. To improve the quality o f budget preparation, the Government has advanced the preparation process to the month o f March (from July in previous years). The preparation wi l l be based on a more realistic fiscal framework agreed upon with the IMF and presented to Cabinet in a budget framework paper. Comprehensive training and capacity building activities have already been launched to address difficulties with the budgetary framework at the level o f the sector ministries. These activities will continue over the course o f the year and also assist the ministries, departments and agencies to improve budget execution. To improve budget execution a program o f targeted technical assistance for priority sectors has been developed that i s aimed to address existing procedural and institutional bottlenecks. Other reform activities focus on improving the system o f internal controls. To this end, the internal control cadre o f the Treasury wi l l be further strengthened. In addition, a reform o f the commitment control cadre has been initiated based on an independent audit. The recommendations o f this audit which was finalized in February 2007 wil l be used to improve operational performance and quality o f the commitment control function. The operational efficiency of the Auditor General’s Off ice wi l l be further upgraded. It i s presently anticipated that the draft budget execution law for 2006 wil l be for the f i rst time submitted within the statutory framework to Parliament. To improve budget transparency the existing reporting system i s presently under review. The main objective i s to consolidate and to harmonize the various execution reports produced by the Ministry o f Finance and Budget and by the sector ministries to create a transparent framework o f budgetary reporting that corresponds to the needs o f the various actors (Cabinet, Ministry o f Finance and Budget, sector ministries). A key instrument in this context wil l be the new integrated financial management system which has been deployed to the central Government and to the provincial treasuries. T h i s system captures about 80 percent o f a l l Government expenditures.

PRSC 4 continues to support the far-reaching reform program as identified in the annual

28

72. Following the recommendations of the PER 2006-7, the PRSC4 will support the Government in updating the Medium-Term Expenditure Framework (MTEF) that underpins the implementation o f the MAP. To achieve this a consistent methodology for the costing o f the MAP and the related sectoral strategies will need to be developed. This would pave the way for an improved prioritization o f public expenditures under the MTEF.

73. The consolidation of procurement reforms is another key element o f the reform agenda of the Government. The work on the regulatory framework has been completed with the adoption of the decrees and Standard Bidding Documents to implement the new procurement code. The new Procurement Oversight Authority (Autoritd de Rdgulation des Marchds Publics - ARMP) became operational in June 2006; it subsequently worked on the development o f a comprehensive training and capacity building program to institutionalize the new regulations at the level o f the public administration. Two independent reviews o f the ministries o f education, health and transport, conducted in early 2007, confirmed that there i s s t i l l a lo t to be done to ensure the adequate application o f the new regulations. T o address existing bottlenecks a workshop was organized in February 2007 to discuss implementation issues and experience and develop an appropriate action plan. To improve transparency o f the public procurement process the ARMP i s setting up a website which wil l provide relevant information about open tenders and about the results o f the tendering process. This website i s expected to be operational before July 2007.

74. T o improve revenue performance the Government continues to implement the customs reform action plan which was adopted in June 2005. This action plan, aimed at improving the quality o f customs services, generating revenue and reducing corruption i s beginning to deliver results. In 2006 revenue performance has been close to the projections, at about 96 percent. Customs regulations have been further simplified, including revision o f the customs code and the elimination o f exemptions and exonerations. The modernization o f the customs administration has continued: the automated data processing system (SYDONIA++) has been deployed to 9 offices including the most important ones in Tamatave and in Antananarivo. Pre-shipment inspections continue to be conducted by a private operator. To facilitate controls new scanners have been installed in the customs offices in Tamatave and in Antanarivo. The Government wi l l also introduce a comprehensive high-quality customs management system (TRADENET); a pi lot installation o f the new system i s planned in Tamatave for 2007. To reduce corruption a mandatory regular rotation o f customs agents has been initiated since 2006. The customs directorate i s supported by the independent Anti-corruption Bureau (BIANCO) which continues to provide advice and organize workshops to sensitize customs officials and private sector operators. In addition, the Government has embarked on a tax reform program. With IMF assistance, the Government i s working on simplifying and rationalizing the tax system and on minimizing tax exemptions. A revised tax code i s expected to be implemented with the Finance L a w 2008. World Bank assistance has been requested to modernize the procedural and institutional framework under which the tax administration operates.

75. The proposed triggers for PRSC 5 include: Satisfactory implementation o f Priority Act ion Plan for 2007. Budget for 2008 allocates adequate resources to MAP priority sectors -this trigger i s meant to monitor consistency between the development strategy o f the Government and i t s annual budget. Reconciliation o f budget execution status o f key sector ministries with the Ministry o f Finance -this trigger intends to improve consistency o f execution data in line ministries which continues to pose significant challenges. This i s also in line with the recommendations o f the PERs 2005 and 2006-7. It i s envisaged that such reconciliation wi l l be done every two months between the Ministry o f Finance and the ministries o f health, education, public works, environment and agriculture. Publication o f the results o f the public tendering processes - this trigger aims at improving transparency o f the public procurement process. In line with international best practice it i s proposed to publish on the website o f the ARMP contracts with a value above US$50,000. Implementation o f the recommendations o f the independent audit o f the commitment control (CDE) - this trigger focuses on an element o f the public finance system that has been identified as a bottleneck

29

by various studies and reviews. It would require Government to fully integrate the CDE into the computerized financial management system, mainly to improve transparency and predictability o f CDE operations, as wel l as to establish and enforce service standards for the CDE.

The proposed triggers for PRSC 5 build on parallel analytical work in the context o f the PER and focus on key priority areas that are considered critical to further deepen ongoing public finance reforms. Of particular importance in this context are: (i) the need to address the consistency o f budget execution data, which continues to negatively impact the implementation and monitoring o f the budget, and (ii) the operational efficiency o f the commitment control (CDE) which is considered one o f the weaknesses o f the public finance system.

> DECENTRALIZATION AND REDUCTION OF CORRUPTION

76. on the areas of decentralization and reduction of corruption. With regard to decentralization the Government has continued to strengthen the role o f the regions by progressively integrating deconcentrated services o f the public administration under the authority o f the regional Chiefs. The objective i s to harmonize a l l sectoral activities in a specific region and to establish integrated regional development plans. T o improve the delivery o f public services the Government also intends to strengthen the role o f the villages (fokotuny) by formally recognizing their important administrative role in the context o f the constitutional amendment which was approved in April 2007. This amendment also abolishes the autonomous provinces. To improve the availability o f financial resources at the level o f the local Government, the Government has increased the share o f certain taxes (impbt synthdtique, impbt foncier) in favor o f the communes o n the basis o f the Finance L a w 2007. At the same time, the implementation o f the Local Development Fund (FDL) has been delayed; it i s presently expected that the FDL will be fully operational only in 2008. The fund intends to integrate financial support t o the local Government levels both by the Government and by the donor community under a single mechanism with harmonized procedural and institutional arrangements.

PRSC 4 continues to support the implementation of governance reforms, with special focus

77. As regards reducing corruption, PSRC 4 wil l build on the significant achievements o f the f irst series o f PRSCs (see paras. 43-46 and Annex 2) and assist the Government in consolidating the regulatory framework. K e y actions include: (i) the declaration o f assets for public and elected officials, which i s in effect since 2005, wi l l be complemented by a declaration o f “economic interests” which intends to lay open the private sector linkages o f public and elected officials. The new declaration wi l l be required for the f i rst time in 2007; (ii) to address conflict-of-interest issues at the level o f elected officials a revision o f the immunities o f elected officials guaranteed by the Constitution has been prepared. The revision aims at facilitating both investigation and prosecution o f corruption and conflict-of interest cases by the relevant authorities. The revision was part o f the recently completed referendum which approved some constitutional amendments; (iii) the regulations in the c iv i l service law that deal with conflict-of-interest issues will be amended and brought to international standards. The revision o f the regulations, which i s planned for June 2007, wi l l also include the establishment o f disciplinary commissions in every sector ministry to monitor and enforce conflict-of-interest regulations. The new regulations wi l l be piloted in four sector ministries in 2007 before i t s application for the entire public service which i s planned for 2008; (iv) the Government wi l l continue to support the development o f self-regulating mechanisms such as codes o f conduct or similar instruments that are aimed at using peer pressure to address corrupt behavior or misuse o f power. Such a new code o f conduct was developed in 2005 for the magistrates together with a public campaign to sensitize both the target audience and the general public. It i s envisaged to develop similar code-of-conducts for a l l public services and to establish instruments to monitor the effective application o f these obligations. This activity i s explicitly mentioned in the Madagascar Act ion Plan (MAP); (v) the Anti-corruption Commission i s also in the process o f preparing regulations to strengthen the watchdog functions o f non-Government entities and to protect whistleblowers; an activity which i s also explicitly mentioned in the MAP. I t i s envisaged to submit these regulations for Parliamentary approval in the second hal f o f 2007; (vi) the Government has agreed to use independent audits and procurement reviews as instruments to address corruption in sensitive areas and to

30

make transparent potential misuse o f power. An audit o f the mining bureau has recently been completed; an audit o f the forestry sector i s planned for 2007.

Box 5: Conflict o f Interest in Madagascar

Improved governance and the fight against corruption has been a key element o f the policy agenda o f the Government o f President Marc Ravolamanana since he took power in 2002. In this context, the Government has faced considerable challenges, in particular to reduce endemic corruption and high-level conflict o f interest which was a main characteristic o f the previous regime.

The international community continues to express concern about potential conflict o f interest o f public and elected officials. The center stage o f the discussion quickly became the role o f the President as an elected official and as the head of a conglomerate o f private firms which have a significant market presence and influence. The discussions with the President focused initially on how to organize an arms-length management o f his firms and assets. Various options were discussed between 2004 and 2005 to separate public and private functions. The Government wanted to avoid a “lex Ravolamanana”, mainly because o f the political implications o f such regulations. I t confirmed, however, i t s intention to address the conflict-of-interest issues in a broader context for al l relevant public and elected officials.

The Government developed a comprehensive governance reform program which focused on increasing transparency, in particular through the declaration o f assets o f public and elected officials, through the publication o f contract awards and exemptions, and through independent audits in areas which are potentially vulnerable to the misuse o f power (e.g. big investment projects). The effectiveness o f the regulatory and institutional framework has been evaluated on a regular basis; the findings o f the evaluations confirm the overall good quality and high impact o f the Government’s reform activities.

While there are no activities specifically targeted at separating the public and private functions of the President, the Government i s establishing a comprehensive framework o f checks and balances that i s aimed at improving transparency and reducing the opportunities for corruption and conflict-of-interest. This framework has already yielded some positive results as evidenced by the fact that Madagascar i s well above other low Income countries on al l key governance indicators (The World Bank Institute’s governance indicators place Madagascar ahead of most low-income countries, especially on controlling corruption. I t i s among very few low-income countries to be in the 50th-75th percentile o f Composite Governance Indicator, along with Ghana and Mongolia, up from the 48th percentile rank in 2003.) At the same time, progress i s slower than expected and it seems that the ambitious governance reform program needs time to consolidate despite high expectations by the citizenry and the development partners.

The Government i s aware o f the reputational risks that are linked to the perception of potential conflict-of-interests at the highest levels o f the State. It has therefore emphasized its continuing commitment to greater transparency, to higher integrity and to decisive actions against the misuse o f power in its new development strategy, the MAP. As a consequence, the first commitment o f the MAP confirms the overarching importance o f the reform to strengthen governance and to reduce corruption for the socio-economic development o f the country and for the international reputation o f Madagascar.

78. adopted but they are less ambitious than originally anticipated. The objective o f the envisaged reform was the development o f a consistent regulatory framework for fiscal decentralization. The Government has initiated this process and in the Budget Law 2007 increased the share o f certain taxes (impdt synthe‘tique, imp& foncier) in favor o f the communes. A more fundamental reform will, however, take longer than initially anticipated, mainly because o f ongoing parallel changes to the institutional framework (abolishment o f the autonomous provinces and strengthening o f the roles and responsibilities o f regional and local governments). A new fiscal decentralization framework wi l l also require deeper analysis o f the impact o f intended changes to the fiscal framework. The Bank wi l l support this analysis through an update o f a fiscal decentralization study which was f i rst completed in 2003.

New regulations on fiscal decentralization to be reflected by the Budget Law have been

31

79. regulations for the civil service. This work took longer than expected because o f difficulties in determining the scope and focus o f conflict-of-interest regulations which have now been clarified. A draft decree o f the new regulations to be piloted in 4 ministries has been prepared. Fol lowing the results o f the pilot it i s expected that regulations wi l l be mainstreamed to a l l public sector entities by 2008. The final prior action for PRSC 4 has been adjusted to reflect the delay in the adoption o f the regulations. In parallel, as described in B o x 5 and paragraph 77 above, the Government continues to implement i t s broader reform agenda o f the regulatory framework for anti-corruption.

Government has initiated the process to develop a comprehensive set o f conflict of interest

80. includes the separation o f the National Office o n Mines and Strategic Industries (0MNIS) ’s regulatory function from i t s commercial one. The law wil l be submitted to Parliament in 2008. This reform focuses on further deepening governance activities in sectors that are considered critical for the success o f the development program o f the Government. In this context the extractive industries sector i s o f particular strategic importance, in view o f the potentially significant mining and o i l resources. The new law wil l address the necessary improvements in the institutional structure and eliminating potential conflict o f interest and regulatory gaps. A key player in this sector i s the parastatal entity OMNIS. The trigger follows, inter alia, the findings o f a recently completed audit o f OMNIS that recommended the separation o f the regulatory function o f the office f rom i t s commercial activities to avoid a potential conflict-of-interest. The trigger i s also harmonized with the broader institutional agenda fostered by the Mineral Resources Governance Project.

The indicative trigger proposed for PRSC 5 i s that a draft hydrocarbon law be prepared which

Education

81. has commenced an impressive reform program in primary education that has led to significant improvements in service delivery. Since the elimination o f school fees in 2002, the Net Enrollment Rate registered a significant increase shifting from 82 percent t o 98 percent between 2002/2003 to 2005/2006. Efforts have been developed in order to reduce the repetition rate f rom 30 percent in 2002 to 19 percent in 2006 and positive impacts are expected on the student retention rate. The Primary Completion Rate (PCR) improved significantly f rom about 30 percent in 2002 to 60 percent in 2006 but i s s t i l l l ow when compared to international standards. In 2005, the country joined the EFA-Fast Track Initiative global partnership. The Ministry updated i t s EFA Plan in early 2005 in order to focus on strategies to improve primary completion and raise quality. The plan was endorsed by local donors and led to additional grant funding from the FTI Cataltyic Fund. The Ministry has put in place mechanisms for taking leadership in donor coordination and alignment. Annex 5 describes in detail the EFA process.

Following the launch of the Government’s Education for All initiative in 2003, Madagascar

82. take concerted action on a number of fronts over several years to show results. According to the results from an international learning achievement survey (PASEC) o f grades 2 and 5, conducted in 2003/04, students in Madagascar registered lower scores in comparison to 1997/98, in particular in French and, in general, for grade 5. The decline in the repetition rate f rom 30 percent in 2003-4 to 18 percent in 2006-7, i s largely the result o f administrative measures on the suppression o f repetition in grades 1 and 4. The pupil-teacher s t i l l remains high at about 5 1, although recruitment o f new teachers (about 2,000 per year) has reduced the level f rom 60 in 2005-6. Nonetheless, recruitments in remote areas remain a challenge. There are s t i l l delays in the provision o f school grants, books and student learning materials due to difficulties in budget execution. Further, distribution problems mean that the objective o f one textbook per student per subject i s not fully met at the classroom level. The construction o f classrooms has also experienced delays leading to overcrowded classrooms.

Issues however still remain with regard to the quality of primary education and this will

83. PRSC 4 continues to support the implementation of the national EFA program. This operation will maintain support t o Government efforts for the EFA program to (i) improve financial management and procurement services; (ii) rationalize teacher management and staff/teacher salary

32

administration; (iii) reorganize and strengthen management structures for improved cost-efficiency and accountability at a l l levels and (iv) increase efforts to implement quality enhancing measures (e.g. teacher hiring and training, curriculum update, timely delivery o f books, school kits, and school grants).

84. ministry report, the implementation of the National Education for All i s on track. During 2006, key actions to increase access and foster free primary education include: (i) a vast teacher recruitment effort coupled with improved selection criteria; about 1,900 new Government teachers and more than 7,800 new community teachers have been recruited and redeployed to schools in zone 3 (those with diff icult access). Moreover, Government teachers are recruited against a contract l inked to a specific school to ensure their retention in remote areas. (ii) an increase in total public contributions to community teachers’ salary (from MGA3,900 mi l l ion in 2005 to MGA14,415 million) to alleviate the costs o f primary education for families as well as to close the salary gap between Government and community teachers; payments were, however, delayed for several months; (iii) continued support for free primary education (with worrisome delays however), with grants distributed to al l 16,917 public schools and pedagogical kits to about 1 mi l l ion new students in grade 1; over 3.7 mi l l ion bilingual textbooks for grade 3 have also been distributed to comply with the objective o f 1 textbook per subject per student, but also to gradually introduce Malagasy language as a means o f instruction.

Following the October 2006 joint donor review and an assessment of the March 2007

85. (EFA) be on track. PRSC 5 continues to support the implementation o f EFA. This includes, inter alia, raising enrollment and completion rates, as well as reducing the repetition rates in the lagging school districts to improve the national indicators and reduce disparities. In the coming 12 months, it i s expected that (i) a draft policy for community teachers wi l l be elaborated for discussion and put in place and that the pupil-teacher ratio w i l l continue to decline on average, (ii) new procedures wil l be adopted for the construction o f classrooms; (iii) school inputs/supplies, such as grants, school kits and books, wi l l be delivered in a timely fashion at the beginning o f the school year, and that Government contribution to community teachers wi l l be made in a timely fashion, through improvements in budget execution, procurement, distribution, monitoring and reporting; (iv) the Ministry wil l begin to update the curricula, books and teacher training; and (iv) the management capacity o f the central Ministry, regional and district offices and schools wi l l be reinforced in key areas to improve service delivery.

The indicative trigger for PRSC 5 i s that the implementation o f the National Education for All

86. challenges in the production, financing, and delivery of health services as well as in the health status of its people. On the positive side, there has been a marked improvement in chi ld health over the last decade, with infant and child mortality fall ing by 43 percent and 41 percent respectively between 1997 and 2004. Although some issues have been raised regarding the reliability o f these marked drops in mortality, other determinants o f chi ld survival - such as morbidity and coverage o f important health interventions - have also improved. For instance, the prevalence o f diarrhea in children decreased about 63 percent and the proportion o f anemic children fe l l about 3 1 percent between 1997 and 2004. Further, vaccination, vitamin A supplementation, and exclusive breastfeeding have increased. However, many other indicators have remained unchanged or worsened during the last decade. Maternal mortality has remained high and unchanged at 469 per 100,000 live births since 1997, jeopardizing the likelihood that Madagascar wi l l reach this MDG by 2015. While antenatal care has increased to 80 percent, the presence o f skilled staff at birth has increased only from 47 percent to 54 percent. The prevalence o f H IV /A IDS in the country remains low, but it has rapidly increased among high risk groups and there are an estimated 180,000 persons living with HIV in the country. Bilharziosis (affecting about two and a hal f mi l l ion people in Madagascar), lymphatic filariosis (prevalence thought to be over 50 percent), tuberculosis (20,000 new cases every year), leprosy (prevalence o f 2.5 per 10,000, which i s the highest in the world), and malaria continue to represent a large health burden to the population. Overall, despite some impressive gains, the health sector in Madagascar continues to face many challenges, relating especially t o the level o f overall financing, utilization o f health services, distribution o f health personnel, availability

33

Despite progress across a number of key indicators, Madagascar continues to face serious

o f drugs and medical supplies in health facilities, and internal administration o f the health system, and in particular, budget execution. If not addressed, these challenges may significantly hamper Madagascar’s ambitions to reach i t s goals as expressed in the MAP.

87. PRSC 4 and subsequent operations will support Government effort to meet these challenges. T o implement the objectives set out in the MAP, the Government i s putting in place a SWAP for the health sector (see Annex 5). The primary focus o f the SWAP i s to strengthen the health system and increase i t s capacity to provide the necessary production, financing, delivery and management support for delivery o f services necessary to meet the eventual objectives o f reducing chi ld and maternal mortality, controlling illnesses due to malaria, sexually transmitted diseases, and HIV-AIDS. In conjunction with the health sector investment operation recently approved by the Board in M a y 2007, in line with the other portfolio activities in the sector (Multisectoral STI/HIV/AIDS Project - US$20m, closing date: December 2007; Second Multisectoral STI/HIV/AIDS Project - US$30m, closing date: December 2009; Community Development Fund - US$176m, closing date: June 2008; and Second Community Nutrit ion Project - US$47.6m7 closing date: December ZOOS), the PRSC 4 and subsequent operations wi l l assist Government efforts to set up an integrated approach to the sector and improve the quality and availability o f health services. In particular, it will support the improvements in financial management, including budget preparation and execution, implementation o f the new procurement code, improvements in human resource policy and decentralization o f service delivery.

88. activity i s a crucial first step in setting up the institutional infrastructure for a SWAP in health. Fol lowing the MAP, the PDSS identifies a number o f key bottlenecks to increased access and use o f health services and improvements in health indicators in Madagascar. Four critical areas o f weakness are highlighted: (i) poorly equipped health centers and low levels o f capacity to produce and deliver health services, especially in rural and remote areas (managerial capacity at the level o f communes i s weak); (ii) uneven staffing o f health facilities, especially in rural and remote areas (a large number o f health centers, particularly in rural and remote areas, do not have adequate number o f qualified staff); (iii) low levels o f health financing and inefficiencies in resource allocation (Madagascar spent around US$6 per capita o n health care in 2005, significantly lower than the average for sub-Saharan Africa, excluding South Africa, o f US$15.4 per capita); and (iv) inadequate demand for health services and l o w levels o f utilization (only 10 percent o f the population reports an illness annually, and o f this, only 40 percent seeks care f rom qualified medical personnel). The PDSS details a series o f interventions to address these weaknesses and presents a logical prioritization o f activities and supporting budgets to be implemented over the next five years. These interventions are expected to result in significant improvements across a range o f demand- side, supply-side and institutional aspects o f the health system, especially in the production and delivery o f quality services in rural and remote areas. Visible results are expected in the deployment, effectiveness and morale o f health teams at service delivery points, particularly in remote areas. Util ization o f health services i s expected to increase significantly, as a result o f which marked and sustained improvements in health status and outcomes are expected to occur.

The Government has completed i ts Health Sector Development Program (PDSS). This

89. levels o f the health system. The overall goal o f the health mapping i s to strengthen the capacities o f infectious diseases and public health programs at a l l levels o f health care delivery through the use o f mapping technologies, and wil l include, at a minimum, information on (i) human resource availability, especially in rural and remote areas; (ii) utilization rates for curative services; (iii) populations served by preventive services; and (iv) budget resources received. The health mapping wil l facilitate the visualization o f disease foci, the monitoring o f newly infected or re-infected villages, the identification o f at-risk populations, and the highly targeted, cost-effective distribution o f interventions, with a view to boost efforts to eradicate diseases which affect the isolated, rural poor. This trigger i s critical for the health sector insofar as health mapping - through the delivery o f user-friendly data collection, management and mapping applications - wil l be central in increasing the efficiency o f national surveillance, prevention and control activities as well as in strengthening the management, analysis and monitoring o f priority infectious diseases at a l l levels. The health map wil l complement the efforts

The indicative trigger for PRSC 5 is that a health mapping be elaborated and validated at a l l

34

outlined in the PDSS to meet the MAP objectives o f eradication o f major diseases, reduction in infant and child mortality, reduction in maternal mortality, and provision o f quality services, especially in remote areas.

Nutrition

90. successful reduction of malnutrition rates among young children. An impact-evaluation o f the community-based nutrition program, which i s implemented in 62 districts, demonstrates a 10 percentage- point reduction in underweight malnutrition in the poorest areas o f Madagascar where the program intervenes for at least two years. Despite this reduction, national level malnutrition rates remain high and more i s needed, especially to reduce chronic malnutrition rates, or stunting. Decreasing stunting takes long-term commitment and intensified attention toward pregnant women in order to reduce l o w birth weight. Impressive improvements have been made concerning exclusive breastfeeding o f children under six months (from 43 percent in 1997 to 67 percent in 2003/04 based on the DHS) and Vi tamin A supplementation among children under five (from 4 percent to 76 percent over the same period). However, iron-deficiency anemia among young children remains very high, with more than two-thirds o f children under the age o f five suffering from anemia. In addition, seasonal short-term hunger among school-age children has been highlighted as a major impediment to learning.

Madagascar has devoted considerable efforts to nutrition interventions that have led to a

Table 9: Key Intermediate Outputs of the Nutrition Program

344,000 493,000 625,300 650,000 650,000 690,000 847,000 Children 0-3 years in growth promotion program National Coverage (YO) 19% 27% 33% 35% 35% 44% 54%

300,000 373,000 Children 3-5 years in growth promotion program

No. of nutrition workers and 1,947 3,198 3,608 3,606 3,606 5,550 5,550 volunteers

National Coverage (%) 46% 57%

91. Government since 2004. The reversal o f the negative trends and improvements in the nutrition situation in Madagascar are the results o f years o f Government investment in community based nutrition activities, improved quality o f nutrition services, and more recently the strengthened capacity to develop policies as wel l as increased attention to institutionalization o f nutrition and allocation o f budget for nutrition services. However, further progress i s needed to consolidate the institutional set up, improve capacity and coordinate within the key-sectors, such as health and agriculture. The ONN should take on these extra efforts and should be encouraged to continue the use o f existing implementation capacity in Madagascar, particularly the executing unit SEECALINE, the implementing agency o f the community based nutrition programs.

PRSC 4 supports the program of institutionalization of nutrition services initiated by the

92. institutional assessment it has carried out. Following the analysis o f the institutional system for the delivery o f nutrition services, the Government has issued a decree that implements the institutional set up initially set forward by the decree that created ONN in 2004. The new decree specifies the legal status and managerial structure o f ONN, provides the necessary minimum standards o f financial transparency and accountability and clarifies the previously outstanding issues in human resource management o f i t s staff.

The Government has issued a formal decree that implements the recommendations of the

35

93. The indicative trigger for PRSC 5 i s that, in accordance with the ONN implementation decree: (i) The National Coordinator submits to the Permanent Office (bureau permanent) o f the National Council for Nutrit ion (CNN) the financial accounts (e'tatsfinanciers) certified by an external independent auditor recruited by competitive bidding; (ii) the accounting and financial procedures manual are validated by the Permanent Office o f the CNN. PRSC 5 continues to support the institutional strengthening o f ONN and, following the 2007 implementation decree, supports activities critical for improving the accountability and financial management o f the institution.

Water and Sanitation

94. rural population by 2012, against 31 percent in 2005. According to the new database, the access rate to safe water increased from 27.2 percent in 2003 to 3 1 percent in 2005. This progress however i s not sufficient for Madagascar to reach the objective o f servicing 53 percent o f the rural population by 2012. As o f 2006, about 10 mi l l ion out o f 14.2 mi l l ion rural residents do not have access to potable water. In 2006 the Government program in rural water and sanitation (RWS) provided 110,000 rural people with access to potable water whereas the rural population increases by about 400,000 people per year.

The Government objective aims at providing improved water supply to 53 percent of the

95. PRSC 4 supports Government to continue to build adequate capacity within the Directorate of Water and Sanitation (DEA) at the central and regional level. These efforts aim to ensure increased ability to plan, execute and monitor the R W S national program and significantly increase the current level o f financing. In recent years, the Government has considerably strengthened the institutional system for water and sanitation service delivery and donors are fully aligned behind the Government strategy and policy (see Annex 5). However, further consolidation i s s t i l l necessary o n the institutional setting and lack o f public resources undermines the potential for reaching the MAP objectives. Total budget for the DEAMEM has continued to increase substantially over the past years, but remains insufficient. Expenditures increased from US$10.6 mi l l ion in 2004 to US$13 mi l l ion in 2005. 87 percent o f the budget was dedicated to rural water, 11 percent to urban water and 2 percent t o rural sanitation. The DEAMEM 2006 budget was set at US$18 million, representing an additional increase o f 33 percent. Allocations for 2007 have however been reduced to US$14 mill ion. Nevertheless, it i s estimated that about US$34 mi l l ion would be needed annually to reach the MDG target for rural water supply and sanitation.

96. Overall, the recommendations issued during the joint Government/donors annual review held in May 2006 have been implemented: (i) the directives for the consultation process between the central and decentralized levels and the stakeholders for the preparation, monitoring and evaluation o f a sector wide budget were published; (ii) an improved R W S user manual o f procedures to standardize implementation processes o f new water and sanitation systems i s now available; (iii) the RWS sector database i s operational; (iv) the f i r s t directory on sector performance was issued in March 2007 during the joint-donor sector review and directives on data collection process have been sent to a l l stakeholders; (v) the definition o f areas o f intervention for NGOs and private sector have been clarified; (vi) the national sanitation strategy and policy document was validated by the Government in April 2007; (vii) the creation o f the Regulatory Body (SOREA) i s taking longer than originally anticipated and the need for additional time has been acknowledged by the 2007 review. The impact o f the delay in implementation on the sector development is, however, considered minimal.

97. o f Water and Sanitation (DGWS) be issued, and the recruitment o f at least 30 o f the 60 new staff be initiated. PRSC 5 continues to sustain Government reform to strengthen i ts institutional framework in water and sanitation service delivery, including increased human resources at both central and regional level to better assist the 22 regions and 1,557 communes to plan, execute, co-finance their program as wel l as manage water supply and sanitation systems.

The indicative trigger for PRSC5 i s that the decree for the creation o f the Directorate General

36

Table 10: Pr ior Actions for PRSC 4 and Indicative Triggers for PRSC 5

Public Financial Management Budget Formulation Budget Execution

Procurement

Public Financial management controls

Decentralization

Anti- corruption

Education

Health

Nutrition

Water Supply

Satisfactory implementation o f Priority Action Plan for 2006 Budget for 2007 allocates adequate resources to PRSPMAP priority sectors. All sector ministries submit budget execution reports based on an economic classification to MEFB within four weeks after the end o f the reference period (every four months) Procurement Audits are carried out by or under the oversight o f the ARMP in at least 3 key ministries (education, health, transport) to assess compliance with new rules and regulations.

Government adopts new regulations o n fiscal decentralization to be reflected by the 2007 Budget Law. Develop conflict-of-interest regulations

Implementation o f National EFA Plan on track. Prepare and validate the Health Sector Development Program. Elaborate nutrition sector institutional assessment, validate it and implement i t s recommendations.

The Ministry and i t s main partners implement the recommendations o f the 2006 joint donors/Government sector review in the program budget 2007-2009

TRIGGERS FOR PRSC 5

Satisfactory implementation o f Priority Action Plan for 2007 Budget for 2008 allocates adequate resources to M A P priority sectors Reconcile at least every two months the budget execution status o f key sector ministries (health, education, transport, public works, environment and agriculture) with the Ministry o f Finance

Publish on the ARMP website the results o f all public tendering processes with a contract value above US$SO,OOO

Implement satisfactorily the recommendations o f the independent audit o f the commitment control (CDE), in particular (i) fully integrate the CDE into the SIGFP, and (ii) reduce the current transaction time for issuing the visa o f the CDE by at least 20 percent

Draft hydrocarbon law prepared which includes the separation o f OMNIS regulatory function from i t s commercial one. The law w i l l be submitted to Parliament in 2008.

Implementation o f national EFA Plan i s on track.

Elaborate and validate a health mapping at al l _ _ - levels o f the health system In accordance with the ONN implementation decree: (i) The National Coordinator submits to the Permanent Office o f the C N N the financial accounts certified by an external independent auditor recruited by competitive bidding (ii) the accounting and financial procedures manual are validated by the Permanent Office o f the CNN. The decree for the creation o f the Directorate General o f Water and Sanitation i s issued, and the recruitment o f at least 30 o f the 60 new staff has started.

37

VI. OPERATION IMPLEMENTATION

1. POVERTY AND SOCIAL IMPACT

98. distributional impacts. The focus o f the operation i s centered o n reforms aimed at improved public financial management, decentralization, anticorruption and institutional strengthening for enhanced service delivery. As such, none o f the reforms supported by the operation has distributional implications that would warrant a poverty and social impact analysis (PSIA). The Government however remains committed to understand the distributional impact o f key policy reforms and economic events. PSIA has been undertaken in the past or i s planned in the coming months to inform critical policy issues. In recent years distributional analyses have been conducted to understand the impact o f the reduction in rice tar i f fs o f 2005 and the implementation o f land tenure securitization. More recently completed PSIAs include: (i) the poverty and social impact o f health care and the poor by investigating Government efforts to meet the health care needs o f the poor in the context o f the reinstatement o f the 2003 cost recovery for drugs and (ii) the impact o f o i l price increases following the 2004 fuel price liberalization and the subsequent sharp increase in world o i l prices in 2005.

The proposed PRSC 4 does not support any reforms that are expected to have significant

2. ENVIRONMENTAL ASPECTS

99. PRSC 4 i s a development policy credit in support o f a broad program o f policy and institutional reforms, for which the environmental requirements o f OP/BP 8.60 apply. However, none o f the activities supported by the PRSC 4 program pose any likely and significant effects on the environment, natural resources and forests. Overall, the envisaged areas o f focus for the operation, governance and improved service delivery, emphasize reforms in public financial management, decentralization, corruption, and strengthened institutions for service delivery. Consequently, they do not encompass any activity that has significant environmental impacts. Furthermore, the Bank’s overall strategy has focused on hrther strengthening o f the Government’s legislative and institutional capacity to address environment and natural resource management through its environment project.

The PRSC 4 program does not pose any significant environmental effects. The proposed

3. IMPLEMENTATION, MONITORING AND EVALUATION

100. Ministry of Finance and Budget. As for the previous PRSC series, the Government continues to take the lead in monitoring progress in implementation and in updating the program policy matrix. The Ministry o f Finance and Budget i s coordinating inputs from a l l the relevant ministries. The Bank wil l also continue to maintain a dialog with the relevant sector ministries and conduct periodic reviews with the other partners in the context o f the jo in t missions on budget support and relevant sector programs.

The responsibility for implementing the PRSC program in Government rests with the

101. The monitoring and evaluation of this PRSC will be adapted to the new monitoring system of the MAP currently under development. The Government i s developing a detailed results framework for the M A P and designing the proper institutional setting to monitor i ts implementation. Once the new system i s in place the monitoring o f the PRSC series will be adapted accordingly. Monitoring systems however are weak and require considerable strengthening - with the support o f donors - to improve data quality and institutional capacity. The Bank i s supporting these efforts through an Institutional Development Fund grant on statistical capacity building and through a PRSP Trust Fund for M&E o f the MAP. The Bank i s also providing support through the PGDI project which supports improvements o f monitoring system at ministry level, support to the national statistics institute (INSTAT) and contributing

38

to the financing needs o f a new Census. The Bank’s on-going investment projects each have an M&E component that supports both the project and the sectoral ministry.

4. FIDUCIARY ASPECTS

102. identified continued weaknesses in the BCM’s system o f internal controls, financial reporting, and legal framework. The assessment made recommendations to address the observed vulnerabilities, which included (i) an annual external audit report on the BCM’s transactions with the Government and their compliance with the central bank law; (ii) quarterly reviews by the BCM’s internal audit function o f monetary program data reported to the Fund; (iii) adoption o f International Financial Reporting Standards as the BCM’s accounting framework; and (iv) measures to strengthen the quality o f the BCM’s external audit. An agreed action plan with the Central Bank authorities has been developed by the IMF to ensure adequate and timely implementation o f these recommendations. A previous assessment was completed in November 2001. While some recommendations to strengthen the safeguards framework o f the B C M have been put in place, others required more time and are now being addressed in the context o f the new assessment and included in the above mentioned action plan monitored by the IMF. Since most o f the safeguards recommendations have been implemented or are underway, no additional fiduciary arrangements are needed.

Foreign exchange system: an IMF safeguards assessment was completed in March 2006 and

103. 2003. Other diagnostics carried out over the last three years by the Bank and other donors identified a range o f issues hampering the performance o f Madagascar’s budget and expenditure management system. The main challenges faced include the following: (i) simplificatiodrationalization o f the expenditure management process; (ii) making functional the General Inspectorate for Finance (IGF); (iii) making operational the jurisdictional function o f the Auditor General by strengthening the number and capacity o f financial auditors and improving their working conditions; (iv) making operational the budgetary and financial Disciplinary Board by appointing i ts members and strengthening their capacity; (v) improvement o f the integrated financial management system in place to allow the production o f periodic reports on budget execution; (vi) reinforcement o f the capacity o f the line ministries in public financial management, especially in the implementation o f the new program budget structure. To address these issues, the Government has developed, since 2004, an annual priority action plan for public finance reform which has been successfully implemented. Details o f implementation for 2006 and challenges ahead are provided in section V.B. above.

Public Finance Management System: the World Bank’s CFMCPAR, was completed in

5. DISBURSEMENT AND AUDITING

104. policy support. Credit proceeds will be disbursed against satisfactory implementation o f the development policy program and not tied to any specific purchases or be subject to procurement requirements. Once the credit i s approved by the Board and becomes effective, the proceeds o f the credit wi l l be disbursed in compliance with the stipulated single tranche release conditions. Once the Bank‘s Board approves the credit and at the request o f the Borrower, IDA wil l disburse the proceeds o f the credit into an account designated by the Borrower that i s part o f the country foreign exchange reserves account at the Central Bank o f Madagascar. The Borrower shall ensure that upon the deposit o f the Credit into said account, an equivalent amount i s credited in the Borrower’s budget management system, in a manner acceptable to the Bank. Based on previous experience, the execution o f such transaction f rom the Central Bank to the Treasury (Ministry o f Finance) doesn’t require more than four days. The Borrower will report to the Bank on the amounts deposited in the foreign currency account and credited in local currency to the budget management system. While no external audit wi l l be required it i s expected that this written confirmation wi l l be signed o f f by both the Accountant General and the Auditor General, and will be supported by a credit note from the Central Bank. If the proceeds o f the credit are used for ineligible

The proposed credit will follow the Bank’s disbursement procedures for development

39

purposes (Le. to finance goods or services on the standard negative list), as defined in the Financing Agreement, IDA will require the Borrower to promptly upon notice f rom IDA, refund an amount equal t o the amount o f said payment to IDA. Amounts refunded to the Bank upon such request shall be cancelled. The administration o f this credit wi l l be the responsibility o f the Ministry o f Finance. As required by law, the Auditor General wi l l carry the audit o f public accounts and submit the annual report t o the Parliament prior to the date o f i t s f i rst session following the year o f the review o f these accounts by the General Audit Office. IDA wil l have access to this report. IDA wil l also receive a copy o f the annual financial statements o f the Central Bank audited by an international audit firm in accordance with International Auditing Standards, within six months after the end o f each fiscal year.

6. R I S K S AND R I S K MITIGATION

105. risks, many o f which were already identified in previous PRSC operations and the CAS. The main risks include:

The implementation o f the poverty reduction strategy in Madagascar continues to be exposed to

(a) Political issues present a risk. The political situation in Madagascar i s stable, solidified further by the transparent and peaceful Presidential elections o f December 2006. Nevertheless, the possibility o f polit ical instability should not be discounted, especially given some o f the more diff icult challenges that the country faces. The recent public demonstrations in a few o f the main cities to protest the continuing crisis in the energy sector raise cause for concern and underscore the urgency with which some critical service delivery reforms need to be carried out. Furthermore, there are concerns that the Government’s ambitious and initially fast-moving efforts on fighting corruption have stagnated recently. The aftermath o f the elections present an opportunity to the population to place extra pressure on the Government to deliver results which could ensure renewed vigor in implementing reforms and poverty-reduction programs. The political leadership has a clear vision o f reform and i s strongly committed to moving the MAP agenda forward. The Bank’s focus in this regard continues to be on issues o f transparency and anti-corruption, with the PRSC and the Governance and Institutional Development Project being the main instruments o f IDA support, and WBI playing a key role through various governance and capacity programs. Reaching and maintaining the economic growth targets laid out in the MAP -while feasible - will be difficult. Sustainable poverty reduction depends o n maintaining growth at high levels, attracting private investment into the labor-intensive manufacturing sector and into agro- businesses. The erosion o f trade preferences and the expiration o f the MFA have already impacted the growth o f the textile sector in the EPZ. Providing a favorable investment climate i s crucial in this regard in order to attract higher levels o f FDI. The Investment Climate Assessment (ICA) outlines a set o f recommendations for mitigating this risk including accelerating reforms to improve competitiveness and attract private sector development. The recent establishment o f the EDBM will play a vital role in facilitating and promoting domestic and foreign investment. The Bank’s Growth Poles Project i s supporting some o f the ICA-recommended reforms as wel l as the init ial operation o f the EDBM. IDA’S AAA program -- including the ICA, the 2005 Development Policy Review and the up-coming C E M -- focuses specifically on growth issues to assist the Government to prioritize and implement reforms. Madagascar remains vulnerable to external shocks, particularly cyclones and increases in global commodity prices, such as oil and rice. As detailed earlier, these shocks impact negatively on growth and poverty reduction. The Bank has supported the Government to finalize a Risk and Social Protection Review to assess risk prevention and mitigation strategies. In i t ia l steps have been taken to investigate the feasibility o f specific options for risk mitigation to the external shocks faced by Madagascar (e.g. weather risk insurance schemes). The Bank has also modified procedures for i t s Community Development Project (FID IV) to allow it to respond more rapidly to emergencies such as cyclones; the FY05 supplemental IDA credit for the FID project was delivered in response to the two cyclones o f 2004. In addition, new schools are being

(b)

(c)

40

built better and reconstruction o f damaged infrastructure i s being improved upon to withstand the effects o f cyclones. The Bureau National de Gestion des Risques et des Catastrophes had i t s role and competencies formalized in December 2006 and i s charged with managing programs to prevent crises and mitigate their impacts when they occur. Finally, the Government has made rice an important policy focus, with an emphasis on the entire rice value chain (production, distribution, marketing), and i s also looking at policy options to better stabilize prices. Maintaining a stable macroeconomic environment remains critical to the successful implementation of the MAP and the PRSC series. The Government made significant progress in 2005 and 2006 in managing the high inflation in the face o f continued high international prices. Nevertheless, further inflationary pressures caused by world price volatility wi l l continue to present a challenge. Furthermore, the recent strong appreciation o f the exchange rate and the continued pressure that wi l l derive f rom the large mining investments, poses additional challenges for the Government as it will need to pay close attention to managing the macroeconomic effects o f this appreciation to avoid Dutch disease. The July 2006 agreement with the IMF on a new PRGF program is a key aspect in managing this risk. In addition, the Bank’s investment portfolio supports Government to focus their efforts on dealing with improving the competitiveness o f the economy by adopting measures that increase productivity through building roads and other infrastructure, improving governance, health, education, and PFM, facilitating private sector development and thereby counterbalancing the potential negative impact o f the appreciation on productive activities. Critical to these efforts i s the successful completion o f the restructuring plan o f the electric and water power utility, JIRAMA, which i s a fundamental element for the maintenance o f a stable macroeconomic environment given the negative repercussions on the whole economy o f the persistent crisis. In July 2006, the Bank provided a f irst phase o f financing to support the J I R A M A restructuring and i s working in collaboration with the IFC to find a suitable private sector concession arrangement (affermage). Potential delays in the implementation of public finance reforms pose challenges and risks for improved basic service delivery. As detailed earlier, Madagascar has carried out an ambitious set o f budgetary reforms that are already yielding results. Nevertheless, a number o f key issues are worrisome such as a weak fiscal framework that overestimated revenues, unpredictable budget execution, capacity weaknesses in applying the new program budget structure, and poor reform coordination and M&E. The Government has recognized these issues and has la id out a priority action plan for 2007 that continues and deepens the reform program. Successful implementation o f this priority action plan wil l be critical to ensure real impact on service delivery and poverty reduction. The Bank continues to support the reforms proposed in the areas o f public finance, budget programming, procurement, institutional development and capacity building through the PRSC and the Governance and Institutional Development Project. The Bank’s on-going investment portfolio also focuses on institutional strengthening, training and capacity building at the sector level.

(d)

(e)

41

MADAGASCAR FOURTH POVERTY REDUCTION SUPPORT CREDIT

ANNEXES

Annex 1 : Policy and Institutional Reform Matrix ......................................................................... 43

Annex 4: The World Bank support to the Growth Agenda ........................................................... 69

Annex 7: Letter o f Development Policy ........................................................................................ 90

Annex 2: The Madagascar Action Plan Matrix: Selected Items ................................................... 51 Annex 3: A Preliminary Assessment o f the First PRSC Series ..................................................... 64

Annex 5: The Sector Wide Approach in Education. Health and Water ........................................ 75 Annex 6: Madagascar Joint World Bank IMF Debt Sustainability Analysis ................................ 78

Annex 8: Country at a Glance ..................................................................................................... 100

42

m d

I

I

E b

i 4 8

C I : : 0

. n

cu cu s

5

Y 51 E

P 51 E

P 51 E

2 E

- r

- a m -

V n 2 = I

m

m

N s N 10

\o

z 0 E:

d

w B

c?

-0

Tz 0 0

\o 0 0 N 8 Y, E" 8 s e 2

- 0

m

F 0 0 N \o 0 0

vr 0 0 N

...

c?

B x 0 0 c

- 8 s

2

v1

4 W 0 0 N E 0 .* Y

2 2 s

L k c

2 9

e 6 8 2 hiif .- 0 g

m

s vr m

2 m $ m m

2 m 8 m

$ W d

s 3

m

L L e 8 L e L L e e

W W W Q W W 9

0

- .- Z

8 5 2

0 2 8 8

.- - ill

n e!

n

s B F e! e! e e! e!

B F

Z - L e

L L L L ,o P 8 ce

c 5 P-

n

c s. =: n 7

L I

B

b Y s 0 5 vl m

(I g c.l

vi W 0 121 IC1

4

P e

P 8 #j :a z

@ a, - S

L

4

4 2 - e 2 P e! B

E

L

.- E .-

I I

3 3

N m 0 o\ 0 8 a. o\

0 0 0 - A 2

A

8 P e! e

b B

E z

- - P 2 B G

L e!

S

+ .- K .-

.-

.-

U 3 1 s

0 3 z 0 m

I

2 00

x P O 0 S I 0 0 0 0 m

a, " e, e, 3 - - - 9 e e e E B B E

R R R e e! e e I b a a C E :z

a

S S

.- .- & Y

3 2 1 Z

m b t N

3

I

f

m d

W -4

LA 2 W

0 0 1s i? '""

vi 2 a a 8 8 s a

a

0 .- a

I I I

yl Y

I? b 3 U e e e 3 3

9 z Ti 2 B

E

0

5

: 2

g 3

3 P b Y

Annex 4: The World Bank support to the Growth Agenda.

1. The Bank portfolio in support of the MAP growth agenda includes a significant number of investment lending operations which encompass policy dialogue for reforms. As noted earlier, given the breath and coverage o f these activities, this PRSC series supports to the growth agenda by improving the budget process, the overall governance environment and the human capital and general living standards o f the population but does not include any specific policy actions directly related to growth. This annex provides an overview o f the Bank’s investment program; it reviews recent accomplishments and summarizes the strategy set out in the new CAS for future support. The current and planned portfolio o f Bank activities in support o f removing bottlenecks to investment and growth is presented in Table 1 below where the overall Bank portfolio and AAA activities are portrayed against each o f the M A P commitments.

2. The existing Bank portfolio comprises a series o f projects that support progress in three key areas for growth: private sector development, transport and rural development and environment. These projects contribute to the investment needs o f Madagascar and foster key sector reforms. The main accomplishments o f the last few years are summarized in Table 2.

Private Sector Development.

3. I n recent years, steps have been taken to improve the investment climate, implement public- private partnerships (PPP), improve co-ordination of policies and give voice to the private sector and civil society, more broadly. GUIDE, the one-stop shop for enterprise creation, i s being revamped and placed under the newly established Economic Development Board o f Madagascar (EDBM) which i t s e l f i s being supported under the IDA-financed Growth Poles Project. The Second Private Sector Development Project has supported the privatization process although there have been no new privatization transactions since the sale o f H A S Y M A in July 2004. Management contracts for the public enterprises J I R A M A (energy) and S IRAMA (sugar) are now in place.

4. critical. In April 2005, a two-year, IDA-funded management contract took over responsibility for J IRAMA. The Government implemented tariff increases in 2006 and twice in 2005 after tariffs remained frozen from 2001 even though this was a period o f high inflation, sharp devaluation o f the local currency and rising world o i l prices. After a history o f very limited new investment to increase power supply, while demand has increased substantially, the Government i s addressing JIRAMA’s unsatisfactory operational performance (i.e. high losses and poor maintenance). A donor conference was held in Paris in January 2006 to secure financing for J IRAMA and the Government i s now implementing a restructuring plan.

However, reform in the energy sector i s still slow and the JIRAMA situation remains

5. The newly established EDBM, an investment promotion and business facilitation agency, will function as an apex body for private sector development. The EDBM i s being financed by the Bank’s Integrated Growth Poles Project (IG2P) which i s in its second year o f implementation and i s expected to increase private investments in the three geographical growth poles (Nosy Be, Antananarivo- Antsirabe, and Fort Dauphin) in the key sectors o f the economy. Along with infrastructure investments, the IG2P provides support to improving the policy and regulatory regime and strengthening institutional capacity to leverage private investments. A new Investment L a w i s being finalized and the existing Zone Franche legislation i s being improved. The EDBM i s also spearheading the investment climate reform program and has successfully simplified the business registration process reducing the number o f procedures to register a business from 10 to 2 and the number o f days required f rom 21 to 5. Other reforms are envisioned to improve Madagascar’s ranking in the Doing Business Indicators.

69

Table 1. Mapping of IDA Program and MAP Commitments

Good governance

High growth economy

Connected infrastructure

Rural devel. and green revolution

Cherish the environment

transformation

Health, family planning, and the fight against HIV/AIDS

National Solidaritv Source: Updated

Existing IDA lending

PRSC Governance & Institutional

Development Mineral Resource Governance

Community Dev. Fund

lestment and growth Integrated Growth Poles Microfinance Private Sector Dev. 2 Irrigation and Watershed

Transport Infrastructure Rural Transport

e Power/Water Sector Restructuring APLl

Integrated Growth Poles Regional Comm. Infrastr.

(EASSY) Rural Development Support Rural Transport Irrigation and Watersh. APL 1 Environment 3 Environment 3 GEF

PRSC EFA Fast-Track Initiative

(non-IDA) Community Dev. Fund

Health Systems support 1 HIV/AIDS 1&2 Nutrition PRSC Communitv Dev. Fund

om the Country Assistance Strategy,

~~

IDA Lending

PRSC Governance & Inst.

Development 2 Local Dev. Fund

e Growthhfrastructure

e Growthhnfrastructure e PowerrWater Sector Restructuring APL2

IDA/IFC Power Guarantee

e Irrigation and Watershed APL2 e Local Dev. Fund

Environment 3 suppl. Environment 4 GEF Environment 4

PRSC e EFA Fast-Track Initiativ, (non-IDA) e Postprimary Education

Local Dev. Fund Health Systems support : PRSC Local Dvp. Fund

anned AAA

e Programmatic. PER Tax policy TA M&ETA Civil service pay policy note PEFA (CFAAKPAR) Programmatic

Decentralization review Extractive industries TA Social accountability TA

GrowthCEM Labor market review Trade (Integr. Framework

Program Trust Fund) e FSAP e ICA e Country dev. Review

TelecomTA PPP Framework TA Infrastructure review

e GrowthCEM Infrastructure review Country dev. Review

e Fisheries policy advice e Environment TA

Labor market review Post-primary education Education impact evaluation Poverty assessment

Health sector study 0 Poverty assessment

Adaptation and risk mgt. TA Social protection

70

Table 2. Support to Higher Investment and Growth - Key Actions.

World Bank Pro ject Supported Actions Increase investment promotion: the Economic Development Board o f Madagascar (EDBM) was established in October 2006 as the premier agency for investment promotion and investor facilitation. Remove Administrative barriers (the GUIDE i s being revamped and placed under the EDBM and a draft Investment Law has been submitted to the National Assembly) Foster Dialogue with private sector to identify and remove bottlenecks through the EDBM. Increase service delivery in telecom, transport (airports and ports), water and electricity, cotton and sugar production through the reform o f the public enterprises Restructuring o f the public utility JIRAMA underway Improve Madagascar’s image through marketing campaigns, active participation in trade fairs: participation to tourism fairs in Dubai, Milan and Mauritius Improve performance o f large-scale irrigation schemes through integrated package o f investments at watershed level. Address political risks concerns through provision o f guarantees National fertilizer policy adopted. Implementation decree for seeds issued. Improve access to finance through provision o f leasing services, SME finance: the PCG scheme has improved access to finance for SMEs in the growth poles Improve trade links with strategic partners (Agreement on Textiles and Clothing (ATC), SADC and COMESA trade agreements) Improve supply chains through rehabilitation o f national and regional roads Rehabilitation o f port o f Toamasina Construction o f new port in fort Dauphin to support mining and agricultural exports commenced in December 2006 Upgrading airports Rehabilitation o f the rail track in Northern railways network Concessioning o f the Northern railways Rehabilitation and maintenance o f roads Focus on decentralizing growth through creation o f growth poles around tourism, industrial zones, agri-business and mining: Improve productive assets o f poor rural households through matching grants for demand-driven productive agricultural investments. First Bio-Carbon contract for Madagascar signed. Capture economic benefits associated with natural resource management through investments in protected areas, natural forest management, and community management transfers.

1 e Delivery of socio-economic infrastructure to communes and communities

Transport.

6. The transport sector, particularly the roads program, plays a key role in Madagascar’s growth and poverty alleviation strategy and i s being strongly supported by the Bank’s Transport Sector APL 1-2-3 (the first phase o f which has already closed). In Madagascar, remoteness i s associated with poverty, and improving access i s critical for enhancing productivity in rural areas, improving access to social services and expanding access to markets. In April 2000, after almost ten years o f sector dialogue and very little investment, the country adopted a comprehensive transport sector policy which aims at: (i) focusing the Government’s role on strategic planning, sector oversight and coordination; (ii) creating agencies for sub-sector management and regulatory functions that are jo int ly controlled by the public and private sectors and gradually user-financed; (iii) divesting operational activities to the private sector, through privatization and concessioning arrangements; (iv) developing the local private sector for works design and execution; and (v) rehabilitating transport infrastructure to appropriate levels and ensuring their maintenance thereafter. This new sector policy allowed the Bank to more forward in 2000 with new transport lending -the 3 phase APL including the A P L 2 Rural Transport and APL 3 Transport Infrastructure Projects which are s t i l l active.

71

7. I n recent years the Government launched an ambitious road rehabilitation and maintenance program (2003 - 2008) with the objective to rehabilitate o r provide periodic maintenance for approximately 2,000 km per year. The road network consists o f about 25,100 km o f national and provincial roads o f which 5,600 km are paved and 19,500 km unpaved. Overall 32% o f the network i s in good or fair condition and 66% o f the paved roads are in good condition. Since 2003, nearly 3,660 km o f national and provincial roads have been improved. For rural roads, between 2003 and 2006, about 3,386 km were improved. Regarding the program financed by the Bank’s Rural Transport APL2, 1,300km have been rehabilitated so far. To rationalize the management o f the rural roads, Government has created a rural roads unit which i s part o f the well-functioning Large Works Unit. Between 2003 and 2006, the Road Maintenance Fund (RMF) contracted for the maintenance o f an average o f 7,400 km o f roads annually, o f which 600km o f rural roads. The organizational effectiveness o f the RMF however needs to be strengthened and i t s resource base needs to be enhanced. Currently the RMF collects about 30-40 percent o f i t s financial needs and these are increasing with the continuing improvement o f the network.

8. (the Maritime, Ports and River Agency (APMF) and The Civil Aviation Agency (ACM); moreover laws creating the Roads Authority (AR) and the Land Transport Agency (ATT) were ratified in 2006, and both entities are expected to be operational by mid-2007. Finally in February 2007 the Transport sector was separated from the Public Woks, and two separate ministries are now in charge o f the two sectors: the Ministry o f Transport and Tourism, and the Ministry o f Public Works and Meteorology: The Ministry o f Public Works i s expected to focus on the supervision o f the huge road program, while the Ministry o f Transport oversees al l other transport subsectors and a l l the regulatory issues. The Government i s using public-private partnerships for managing the transport infrastructure. Air Madagascar i s operating under a management contract. The Government liberalized the air transport access to the country, but the impacts o f such policy have to be consolidated. The Transport Infrastructure Investment Project (APL3) has been restructured to finance the investment program o f the Northern Railway which was concessioned in 2002 to Madarail. The main port o f Toamasina, which handles more that 80 percent o f the total traffic, has been restructured with i t s container terminal concessioned. The operations o f the secondary ports TulBar, Mahajanga, and Antsiranana/Nosy Be/Ankify wi l l be concessioned by mid-2007

Institutionally there has been progress in setting up the autonomous sub-sector agencies

Rural Development and Environment.

9. It envisions Madagascar as a wor ld leader in environmental best-practices and to become a green island again, protecting i t s extraordinary environment. It commits to developing eco-tourism, agri-business, sustainable farming practices, and industries based on organic and natural products which minimize biodiversity damage and maximize benefits around the environment, on behalf o f the nation and i t s people.

The strategy laid out in the MAP has a strong focus on environment and rural development.

10. the Government’s institutional reform program for the Ministry o f Agriculture, Livestock and Fisheries i s underway, aimed at supporting the decentralization process and improving the quality o f services. Re- assignment o f staff and budget towards the regions continues to progress, with deconcentration o f responsibilities to the Regional Directors for Regional Development (DRDR). Decentralization efforts are also underway: the Ministry aims to establish district-level Agriculture Service Centers (CSAs) as a consultative and service platform between farmers, private sector, NGOs and the Government. T w o CSAs have been piloted in Itasy and Ambohimahasoa, and five more have started in other regions. The Government has developed i t s Land Policy Letter which was validated by a wide range o f stakeholders in February 2005 and adopted on M a y 3,2005. Under the National Land Program the Government has put in place a land rights registration system based on the principles of: (i) decentralization o f the land administration to the lowest level o f local government; (ii) improvement o f land tenure information; (iii) simplified land tenure legislation; and (iv) capacity building, through a learning-by-doing approach. Activities had started in 5 communal guichet fonciers by end-2006, and 188 are envisaged in 2007. The

To date several reforms have been implemented to foster this vision. The implementation o f

72

Bank has completed a AAA on Land and Property Rights Review which served as an input to the National Land Tenure Program.

11. The Bank approved the Irrigation and Watershed Management APL in October 2006 to support the implementation o f the National Program o f Watershed Management and Irrigated Perimeters Policy Letter. It i s expected that this project will contribute significantly to the goal in the MAP o f doubling rice production. The project also supports the promotion o f agriculture diversification and growth centers in the four sites where it i s active (Alaotra, Itasy, Andapa, and Marovoay). The Bank’s Rural Development Support Project (PSDR) i s a nation-wide project supporting farmers’ associations through a small-grants facility, technical assistance and market information systems. The project also supports improved planning o f infrastructure in enclaved areas, a new rice observatory, a newly completed agriculture census and diffusion o f agriculture price statistics. The Bank’s AAA work has helped to define the new National Strategy for Reduction o f Risks and Catastrophes. Market development i s being promoted through public- private partnerships (PPPs), the strengthening o f professional organizations such as the recently created Rice Platform (PC Riz) and Fertilizer Platform, the Seeds Task Force and Dairy Board, adoption o f a new Fertilizer Policy, promotion o f agriculture growth centers in major potential areas and reinforcement o f quality standards (namely through the Aquatic Surveillance Agency, ASH).

Food security and agriculture productivity are being strengthened through several means.

12. The Government has continued to expand its national System of Protected Areas (SAPM), now at 3,850,000 ha. The SAPM i s expected to attain 6 mi l l ion ha by 2012 (about 10% o f the national territory). The Foundation for Protected Areas was established in January 2006 to help finance the SAPM. The National Environmental Program - supported by the Bank’s Third Environment Project - i s now in i t s third phase. This program focuses on strengthened forestry and environmental governance. The Government has strengthened i t s forest exploitation adjudication system, by publishing the status o f forest exploitation permits in newspapers. A Forestry Observatory and a mobile control unit are now operational. Mining and forest concessions have been frozen in the new system o f Protected Areas o f Madagascar. Fire monitoring committees have been created and are being strengthened at commune level. The decree making the Ofice National pour I ’Environnement (ONE) the one-stop shop for enforcing the MECIE (National Environmental Impact) law passed in February 2005. The Ministry wil l also be realigning forestry and environmental regional units with each o f the 22 regions, to help mainstream environmental concerns with regional plans and strengthen the efficiency o f forestry operations

Bank Program for Next Five Years

13. Looking forward, the CAS presents the mix of investment instruments aimed at the removal o f bottlenecks to investment and growth in both rural and urban areas. The specific objectives o f the planned portfolio can be summarized as follows: (i) eliminate barriers to access domestic and international markets; (ii) improve access to finance and factor markets; (iii) reduce regulatory burden and foster competition and (iv) achieve sustainable development and minimize the impact o f shocks. A substantial program o f AAA activities provides the necessary analytical underpinnings.

Eliminate the barriers to access domestic and international markets. To achieve this objective, the Bank’s program wil l complement existing projects - Growth Poles Project (FY06), Watershed and Irrigation APL (FY07), and the two transport operations -with: (i) technical assistance to build Government capacity and to help producers adopt improved quality standards under the ongoing Trade Integrated Framework Program; (ii) new investments in irrigation infrastructure, marketing support and other services to increase agricultural productivity and diversification; and (iii) support to policy reforms and investments in transportation - roads, railways, ports, etc. In doing so, it wi l l place special emphasis on the sustainability o f the investments (for example, road maintenance rather than road construction) and on involving the private sector through public-private partnerships. Finally, the program wil l continue to emphasize lowering air transport and telecommunication costs and improving accessibility through an open s k y policy and upgrades to the telecommunications sector. Key projects

73

include new planned transport and growth operations and the recently approved regional communication infrastructure (EASSY) project.

Improve access tofinance and factor markets. IDA, in collaboration with other donors, wi l l increase i t s support to the financial sector, addressing bottlenecks that are preventing the emergence o f a financial services industry that meets the needs o f a l l market segments, f rom microfinance to large enterprises. This wil l include (i) the provision o f technical assistance to improve the supervision and regulatory framework, payment and credit information systems, and the institutional capacity o f the sector; (ii) continue to facilitate access to credit and other financial services including such emerging areas as guarantees and leasing; and (iii) continue assisting the Government to develop the strategy and programs for scaling up and expanding coverage o f the financial sector interventions using a sector wide approach with other donors. The microfinance project recently benefited from 45 mi l l ion in additional financing to provide bridge financing until the multi-donor financial sector wide support i s in place. The Bank Group wil l continue i t s efforts at improving the situation in the energy sector with other partners and wil l work together with the Government o n a concession arrangement for the power company J I R A M A and on attracting private agents to generate and sell electricity. Key projects include: the Energy and Water Adaptable Program Loan 1 &2 and an IFC-IDA Partial Risk Guarantee for public-private partnership investments in hydropower. Additionally, MIGA intends to support i t s second guarantee in the energy sector in FY08.

Reduce regulatory burden and foster competition. The new Bank program wi l l continue to assist the Government’s efforts to improve i t s business climate and bring in higher levels o f FDI. This wil l include continued assistance to the Economic Development Board and other agencies to improve the regulatory environment, achieve greater transparency in issuing licenses and concessions (especially in mining, fishing, tourism, and forestry), and improve the quality o f governance in extractive industries, including the country’s jo in ing o f the Extractive Industries Transparency Initiative (EITI). A key objective i s to balance the economic potential in these sectors with sustainable development. The instruments will include the ongoing and new Growth Poles projects, the Mineral Resources Governance Project, and the Governance and Institutional Development projects.

Achieve sustainable development and minimize the impact of shocks. IDA will build on the progress made so far to preserve Madagascar’s unique natural environment by supporting the expansion o f the System o f Protected Areas o f Madagascar to 6 mil l ion hectares. It wi l l encourage development o f a concession policy to engage the private sector in managing the protected areas. In addition, the Bank wil l help the Government develop national capacity to increase the country’s resilience to frequent natural calamities. During the CAS period, implementation o f the Government’s strategy in this area wil l begin on a pi lot basis. The Bank Group wil l start with reinforcing climate modeling, developing climate-proof standards and adhering to them in i t s own projects. It will also help the Government assess the feasibility o f a Risk Insurance Scheme and i t s piloting. The ongoing as wel l as a follow-on project in the environment sector, together with Global Environment Facil ity (GEF) projects and analytical and advisory activities, will support these efforts.

74

Annex 5: The Sector Wide Approach in Education, Health and Water.

1. This Annex provides background information on the Sector Wide Approaches (SWAP) currently under implementation in Madagascar and supported by this PRSC operation in the Education, Health, and Water and Sanitation sectors.

Education

2. Donor support to the primary education sector in Madagascar i s formalized around the Education for AWFast Track Initiative. In 2003, the Government prepared a Strategic Plan for the Reform and Development o f the Education Sector along with a detailed plan o f action for Education for All (EFA), which covers the f i rs t nine grades o f school (called “Education Fondamentale”), with concrete proposals for achieving the target o f universal completion o f the primary cycle (grades 1-5). Following local donors’ endorsement o f the updated EFA National Act ion Plan in April 2005, the Steering Committee o f the EFA-Fast Track Initiative (FTI) secretariat agreed to provide interim grants f rom the Catalytic Fund to bridge the financing gaps for three years for Madagascar (US$lO mi l l ion for 2005, US$25 mi l l ion for 2006 and US$25 mi l l ion for 2007). These additional grants are provided on the understanding that Government wi l l continue to increase i t s budgetary allocations to primary education (using own resources and aid from budgetary support programs/HIPC funds) and are not meant to substitute for them. The Wor ld Bank has provided continued support for initiating and sustaining these processes, including the supervision o f the Catalytic Fund grant. A new plan wil l be submitted to the EFA secretariat by March 2008 to obtain a new release o f funds for the period 2008-2010.

3. A joint review mechanism, led by the Ministry, has been set up for monitoring the implementation of the EFA plan. Twice a year, a jo in t mission o f the Ministry and the donors i s organized leading to a Joint Donor Report (JDR). The report i s an essential requirement for disbursement o f the Catalytic Funds as well as additional bilateral funds. The two jo in t donor missions are the only formal process o f review and supervision o f Government activities.

4. Government and donors have agreed on a specific process for the preparation of these reviews. One month before the mission, the Ministry o f Education provides a report that reviews progress in primary education and meets the essential information requirements o f a l l partners. The report covers the following areas: (i) overall progress in the EFA implementation with an analysis o f the agreed performance indicators, (ii) financial analysis o f the EFA plan including specific information on the use o f both domestic and external resources; (iii) progress in implementation o f activities to improve access (e.g. construction, teachers recruitment) and quality (e.g. training, learningheaching methods, student learning outcomes, textbooks), (iv) the management system (budget management, school management, decentralization) and (v) fo l low up on the recommendations o f the previous review. A separate section investigates a specific topic chosen in the course o f the previous jo int donor review. The Joint Donor Report provides an assessment o f implementation progress and constraints, based o n the Ministry’s report, interactions with senior managers and technical staff o f the Ministry and field visits to districts and schools.

5. budget management (budget preparation and execution), policy changes (conditional cash transfer feasibility analysis and school nutrition program design) and impact assessments o f recent reforms.

I n addition, coordinated technical assistance i s provided by the partners on issues such as

6. Overall, this process has strengthened the Ministry o f Education in its role o f donors’ coordinator. For the implementation o f the EFA Plan, the “Unit6 d ’Appui Technique - UAT’ has been created inside the Ministry o f Education and it manages additional external funds for the EFA plan, excluding project funding. The jo in t reviews are also the occasion for reaching agreements among the partners on greater harmonisation and alignment.

75

Health

7. rate, malaria, tuberculosis, sexually transmitted diseases and HIV/AIDS control; and reduction of malnutrition in children under the age of five. T o achieve these objectives, it proposes a multisectoral approach and recognizes the importance o f system and institution strengthening.

The MAP sets very ambitious targets in the areas of maternal and child mortality and fertility

8. The Ministry of Health and Family Planning has started to put in place the necessary elements for an integrated approach to meet the challenges in the sector and has completed the elaboration o f i t s PDSS, which represents the cornerstone o f the whole SWAP it intends to achieve. The Health SWAP seeks to improve health financing, delivery and management through a programmatic approach.

9. The MOHPF has established and agreed upon an Annual Work Program in cooperation with financing and implementing partners, consistent with the policy framework outlined in the PDSS and an estimated resource envelope for the following year. The Annual Program also foresees appropriate technical assistance, training and institution strengthening measures to support the full integration o f planning and managerial functions into the existing core Government agencies. A Memorandum o f Understanding signed by the Government and i t s development partners pooling their resources outlines organizational, institutional and coordination arrangements for implementation and the roles and responsibilities o f each partner.

10. Bi-annual health summits will be held and led by the Ministry o f Health with the participation of all stakeholders and development partners as well as representatives from civil society, private sector and other relevant ministries. Progress on the national program wil l be reviewed during these summits and wil l provide input into the Annual Work Program for the Ministry. These Summits wil l also allow evaluation o f progress towards achieving the development objectives and the MDGs. Moreover, these discussions wil l be used to fine-tune the project and the program to changes that might occur in the sector and to coordinate, at a technical level, with al l partners. Donors will adjust their actual allocations based on the bi-annual jo int reviews by Government and its development partners in the health sector and based on the Government’s Annual Work Program.

1 1. systems, including production, financing, delivery, stewardship and governance. The achievement o f the goals o f the sector wide program will, inter alia, include reduction in maternal, chi ld and infant mortality, fertility rate, chronic malnutrition in children under the age o f three, HIV prevalence, and prevalence o f syphilis in pregnant women. The successful adoption o f the SWAP i s expected to y ie ld a number o f other development benefits as well, including stronger country ownership and leadership, and greater focus on results. In addition, the SWAP process wil l encourage and foster coordinated and open policy dialogue, guide allocation o f resources based on priorities, and facilitate scaling-up o f benefits t o the entire sector. It wil l also enhance sector-wide accountability with common fiduciary standards, and strengthen the country’s capacity, systems and institutions.

The Madagascar Health SWAP has a strong focus on strengthening all aspects o f health

Water and Sanitation

12. framework to support its rural water supply and sanitation sector (RWSS). The RWSS sector i s moving progressively towards a sector wide approach. A series o f actions were undertaken by the Government as building blocks for the SWAP.

Since 1999, the Government has successfully developed the legal, institutional and policy

13. The Water Law was promulgated in January 1999 and bylaws and decrees approved in 2003, a remarkable achievement in a four-year period. As part o f the implementation o f the Water Law, ANDEA (the national water resource agency) and SOREA (the water regulatory agency) have been created. They are attached to the Prime Minister’s office, but operate under the auspices o f MEM. The Government

76

has successfully tested with the support o f communities, private sector and NGOs, the service delivery arrangements to expand sustainable and cost effective water supply, in particular with the Bank financed RWSS pi lot project (closed in 2005).

14. stakeholders. It became in 2005 the “Euu Pour Tous” (Water for All) policy paper used to market the sector’s best practices along with a Water for All documentary financed by UNICEF. That led to the national WSS program (PNAEPA) aimed at reaching the MDG for the water and sanitation sector which was endorsed by the Government in June 2005. This document now forms the basis for the urban and rural WSS sectors action plans that the Government envisages to finance by a mix o f external financing and internal resources. The Government has drafted and disseminated a manual o f procedures for implementing and managing o f rural WSS projects to be used by a l l stakeholders in order to improve quality o f construction and sustainability o f the service. A sound monitoring and evaluation system i s under development and wil l be used to measure sector progress.

The WSS sector policy and implementation strategy was formulated after involving all major

15. lead the work o f the sector wide approach in close collaboration with other donors (AfDB, EU, JICA, WaterAid, UNICEF, USAID) to increase i t s absorptive execution capacity. More specifically, on-going activities support the sector: 1) strengthening the medium t e r m results oriented program budget planning process in order to increase sector execution capacity, public expenditures efficiency, and monitoring and evaluation; 2) harmonizing stakeholders’ approaches; 3) increasing responsibility and resources to deconcentrated levels as wel l as to regions and communes in decision making for programming and supervising o f service delivery; 4) increasing support to sanitation and hygiene promotion to maximize health benefits for the population and 5) promoting innovative water service delivery mechanism using local Public Private Partnership, where ha l f o f the capital investment i s provided to local governments (mostly by supplying pipes, equipment and meters) and where private operators and community/local government provide the remaining 50 percent and s ign a medium term management contract for the service

The overall implementation of the PNAEPA continues satisfactorily. DEA/MEM continues to

16. activities o f the W A S H committee (Water Sanitation and Hygiene) which includes al l sector donors and stakeholders as well as the Ministry o f Health, the Ministry o f Education and other multi-sector projects or organisms, such as FID and ACORDS. And second through the directorate o f water/donors regular meetings to discuss the budget process and the sector’s Medium Term Expenditure Framework (MTEF). Joint Government/donors reviews are held every year to formulate an action plan for the coming year and assess progress on the actions agreed on the previous review. The annual water and sanitation review has been institutionalized in 2005 to offer the opportunity to review, through a participative approach, sector performance, past DEA program budget execution and address key sector issue and make recommendations to remediate sector weaknesses. About one hundred people participated in this event, f rom the Government, donors’ community, NGOs, private sector, mayors, and heads o f region. The f irst one was organized in June 2005, the second one in April 2006 and the third in March 2007.

Stakeholders coordination has really improved over the past 2-3 years. First, through the

77

Annex 6: Madagascar Joint World Bank IMF Debt Sustainability Analysis

Madagascar’s risk of debt distress is low. The upgrading of Madagascar’s risk of debt distress rating compared to the previous debt sustainability analysis (DSA) is on account of the improved growth and export prospects linked to the big mining projects under construction. Madagascar’s external debt burden indicators under the baseline scenario remain below the relevant policy-dependent indicative thresholds. The stress tests do not result in indicators breaching the thresholds although they reveal that external debt sustainability is sensitive to export shocks, which are likely given the concentration of Madagascar exports. The inclusion in the analysis of the small domestic debt does not change the assessment of country S. risk of debt distress.

A. Introduction

1. framework for low-income countries approved by the respective Executive Boards. The framework takes into account indicative thresholds for debt burden indicators determined by the quality of the country’s policies and institutions.’ It comprises o f a baseline scenario (which assumes, among others, full delivery o f HIPC Initiative debt relief by external creditors) and a set o f alternative scenarios.

This DSA has been prepared jointly by IMF and World Bank staff. It i s based on the

B. Recent Developments and Current Debt Situation

2. October 2004. The resulting debt relief, including additional bilateral debt rel ief f rom most Paris Club creditors, reduced the end-2003 NPV o f debt-to-exports ratio to an estimated 137 per~ent.~ 4At that time, the ratio was projected to increase to 154 percent in 2004 and decline thereafter.

Madagascar reached its completion point under the Enhanced HIPC Initiative in

According to the World Bank Country and Policy Institutional Assessment (CPIA) Index, Madagascar i s rated as a medium performer. This rating i s the same using either the latest index or the three-year average. The indicative sustainability thresholds for external debt applicable for that category o f countries are: (i) 150 percent for NPV o f debt-to-exports ratio, (ii) 40 percent for the NPV o f debt-to-GDP ratio, (iii) 250 percent for the NPV o f debt to fiscal revenues ratio, (iv) 20 percent for the debt service to exports ratio and (v) 30 percent for the debt service to revenue ratio.

’ As o f end-2006, Madagascar has estimated US$595 million in arrears towards non-Paris Club and private creditors that are not delivering HIPC debt re l ie f (Algeria, Libya, and Iraq are the largest accounting for 92 percent o f the total). Madagascar continues to make efforts to contact these creditors, regularize the payments, and obtain full .debt re l ie f under the HIPC Initiative.

Total debt re l ie f to Madagascar under the Initiative amounts to US$836 million in NPV terms.

Most Paris Club creditors have written-off their outstanding claims after full delivery o f HIPC debt relief, reducing claims on Madagascar by further US$466 million in NPV terms. In 2006, Sweden and Israel canceled 100 percent o f the Malagasy debt. In addition an agreement was finalized with Japan and an agreement i s under discussion with the Federation o f Russia. Regarding non-Paris Club creditors, cancellation agreements should be finalized soon with Abu Dhabi and the People’s Republic o f China.

78

Madagascar : External Debt Outstanding 2006

Creditor Amounts In percent Share (millions o f $US) o f GDP (in percent)

Total external debt 1,584.4 28.7 100

Bilateral Creditors 724.5 13.1 46 Paris Club 111.6 2.0 7 Other countries 6 12.9 11.1 39

Private creditors 14.3 0.3 1

Multilateral 845.6 15.3 53

Source: Madagascar authorities and Fund Staff estimates

3. Madagascar’s external public debt declined significantly from US$3.5 billion at end 2005 (including arrears) to US$1.6 billion at end 2006 on the account o f the debt relief under MDRI. The IMF’s debt relief under the MDRI became effective in January 2006 and amounts to US$197 mi l l i~n .~ MDRI debt re l ie f f rom IDA was implemented starting in July 2006 through the 100 percent reduction o f the debt disbursed as o f end-2003 that was s t i l l outstanding at the implementation date. Total MDRI debt service relief f rom IDA is estimated at SDRl.2 bi l l ion (equivalent to about US$1,780.1 million).6 As for the ADF, the delivery o f debt rel ief under the MDRI though a write-off o f the outstanding obligations as o f end-December 2004 became effective in September 2006 (with retroactive application to January 2006). Estimated MDRI debt relief f rom the ADF amounts to US$393 million. This has been partly offset by new borrowings as wel l as exchange rate developments7, and the actual outstanding stock o f debt has declined by 55 percent in 2006.

4. share o f multilateral creditors has decreased from more than 75 percent at end-2005 to 53 percent at end-2006. Conversely, bilateral and commercial creditors represented 47 percent o f total outstanding obligations (with Paris Club creditors accounting for 7 percent), compared to about 23 percent by end-2005. The bilateral Paris Club debt that remains i s mainly to Russia. The current creditor composition i s broadly similar to the one prevailing at end-2003, i.e. prior to the debt write-offs granted by most Paris Club and the MDRI debt rel ief.

The MDRI debt relief has triggered a drastic change in the creditor composition. The

See www.imf.org for details on the implementation o f the MDRI by the IMF. The amount o f relief includes undisbursed HIPC assistance from the Fund, previously expected to be delivered over time, and MDRI assistance. Excluding the HIPC share, the MDRI debt re l i e f amounts to US$ 186 million. For details on the implementation o f the MDRI by IDA, see IDNSecM2005 and IDNSecM2006-0131. This refers to the increase on the US$ value o f the debt due to the depreciation o f the US$ vis-his other

currencies in which Madagascar’s debt i s denominated.

79

C. Baseline Medium- and Long-Term Scenario

5. due to the impact of two large mining projects. Construction of a US$650 million (12 percent o f GDP) ilmenite mine began in mid-2006 and a US$2.5 billion (45 percent o f GDP) nickel and cobalt mine and processing facility commenced in 2007 and wil l be completed over the next 3 years. Such a large inflow o f capital i s leading to an appreciation of the currency and the project wi l l result in higher growth and starting in 2009/10 in higher exports (Box 1) than in the previous DSA.

The baseline scenario i s substantially different to the one described in the previous DSA

6. implementation of sound macroeconomic and structural policies and external financing that i s through grants and highly concessional loans. Key macroeconomic assumptions are indicated in Box 1. With respect to external financing, new borrowing i s projected to remain largely at highly concessional terms. External assistance as a share o f GDP, which had climbed very rapidly to close to 14 percent in 2004 due to large inflows o f external aid and borrowing to finance recovery after the 2002 political crisis, wi l l remain relatively high in the short term (increasing from 8 percent o f GDP in 2005 to 11 percent o f GDP in 2006, in part due to external financing o f the presidential election, and 9 percent in 2007 based on recent information from donors) and gradually decrease to about 6 percent o f GDP by the end of the projection period. The borrowing i s largely for financing infrastructure projects aimed at lowering costs and enhancing competitiveness, and to help Madagascar attain the objectives of the Madagascar Action Plan (MAP) and the Millennium Development Goals (MDGs).

The baseline scenario is built on a number of key macroeconomic assumptions, the

7. the thresholds throughout the projection period (Figure l a and Table la). The debt indicators dropped sharply in 2006 as a result o f the MDRI (Table la). The NPV of debt-to-GDP ratio which was at about 36 percent in 20058 (a level already below the threshold for medium performers) dropped to below 12 percent in 2006 (Figure 1 a and Table la); it increases subsequently to peak at 16 percent in 201 7 and drops after to about 13 percent in the outer years. The NPV of debt-to-revenue ratios (Tables 2a) exhibit a similar profile. The increase in these ratios in the initial years (from the low post-MDRI levels) reflects relatively high new borrowing albeit at concessional terms to finance needed investment expenditures. The NPV o f debt-to-exports i s driven by the impact o f the big mining projects. Before they start their exports, these projects are expected to lead to an appreciation o f the exchange rate that wi l l negatively impact competitiveness of exports. This in conjunction with the weak performance of agricultural prices of key exports, such as vanilla, leads to a deterioration of debt indicators based on exports up to 2009. The mining projects are expected to start exporting in end-2009 or in 2010. The value o f these exports i s so large that the NPV of debt-to-export ratio i s projected to drop from 61 percent in 2009 to 38 percent in 2010 and grow through the projected period (but remaining well below the threshold ) due to new borrowing. The debt service-to-exports ratio exhibits a similar pattern. Moreover, given the highly concessional nature of the existing debt and new borrowing, the debt service ratios are well below the indicative thresholds throughout the projection period but show a rising trend due to the accumulation of new debt.

Under the baseline scenario, Madagascar’s external debt indicators remain well below

8. Madagascar’s total public debt ratios, including domestic debt, also stay well below the external debt sustainability thresholds under the base case scenario (Figure 2a and Table 2a). The domestic debt i s projected to remain under 10 percent o f GDP through the projection period, as total expenditure i s assumed to be broadly kept in check with available financing from tax revenue and

* See IMF Country Report No. 06/306, Republic o f Madagascar: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Activation o f the Trade Integration Mechanism.

80

external assistance, and the fiscal deficit i s projected to remain predominantly financed by external assistance on concessional terms.

D. Sensitivity Analysis

External public debt indicators

9. deteriorate with inappropriate policies, and/or if confronted by adverse shocks. They would however remain below the threshold?

The sensitivity analysis suggests that the external debt indicators are low but could

0

the average o f the years 1999-2006) fo l low a lower trajectory than under the baseline. It should be noted, however, that the years leading up to 2006 include years o f political turmoil, large terms o f trade shocks, cyclones, and natural disasters. During that period, although real growth averaged only about 3.5 percent, the current account deficit was also l ow as the Export Processing Zone sector (put in place in 1989) was growing at very high rates. This factor explains the relatively benign trajectory o f the debt indicators under the historic scenario. If the years o f the political crisis (GDP decline o f 12.7 percent in 2002) and the recovery f rom this (growth o f 9.8 percent in 2003) are excluded, the average growth i s significantly higher at 5 percent, which remains below the baseline scenario but close to it if the impact o f the big mining projects is excluded.

0 The financing scenario (Scenario A2) reveals that Madagascar’s external debt indicators are sensitive to the terms o f new borrowing. Under this scenario, the N P V o f debt-to-GDP remains below the threshold but would more than double in the next decade (from 11 percent in 2007 to 23 percent in 201 7), and remains at about that level through 202 1 before decreasing slightly. The NPV o f debt- to-exports ratio would increase steadily f rom 46 percent in 2007 to 101 percent in 2027. This increase i s substantial although the ratio would remain below the threshold. The projected path o f these two ratios, together with the rising trend o f the debt service ratio f rom 2 to 6 percent during the projection period, points to r isks from new borrowing at less favorable terms than assumed in the baseline scenario.”

0 The bound tests do not reveal major underlying vulnerabilities. The most extreme stress tests shows the impact o f the combined FDI and growth shock on the NPV o f debt-to-GDP ratio (Scenario BS), and exports shock (Scenario B2) on the NPV o f debt-to exports ratio do not result in indicators significantly breaching thresholds. These scenarios show that debt sustainability i s most vulnerable to changes in the inflows o f FDI and to the impact o f these projects on growth and exports. The NPV o f debt-to-GDP increases significantly (to 26 percent in 2027) but remains comfortably below the threshold level. On the other hand, the export based indicator-the NPV o f debt to exports, crosses the threshold in 2009 only but falls back below the threshold as soon as the exports o f the two big mining projects materialize. The shock to exports i s somewhat extreme (the standard deviation i s about 33

The debt indicators in the historical scenario (Scenario A1 in Figure 1A and Table l b based on

The stress tests performed under the sensitivity scenario assumed permanent modifications o f key baseline 9

assumptions (“alternative scenarios”) as well as temporary deviations (“bound tests”). The “alternative scenarios” include a “historical scenario”, under which the main variables that determine the debt dynamics are assumed to remain at their historical average, and a “financing scenario” that depicts the impact o f lower concessionality in new borrowing. The “bound tests” are designed to examine the impact on debt and debt service indicators o f shocks, based on the country’s historical volatility, to key variables. lo This scenario i s similar to a sharp decline in grant financing, compared to the baseline, compensated by loans.

81

percent) as it i s influenced by the rapid increase in exports in the historical period from textiles exports, and the large decline in exports that took place during the political crises and the subsequent rapid recovery. The implications of export concentration for vulnerability are nevertheless to be noted, as they illustrate the impact o f shocks to certain export commodities (such as textiles), which have become large as a share o f total exports in Madagascar (about 40 percent in 2005 and 2006), as well as the exports o f only two mining projects that are expected to account for over 50 percent o f exports o f goods and services over 201 1-2017. However, the vulnerabilities associated with the big mining projects appear limited: even if the exports o f the big mining projects are only 1/3 of their baseline level (due either to a lower volume andor to lower export prices) the NPV o f debt-to-exports would remain below the threshold (scenario B7) peaking at 71 percent in 2022 (61 percent in the baseline).

Total public debt indicators

10. or permanent deviation from the baseline real GDP growth path would bring the total public debt beyond the external debt sustainability thresholds beginning in 2015, if spending plans were kept unchanged, which i s unlikely in view of past experience (Table 2b, Scenarios A3 and Bl).

Total public debt indicators are most sensitive to economic growth shocks. A temporary

E. Debt Distress Classification and Conclusions

1 1. Initiative and the MDRI and due to the impact on exports and GDP of big mining projects. In the baseline scenario Madagascar’s debt indicators are below the thresholds. The debt situation does not appear to be significantly vulnerable to shocks. Debt sustainability appears somewhat vulnerable if large export shocks materialize. This i s a risk in the medium term given the high concentration in exports in textiles in the short run and two mining products whose prices are volatile.

Madagascar’s risk of debt distress i s low following the debt rel ief under the HIPC

12. Sensitivity analysis nonetheless points to the need not only for implementing the policies underpinning the baseline scenario, but also for careful monitoring of borrowing policies and, more importantly, export performance. The latter i s critical given the concentration o f exports in textiles and clothing in the short run and in two mining projects starting in 2010. Borrowing at non- concessional terms as well new borrowing beyond the levels assumed under the baseline could also raise Madagascar’s risk of debt distress.

In conclusion, the debt situation seems under control and not subject to major risks.

82

Box 1. Baseline Macroeconomic Assumptions

Real GDP growth i s projected at 7 percent over 2007-2027. This growth rate i s higher than the historical average (5 percent over 1999-2006 if the impact o f the political turmoil o f 2002 i s excluded) due to the impact o f two large mining projects that started at the end o f 2006. Without these projects, the real growth rates would have been a l itt le under 6 percent on average i.e. higher but close to the historical rate.

Inflation as measured by the GDP deflator in dollar terms i s projected to average about 3.7 percent, with higher rates o f 20 percent in 2007 and decelerating to 2 percent subsequently. However, reflecting the impact o f the large inflows o f FDI on the exchange rate, which in turn wil l depend crucially o f the monetary policy undertaken, the increase in the GDP deflator in local currency i s expected to decelerate from 9.5 percent in 2007 to 5 percent beginning in 2010.

Export volumes grow at 11 percent on average and support GDP growth. The growth rates are relatively modest in the init ial years reflecting the impact o f the exchange rate appreciation on some vulnerable export industries such as textiles and shrimp but wil l jump as soon as the exports o f the big mining projects start.

Import volumes average about 7 percent for the period. Import volumes are expected to grow significantly due to the high import content (estimated at about 80 percent) o f the mining projects during their construction phase and wil l then slow down to about 6.5 percent i.e. at about the pace o f real GDP growth.

The current account deficit i s projected to increase significantly during the init ial years o f the projections due to the large increase in imports related to the big mining projects. However as exports o f these projects start, the current account deficit would gradually shrink from about 20 percent o f GDP in 2008 to 9 percent by 2010 and 5 percent by the end o f the projection period.

Tax revenues are projected to increase from 10.7 percent o f GDP in 2006 to about 15.5 percent o f GDP in 2027, owing to the termination o f ad hoc tax and import duty exemptions, tax policy reforms aimed at simplifying the corporate and personal income tax regimes, and steadfast improvements in tax and custom administration.

Total expenditures are broadly kept in check with available financing f rom tax revenue and external assistance, resulting in a roughly constant share o f GDP over the projection period.

External assistance progressively unwinds from the exceptionally high leve l o f about 11 percent o f GDP reached during the period 2004 to 2006 (financing o f recovery after the 2002 political crisis and o f the 2006 presidential elections) to over 7 percent o f GDP over 2007-201 1 (which i s slightly higher than the 6 percent o f GDP observed during the late 1990s because o f donor financing o f the MAP) and to 5 percent o f GDP in outer years. The share o f grants gradually increases from ha l f in the init ial years to more than ha l f in the later years.

83

- m - 00 0. N t - N - V I e P

N N w, - p - m a, m a N P N w g g ? - o ~ - m ~ o s ; o ; N N N P ,

e 1 0 a - -

O N x T V :

: N O ' 9 0

t - 0 - 0

' 00 N O

a m a, N N N + e, P N P N - - - e P P - P

m m m v 1 m m m m n n t-

p m f m 0 0 P m

w F. w y a a P. o c t - m t - o o w w

m - m N m

0 ' 0 , a 01 e, e, m p N - N O - - O z -10 w N

P m P, N w, w m N - w - w - - m a - p - * V I - -

: : : : m o m ' ? m m e o a m

; 0, 0, P N,

- - E . . . . . . . .

0 0 0 -

VI m 0 P, w N P N - I O P

VI, VI - c 0 m w s - w m m m e

Table l b Madagascar Sensitivity Analyses for Key Indicators of Publ ic and Publ ic ly Guaranteed External Debt, 2007-27 (In percent)

Project ions 2007 2008 2009 2010 2011 2012 2017 2027

NPV of debt- to-GDP ra t i o

Baseline

A. Alternative Scenarios

A l . Key vatiables at their historical averages In 2007-26 I/ A l New public sector loans on less favorable t e r n in 2007-26 2/

11 12 13 14 14 I 5 16 13

11 12 12 12 11 11 10 13 11 13 15 16 18 19 23 21

B. Bound Tests

B1. Real GDP gowth at histoncal average nunus one standard denahon in 2007-08 11 13 16 17 18 18 20 16 B2. Export value growth at histoncal average nunus one standard denation in 2007-08 3/ 11 15 21 21 21 21 21 14 83. US dollar GDP deflator at historical average minus one standard demahon in 2007-08 11 15 18 19 20 21 23 18 B4 Net non-debt creating flows at histoncal average nunus one standard denahon in 2007-08 41 11 20 27 27 26 27 24 15 B5. Combinahon o f B 1-B4 using one-half standard denabon shocks I 1 16 22 23 24 25 26 19 B6 One-hme 30 percent nonund depreciation relahve to the baseline in 2007 5/ I 1 16 18 19 19 20 22 17

NPV of debt-to-exports ra t i o

Baseline 46 54 61 38 38 42 55 61

A. Alternative Scenarios

A1 Key v ~ a b l ~ at their histoncal averages in 2007-26 I1 A2 New public sector loans on less favorable terms in 2007-26 21

46 54 55 32 31 31 34 61 46 59 70 45 48 54 78 101

B. Bound Tats

B1. Real GDP growth at histoncal average nunus one standard dewahon in 2007-08 46 54 61 38 38 42 55 61 B2. Export value growth at histoncal average nunus one standard deviahon m 2007-08 3/ 46 89 171 101 99 105 124 117 B3 US dollar GDP deflator at historical average nunus one standard deviation in 200768 46 54 61 38 38 42 55 61 B4. Net non-debt creating flows at histoncal average nunus one standard deviation i n 2007-08 41 46 91 128 74 71 75 84 73 B5 Combinahon o f B b B 4 using one-half standard denahon shocks 46 63 88 53 53 58 73 76 B 6 One-time 30 percent nonunal depreciation relative to the baseline in 2007 5/ 46 54 61 38 38 42 55 61

D e b t service r a t i o

Baseline 2 2 2 1 1 1 2 3

A. Alternative Scenarios

A l . Key vanables at their histoncal averages in 2007-26 l / A2 New public sector loans on less favorable terms in 2007-26 2/

2 2 3 1 1 2 3 5 2 2 2 2 1 2 3 6

B. Bound Twts

B1 Real GDP growth at histoncal average nunus one standard dewahon in 2007-08 2 2 2 I I 2 3 4 B2. Export value growth at historical average nunus one standard deviation in 2007-08 3/ 2 3 4 3 3 3 7 8 B3. US dollar GDP deflator at histoncd average minus one standard denation i n 2007-08 2 2 2 1 1 2 3 4 B4 Net non-debt creating flows at historical average nunus one snndard denation in 2007-08 41 2 2 3 2 2 2 5 5 B5. Combinahon ofB1-B4 using one-half standard deviahon shocks 2 2 3 2 1 2 4 5 B6. One-time 30 percent nominal depreciation relabve to the baseline in 2007 51 2 2 2 1 1 2 3 4

Memorandum item: Grant element assumed on residual financing (i.e., financing required above baseline) 61 42 42 42 42 42 42 42 42

Source: Staffprojections and simulahons

1/ VUiabiK include real GDP growth, growth o f GDP deflator (in US dollar terms), non-interest current account i n percent o f GDP, and "on-debt creating f low. 21 Assumes that the interest rate on new borrowng i s by 2 percentage points higher than in the baseline., while grace and matunty periods are the same as in the baseline 3/ Exports values are assumed to r e m i n permanently at the lower level, but the current account as a share o f GDP i s assumed to r e m to its baseline level af~er the shock (implicitly assvrmng an offsemng adjustment In import levels). 4/ IncludK official and private transfers and FDI. 51 Depreciation IS defined a~ percentage decline ~n dollarflocal currency rate, such that i t never exceeds 100 percent. 61 Applies to all stress scenanos except for A2 (less favorable financing) i n which the terms on all new financing are as specified in fwmote 2

85

45

40

35

30

0 " " " " " " " " " " ' 2007 2008 2009 2010 2011 2012 2013 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

- NPV o f debt-to-GDP ratio

- -Baseline

Historical scenario

Most extreme stress test

--- - -

250

200

150

100

50

0

20

NPV o f debt-to-exports ratio -Baseline

Historical scenario

Most extreme stress test

---

A I \

Debt service-to-exports ratio

-

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

15 .

5 -

Baseline

Historical scenario Most extreme stress test

- ---

-- _________-- - - - - - - - - - - - - - - c

. -- -- l o t .

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Source: Staff projections and simulations

86

w

k r

" ! ? ? : ? ? " ! b o t P a m t

Table 2b.Madagascar: Sensitivity Analysis for Key Indicators of Public Debt 2007-2027

Projectlons 2007 2008 2009 2010 2011 2012 2017 2027

NPV of Debt-to-GDP Ratio

Baseline

A. Alternatlve scanarlos

A l . Real GDP growth and primary balance are at historical averages A2. Primary balance is unchanged from 2007 A3. Permanently lower GDP growth ’ E. Bound tests

B l . Real GDP growth is at historical average minus one standard deviations in 2008-2009 B2. Primary balance is at historical average minus one standard deviations in 2008-2009 83. Combination of Bl-B2 using one half standard deviation shocks 84. Onetime 30 percent real depreciation in 2008 B5. 10 percent of GDP increase in other debt-creating flows in 2008

NPV of Debt-to-Revenue Ratlo’

Baseline A. Alternatlve scenarios A l . Real GDP growth and primary balance are at historical averages A2. Primary balance is unchanged from 2007 A3. Permanently lower GDP growth 11 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2008-2009 82. Primary balance is at historical average minus one standard deviations in 2008-2009 83. Combination of 81-82 using one half standard deviation shocks 84. One-time 30 percent real depreciation in 2008 85. 10 percent of GDP increase in other debt-creating flows in 2008

Debt Servlce-to-Revenue Ratlo

Baseline

A. Alternatlve scenarios

A l . Real GDP growth and primary balance are at historical averages A2. Primary balance is unchanged from 2007 A3. Permanently lower GDP growth’

E. Bound tests

B1. Real GDP growth is at historical average minus one standard deviations in 2008-2009 82. Primary balance is at historical average minus one standard deviations in 2008-2009 83. Combination of B1-B2 using one haif standard deviation shocks 84. One-time 30 percent real depreciation in 2008 85. 10 percent of GDP increase in other debt-creating flows in 2008

21 20 21 21 21 21 23 23

21 20 20 20 20 20 21 27 21 21 22 22 23 24 28 35 21 21 21 22 23 24 33 54

21 23 28 30 32 34 44 54 21 20 21 21 21 21 23 23 21 21 22 21 21 21 21 20 21 25 24 23 22 22 23 23 21 29 29 27 27 27 27 25

130 134 133 129 127 129 134

130 130 126 122 119 118 114 130 139 142 141 142 146 162 130 136 138 138 139 147 187

130 151 174 181 189 202 247 130 135 134 130 128 129 134 130 137 138 131 125 125 122 130 166 154 144 138 137 134 130 194 184 172 164 162 155

128

129 194 287

291 128 110 125 138

1 2 1 0 9 7 6 6 7 8

1 2 1 1 9 7 6 5 6 9 1 2 1 0 9 8 7 7 8 1 1 12 11 9 8 7 7 10 16

12 11 11 10 9 10 13 16 1 2 1 0 9 7 6 6 7 8 1 2 1 1 9 7 6 6 6 7 1 2 1 1 9 8 7 7 8 9 12 10 13 10 9 8 8 9

~~ ~ ~~~

Sources: Country authorities; and Fund staff estimates and projections. ’ Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (Le., the length of the projection period) ’Revenues are defined inclusive of grants.

88

Figure 2a.Madagascar: Indicators o f Public Debt Under Alternative Scenarios, 2007-2027 1/

60

NPV o f debt-to-GDP ratio

lo I -Baseline

N o Reform --- -Most extreme stress test

o ~ ' " ' " ' " ' " " ' ' " " 2007 ZOO8 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

NPV o f Debt-to-Revenue Ratio 2/ -.- I

lo0l so

-Baseline

No Reform --- -Most extreme stress test

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

18

Debt Service-to-Revenue Ratio 2/ 16 - 14 - 12 - I O - -----------

8 -

6 -

-Baseline

No Reform --- -Most extreme stress test

2W7 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Source: Staff projections and simulations. 1/ Most extreme stress test i s test that yields highest ratio in 2017. 2/ Revenue including grants.

89

Annex 7: Letter of Development Policy

REPOBLIKAN'I MADAGASIKARA Tanindrazana - Fahafahana - Fandrosoana

MINISTERE DES FINANCES ET DU BUDGET

Antanamivo, le 11 Mai 2007

Le Ministre des Finances et du Budget

a

Mr Paul WOLFOWITZ President de la

Banque Mondiale 1818H Street NW Washington DC

No76-07/MEFB/Mi

Monsieur l e President,

1. L a Republique de Madagascar a lance depuis l e dCbut de cette annde 2007 la mise en ceuvre du Madagascar Actions Plan (MAP), la seconde gCnBration de sa stratCgie de lutte contre l a pauvrete. Prenant l a relbve du Document de StratCgie de RCduction de l a PauvretC (DSRP), le MAP est l a diclinaison de l a vision Madagascar Naturellement >> pour les cinq annBes i venir. L e MAP traduit aussi l a concretisation par le Gouvermement malgache des Objectifs du M i l l h a i r e pour le DCveloppement. Capitalisant les acquis du DRSP, le MAP a CtC Clabore selon un processus largement participatif. Sa mise en ceuvre connait aussi l e mdme processus au niveau de regions et des districts. Les objectifs fixes par l e MAP sont tres ambitieux et le gouvernement entend mettre en ceuvre des reformes en profondeur pour les atteindre.

2. L'achevement du DSRP, mis en ceuvre de 2003 a 2006, a permis a Madagascar de jeter les bases d'une Bconomie a croissance solide et rapide. Avec les reformes entreprises durant cette periode, Madagascar a pu atteindre un niveau de croissance et de developpement nettement supCrieur a l a moyenne des annees passees. En effet, sans compter l 'effet de l a reprise en 2003, le taux de croissance Bconomique a atteint une moyenne annuelle de 5,0% pendant les trois ans. Cette performance Cconomique, combin6e aux rkalisations des finances publiques, dCcrites dans le paragraphe suivant, a permis de diminuer l e taux de pauvretC de 72,O % en 2002 a 67,0% en 2006.

3. Avec une croissance moyenne de 7,5 % par an, le secteur tertiaire a BtB l e principal moteur de l a croissance. L e secteur secondaire qui jouait un r61e important jusqu'en 2004, a connu un ralentissement relatif (6,0% de croissance moyenne annuelle). L a performance du secteur tertiaire a et6 dopCe par l a rdalisation de diverses infrastructures financde par les investissements publics, l a croissance de l a branche (( Biitiment et Travaux publics >> a cru en moyenne de 23,0% par an pendant les quatre dernieres annCes. L e secteur primaire reste un Del majeur car l a branche (( Agriculture D, qui fait vivre une grande partie de l a population, n'a connu qu'une croissance moyenne de 3,3% sur les quatre dernieres annCes.

4. MalgrC l a volatilitC de la conjoncture internationale marquee par la hausse du prix du parole et 1' effondrement des prix de produits de base, les grands Bquilibres internes et externes ont pu Btre

90

maintenus. Ainsi, les recettes fiscales ont subi une diminution durant les deux dernibres anndes a cause de la baisse des importations, l e deficit budgktaire a Btk contenu a moins de 4,O % du PIJ3 grdce a une gestion rigoureuse des dkpenses publiques. MalgrB une politique d'encadrement monetaire trbs stricte, l a progression de l a masse monktaire globale a BtB de 25% en 2006. Et le dkficit de l a balance commerciale s'est stabilise grdce a une politique de change visant l a promotion de l'exportation. L a maitrise de l'inflation a et6 cependant marquke par quelques ddfaillances a cause de l'insufisance de l'offre int6rieure due aux cataclysmes naturels notamment en 2004 (cyclones) et en 2006 (skcheresse dans le sud du pays).

5. Les rkalisations les plus importantes du DRSP concernent l a mise en place &infrastructures de base qui va permettre de jeter une croissance plus rapide dans l e proche futur. L'infrastructure routibre praticable du pays a ktk multiplike au moins par quatre. L a rehabilitation de l'infrastructure routibre concerne aussi bien la consolidation des grands axes structurant te ls que les routes nationales No 1, 1 bis, 4, 5, 6, 7 et 44 que les pistes des zones males. Une augmentation importante des Cchanges intkrieurs du pays qui entrainera en consequence une augmentation de la production surtout dans le milieu rural est attendue de cette extension du rkseau routier. D'un autre cote, la gestion du premier port international du pays a et6 profondkment restructurke de manibre a repondre aux exigences de standard international et ameliorer son efficacitk. L a rkussite du redressement de l a compagnie adrienne Air Madagascar permettra d'envisager l a restructuration prochaine du secteur de transport aerien pour y introduire davantage de concurrence et augmenter la capacitk afin de rkpondre aux besoins grandissants du secteur tourisme.

6. L'amklioration de la qualitk du capital humain a BtC aussi rune des realisations du DSRP. L a mise en ceuvre du programme Education Pour Tous a permis d'atteindre un taux de scolarisation presque 100,O YO a l a fin de l'annke 2006. L'objectif en matibre de taux de d'achbvement du primaire n'a pas kte atteint mais l e taux a kt6 substantiellement amkliore. Pour l a sante, une nette amklioration a atte constatde avec l a rkduction de 43,0% du taux de mortalitk infantile et de 41,0% du taux de mortalite juvenile. Cette amelioration a kt6 atteinte grdce a une extension de la couverture vaccindtes et au programme prkventif de l a malnutrition.

7. Une grande partie de ces resultats a Ctk realiske grdce a l a gestion judicieuse des finances publiques, objet d'importantes reformes commenckes en 2004 a travers des Plans &Actions Prioritaires successifs. L a realisation substantielle du PAP 2006 a ktC determinante dans cette performance. Cette rkalisation est notamment marquee par : 1) l e renforcement du processus de preparation budgktaire avec l'elaboration de la lettre de cadrage budgktaire discute en Conseil de Gouvernement, 2) le renforcement de l a capacit6 des ministbres pilotes (kducation, sante, eau et assainissement) pour amkliorer l'exkcution budgktaire, 3) l a mise en axvre des textes d'application du nouveau code de marche public Blabore en Juillet 2004 et 4) l'accroissement des performances des administrations fiscales et douanibres. L e taux d'exkcution du budget a connu une nette amklioration. Ainsi, malgrd les difficultks au niveau des recettes, l e budget 2006 a et6 exkcute a plus de 94,O % s i elle n'ktait que de 89,O % en 2005.

8. Toujours dans le cadre d'une meilleure gestion des finances publiques, l e gouvernement a mis en place un outil pour le suivi de l'ex6cution du Budget par l'intermediaire de l a publication d'un rapport d'exdcution quadrimestres auquel sont soumis tous les ministbres. L e souci de l'efficacitk des depenses a amen a aussi l e gouvernement a conduire un audit pour Bvaluer l'application de nouvelles rbgles de passation de marches publics dans les ministbres de l'kducation de la sante de l'agriculture et des transports. L e s conclusions de cet audit permettront a 1 'administration d'affiner 1' application du nouveau code de marches publics publie en 2004.

9. L a periode de mise en ceuvre du DRSP a aussi permis le lancement d'un vaste programme pour l a bonne souvenance, garantie d'une meilleure efficacitk de faction de 1'Etat et de 1'Etat de droit. Ce programme a notamment permis l a mise en place de plusieurs agences pour l a prkservation de l'intkgritd de 1'Etat (Comite pour l a Sauvegarde de 1'IntkgritB de 1'Etat et l a lutte contre l a corruption (Bureau Independant pour la Lutte conte l a corruption). L e cadre ldgislatif et rkglementaire a Ctk aussi renove et renforce notamment par la mise en place de l o i sur l a corruption (loi No 2004-030 du 09 septembre 2004) et de decret obligeant les Blus et les hauts fonctionnaires i declarer leur patrimoine. L e C S I a termine la preparation d'un projet de texte sur le conflit d'int6r8ts qui sera prochainement soumis a l'approbation du

91

conseil de ministres

10. Grace a ces risultats, le MAP a pu se fixer des objectifs ambitieux, en rupture avec les tendances du passe. L e plan vise d'atteindre une croissance kconomique entre 8 et 10 % par an jusqu'en 2012. Cette croissance s'appuiera particulibrement sur le secteur prive et notamment par une augmentation du taux d'investissement a plus de 24% du PIB. L e rythme de l a croissance iconomique devrait permettre a Madagascar d'atteindre un PIB habitant de 467 dollars et de reduire ainsi le taux de pauvreti a 50%. Les anses 2007 et 2008 sont cruciales pour l'atteinte de ces objectifs car elles constituent l a pkriode pour l a rialisation des (( sauts qualitatifs > nicessaires pour ce faire. L e s (( sauts qualitatifs >> sont les rksultats escomptes des reformes en profondeur qui donneront les conditions de croissance accklerke.

11. Leo saut qualitatif)) l e plus important que Madagascar se doit de rialiser rapidement est d'augmenter les investissements prives. Ainsi, l e gouvernement escompterait 1 'effet d'importants investissements directs stringers dans le secteur minier, notamment le nickel, d'un montant de 3 mill ions de dollars. D'autre part, l e gouvernement est en train de priparer un nouveau texte pour skcuriser et encourager les investissements prives y compris les investissements stringers. Ce nouveau texte sera soumis au vote du parlement avant l a fin de cette annee. L'Economico Dkveloppent Bocard of Madagascar (EDBM) est mis en place af in d'assurer l 'exicution de cette loi. L e gouvernement entreprendra aussi durant cette annie et l 'annie 2008 l a revision du code des impbts pour favoriser les investissements prives. Par l a mise en ceuvre d'une politique adiquate de change et de gestion monktaire, le gouvernement dkveloppera tous les efforts nkcessaires pour que les chocs positifs, consiquences de l 'af f lux des investissements stringers ne soient pas un facteur de perte de compitit ivitk pour nos exportations.

12. L e secteur financier sera aussi l'objet de restructuration pour instaurer une plus grande compitit ion dans l e secteur et mettre en place des infrastructures et instruments rkpondant aux besoins de la population et du pays. Par ailleurs, le gouvernement mettra en place pendant les deux annkes a venir les conditions nicessaires pour lancer l a r ivolut ion verte, le saut qualitatif)) pour faire decoller kconomiquement le monde rural ou rkside l a majoritk des pauvres. Outre un vaste programme de facilitation de l'accbs a l a terre et de sicurisation foncibre, l a reforme comprendra notamment le renforcement des institutions et des instruments financiers de microcrkdit.

13. Comme les ressources publiques seront fortement sollicitkes dans l e cadre de l a mise en ceuvre du MAP, le gouvernement poursuivra l a restructuration de l a gestion des finances publiques entreprises depuis 2004. L a reforme de la politique fiscale sera l a priorit6 absolue. Cette reforme portera notamment sur l a mise en ceuvre d'un plan d'actions pour augmenter et rationaliser les recettes intirieures. Ce plan tient compte a l a fois de l a nicessite d'encourager I'investissement citke plus haut et du besoin d'augmenter de substantielles ressources publiques exigies par le M A P . L a douane pour sa part continuera de mettre en ceuvre sa stratkgie de reforme pour un renforcement de l 'ef f icaci t i des procidures douanikres (achbvement du dkploiement de SYDONIA ++ dans 12 bureaux de Douanes) et par l a mise en service des contrbles renforces et efficaces (optimisation de l'utilisation des outils de contrble moderne lors du didouanement (Scanners, Profilers, Valunet, Resus) et 1 'amilioration de la lutte contre l a fraude par un ktouffement des unites de Brigade Mobi le de Surveillance. Ces reformes intkgreront, d'autre part, le d i c l i n attendu des recettes provenant du commerce international du fait des programmes d'intigration rigionale.

14. L a reforme des finances publiques continuera l a rationalisation des dipenses. Cependant, sans attendre cette reforme, le mouvement a d i j a pris des mesures pour aligner des 2007 le budget avec les prioritks du MAP. Ainsi, les quatre secteurs prioritaires du M A P ont r e c u des allocations importantes par rapport au montant total du budget. L'allocation pour le secteur de l ' iducation a atteint plus de 18% du total du budget et celui de l a sante 9%. L a part du secteur transport et de l'agriculture a connu une augmentation remarquie. L e transport qui ne recevait en moyenne que 14 % du total du budget pour l a pkriode 2003-2006, a eu 16,2% en 2007 et l a part de l'agriculture passe de 5 a 8 % du total du budget.

92

15. Un effort particulier est mis en ceuvre pour rendre opkrationnel l'application de l a l o i organique des lois des finances de juillet 2004 instaurant l e budget de programme. L'application effective du budget de programme permettra d'amkliorer et de rationaliser l'allocation des ressources dans le cadre l a mise en ceuvre du MAP, et permettra son suivi efficace. En parallble, l a mise en place rkcente d'un calendrier de preparation budgktaire qui instaurera une plus grande concertation entre les acteurs du budget, aidera le gouvermement e t 1' administration a renforcer l a rationalisation des allocations.

16. L'exkcution des dkpenses sera poursuivie et ameliorke pour obtenir de meil leurs rksultats sur le terrain. L a reforme dans ce domaine sera entreprise par l a rkvision en profondeur de l a chaine de l a dkpense et l a consolidation du Systbme Intbgre de Gestion de finances Publiques (SIGFP). L a consolidation du SIGFP amdliorera aussi l e suivi de 1 'exkcution des dkpenses publiques. En conskquence, tous les ministirres soumettront dksormais un rapport de suivi quadrimestre de l'exkcution budgktaire sur la base de l a classification kconomique, un mois &pres la clbture des kcritures. L a mise en ceuvre des recommandations de 1 'audit organisationnel et analytique du Contrble des Dkpenses Engagkes (CDE) permettra de mieux maitriser l'exkcution des dkpenses budgktaires et de rdflkchir sur le nouveau rble que doit revdtir l e CDE dans le contrble budgktaire.

17. Afin d'amkliorer les rksultats sur le terrain et l a qualitk ainsi que le niveau de services fourmis a l a population, le gouvernement mettra en ceuvre l e plan d'actions pour affiner l'application du nouveau code des marches publics. Un plan de travail annuel a et6 klabore pour rendre professionnel les fonctions de l a Personne Responsable des Marches Publics et de 1'Unitk de Gestion des Marches Publics et de renforcer les capacitks professionnelles des ministirres et institutions en matibre d'exkcution des marches publics.

18. Dans l e mGme objectif, l e gouvernement affinera le processus de dkcentralisation. I1 s'agit d'abord de mettre en place une nouvelle lkgislation sur les ressources des collectivitks. En effet, selon les disposition de la L o i N o 2006-034 du 19 dkcembre 2006 portant L o i de Finances 2007: 1'Impbt Synthktique, impbt libkratoire de l a Taxe Professionnelle, de la Taxe sur les Chiffres d'Affaires et de 1'Impbt sur les Revenus comportera des modifications d'une part, sur le seui l d'application, 6.000.000 d'Ariary relirve a 20.000.000 d'Ariary de chiffre d'affaires annuel, revenu brut ou gain hors taxe et d'autre part, sur l a rkpartition du produit de l'impbt entre le Budget General (25%), les Communes (25%) et les Rkgions (50%). L e gouvernement a aussi mis en place un nouveau systbme de suivi des finances des communes pour rationaliser leur gestion.

19. L e gouvermement attend renforcer les rbles des rkgions. L e s ressources propres des regions seront augmentkes par le transfert des ressources dkvolues aux ex-provinces autonomes. 11 sera ensuite procbde au transfert progressif des budgets d'investissements nkcessaires a l a mise en place des infrastructures structurantes et des Bquipements les plus utiles a l a population. I1 s'agit notamment des infrastructures routibres rkgionales et des pistes rurales, des amknagements hydro-agricoles e t des infrastructures d'adduction d'eau potable. Dans un premier temps, l e gouvermement transfkrera l a gestion des crkdits budgktaires pour ces dBpenses aux responsables techniques des services rkgionaux qui executeront les dkpenses sous l a supervision des autoritks des rkgions.

20. L e renforcement des rbles kconomiques des regions ne sera pas un obstacle au dkveloppement des communes qui continueront a dtre l e fer de lance du dkveloppement a l a base et de proximitk. Les ressources des communes seront en effet confortees avec l e transfert direct provenant du Fonds de DBveloppement Local (FDL) actuellement en cours de mise en place avec un credit de 4 milliards Ar iary en 2006 et 4,5 milliards Ariary en 2007. L e FDL financera directement des investissements nkcessaires au dkveloppement kconomique et social des communes. D'autre part, l 'amklioration des ressources propres des communes est aussi en cours par le recouvrement effective des ressources prkvues par les dispositions fiscales existantes, notamment les impbts fonciers. Avec ces mesures, l e gouvemement compte augmenter l e pourcentage de transfert aux collectivitks dkcentraliskes plus de 25 % des ressources publiques d'ici 2012.

93

21. L'effort de moralisation du secteur public et de l a lutte contre l a corruption connaitra une nouvelle dimension. Pour completer les diverses dispositions mises en place pour Bradiquer l a corruption, le gouvernement mettra en place une nouvelle l igislation pour Bviter les conflits d'intirets. L'objectif est de privenir que la detention de poste de responsabilite dans le secteur public ne soit pas ut i l is ie comme source d'accumulation de richesse injustifiie ou pour introduire de distorsions dans le fonctionnement des rbgles de l a concurrence et de l a compitit ion qui caracterise l'iconomie de marche.

22. Sur l e plan social, l a realisation des Objectifs du M i l l h a i r e pour le DBveloppement (OMD) intkgres dans l e MAP nicessite aussi l a mise en euvre de reformes pour l a realisation des (( sauts qualitatifs D. Apres l e lancement du programme G Education pour Tous )) il y a plus de trois ms et dont les actions seront poursuivies dans les deux annies a venir, l e gouvernement s'attachera a mettre un nouveau programme d'bducation post Primaire. L e programme EPT a presque atteint son objectif en matiere de taux de scolarisation et il s'agit maintenant d'assurer l a capitalisation et l a consolidation des ces acquis pour renforcer l a qualite des ressources humaines. Ce programme sera oriente d'une part sur la formation professionnelle dont 1'Etat s'est engage a fournir a l a population dans le cadre mCme de l a constitution. L e programme portera ensuite sur l'am6lioration a l'accbs et la qualite de 1 'iducation secondaire.

23. Pour la sante, le gouvernement a adopte en avril 2007, le nouveau Plan de DBveloppement du Secteur Sante, declinaison sectorielle de la mise en ceuvre du P. Ce programme mettra l'accent sur les points suivants : (i) l'amelioration de l'accbs de l a population aux services de qualite par la construction et la rehabilitation des CSB (Centres de Sante de Base) et l'amelioration du plateau technique des h6pitaux de reference par la rehabilitation et l a dotation en Bquipements et materiels techniques, (ii) l e diveloppement des ressources humaines par le recrutement de personnel medical, paramidical, personnel d'appui et des specialistes, (iii) la hierarchisation des nouvelles structures et des zones enclavies dans les postes budgitaires ainsi que (iv) 1'6tude d'un systbme de motivation des midecins dans les zones enclavkes, (v) les mesures visant a promouvoir l a sante de la mbre et de l'enfant, a lutter contre l a malnutrition et les maladies (vi) l a prevention et le traitement du SIDA, de la tuberculose et de l a malaria; et (vii) 1 'amelioration de l'accbs a l'eau potable et l'assainissement.

24. Complement indispensable des soins sanitaires, l 'amelioration de l'approvisionnement en eau potable sera poursuivi et amplifie. L'objectif du gouvernement sur ce domaine est d'atteindre un taux de couverture en eau potable de 65% d'ici l 'annie 2012. Pour ce faire il a deploy6 un effort particulier pour rationaliser les ddpenses dans l e secteur notamment par l a prise en compte les recommandations des partenaires financiers lors de l a revue conjointe du secteur en 2006 dans l ' i laboration du budget programme 2007-2009. Par ailleurs, le programme priventif de lutte contre l a malnutrition sera l'objet d'une nouvelle dynamisation par l a mise en Eure d'un nouveau plan a l a suite des recommandations d'une evaluation institutionnelle du secteur de la nutrition.

25. Avec toutes ces actions, l e gouvernement compte obtenir des resultats tangibles d'ici l a fin 2008 notamment un taux de croissance atteignant plus de 7% proche des objectifs affiches du MAP, et une maitrise de l'inflation. Comme les ressources du pays sont limitees, Madagascar a encore besoin du soutien financier et technique de la communautk internationale dans les efforts a entreprendre pour l'atteinte de ces objectifs.

94

Unofficial Translation

REPOBLIKAN'I MADAGASIKARA Tanindrazana - Fahafahana - Fandrosoana

MINISTRY OF FINANCE AND BUDGET

Antananarivo, May 11,2007

The Minister of Finance and Budget

To

Mr. Paul Wolfowitz President o f

The World Bank 1818H Street NW Washington DC

No 7 6 - 0 6 M E F B M i

Mister President,

1. In early 2007, the Republic o f Madagascar began the implementation o f the Madagascar Act ion Plan (MAP), the second generation poverty reduction strategy. Taking over the Poverty Reduction Strategy Paper (PRSP), the M A P i s the articulation o f the "Madagascar Naturally" vision for the next five years. The MAP also conveys the concretization by the Malagasy Government o f the Millennium Development Goals. By integrating the positive experience from the PRSP, the MAP has been developed through a largely participatory process. I t s implementation will also be participatory at the level o f the regions and the districts. The objectives set in the MAP are very ambitious and the Government intends to undertake in-depth reforms to achieve them.

2. The PRSP, implemented from 2003 to 2006, set the basis for a strong and quickly growing economy. The reforms undertaken during that period, helped Madagascar reach a level o f growth and development wel l above those o f the previous years. Indeed, without even taking account o f the 2003 recovery, the economic growth rate reached an average o f 5.0% during those three years. This economic performance, combined with the achievements in the area o f public finances described in the fol lowing paragraph, resulted in a reduced poverty incidence rate: f rom 72.0% in 2002 to 67.0% in 2006.

3. With an average growth rate o f 7.5% each year, the tertiary sector has been the main growth engine. The secondary sector, which played an important role until 2004, has experienced a relative decrease o f activity (6.0% o f annual growth rate). The performance o f the tertiary sector was boosted by the various new infrastructures, funded by public investments; the "Construction Industry and Public Works" has grown at an average rate o f 23% over the last four years. The primary sector continues to offer major challenges, as the "Agriculture" branch, which provides a living for a great part o f the population, only achieved an average growth o f 3.3% over the last four years.

4. Despite the volatility o f the international market, marked by the rise o f o i l prices and the decline o f the costs o f basic products, the domestic and external balances could be maintained. Thus, although tax revenues decreased over the last two years due to the decrease o f imports, the budget deficit has been contained at less than 4.0% o f GDP, thanks to the rigorous management o f public expenditures. Despite a very strict monetary control policy, the progression o f the overall monetary supply was 25% in 2006. The

95

commercial deficit was stabilized due to a foreign exchange policy which promoted exports. Inflation control was, however, impacted by the shortage o f domestic supplies due to natural disasters in both 2004 (cyclones) and 2006 (drought in the South o f the country).

5. The most important achievements o f the PRSP was the establishment o f basic infrastructures that wi l l allow Madagascar to have a better growth in the near future. The number o f passable roads in the country has been multiplied four-fold, and the overall roads systems have been improved through the reinforcement o f the major axes, such as the national highways #1, 1-bis, 4, 5, 6, 7, and 44, as wel l as the rural roads. A significant increase o f domestic transactions i s expected from this extension o f the road network, leading to an increase in production, mainly in rural areas. On another front, the management o f the country's f irst international port has been restructured in-depth bringing it into compliance with the international standards and improving its efficiency. Finally, the successful recovery o f the airline company, Air Madagascar, wi l l allow the country to consider the restructuring o f the air transport industry to introduce more competition and to increase its capacity and fulfill the increasing needs o f the tourism sector.

6. The improvement o f the quality o f our human capital has also been one o f the achievements o f the PRSP. The implementation o f the Education for All program allowed us to achieve a 100% school enrollment rate at the end o f 2006. Although the hoped-for achievement rate for the primary level has not been reached, the rate has substantially improved. The health system has improved, with a reduction o f infant mortality by 43% and o f juvenile mortality by 41%. Such improvements could be continued with an extension o f the immunization coverage and the malnutrition prevention program.

7. A major part o f these results has been achieved thanks to the judicious management o f public finances, which underwent important reforms starting from 2004 through successive Priority Act ion Plans (PAP). The substantial implementation o f the PAP 2006 has been a determining factor in this performance. This achievement i s notably marked by: 1) the strengthening o f the budget preparation process with the budget framework paper discussed during the Cabinet meeting, 2) the capacity building o f pi lot ministries (Education, Health, Water and Sanitation) to improve the execution o f the budget, 3) the application and enforcement o f texts o f the new public procurement code developed in July 2004, and 4) the improvement o f the performance o f tax and customs services. The budget execution rate has noticeably improved. So, despite difficulties at the level o f revenues, the 2006 budget has been executed at more than 94%, while the rate was 89% in 2005.

8. Still, in the context o f a continued improvement in the management o f public finances, the Government has set up a tool to monitor the execution o f the budget through the publication by a l l ministries o f a four-monthly execution report. Furthermore, concerns about expense efficiency also led the Government to audit and assess the application o f new rules governing the public procurements in the ministries o f Education, Health, Agriculture, and Transport. The conclusions o f the audit wi l l allow the Government to refine the application o f the new public procurement code that was published in 2004.

9. The PRSP implementation period also allowed the launching o f a large program for good governance, guaranteeing a better efficiency o f the Government's actions, as well as the rule o f law. This program allowed, among other things, the establishment o f several agencies to preserve the Government's integrity (Committee for the safeguard o f the State's Integr i ty - CSI) and to fight against corruption (Independent Bureau for the fight against corruption). The legal and regulatory framework has also been renewed and strengthened, by the enforcement o f the anti-corruption act (Act # 2004-030, on September 9, 2004) and the decree obliging the elected people and the high-ranked c iv i l servants to declare their wealth. The CSI has finished developing a bill on the conflicts o f interests that wi l l soon be presented to the Cabinet for approval.

10. Thanks to these results, the M A P was developed with ambitious objectives, different f rom the trends o f the past. The plan aims at achieving a yearly growth rate between 8 and 10% up until 2012. This growth rate wi l l mainly rely upon the private sector and on an increase o f the investment rate up to 24%

96

o f GDP. The growth rhythm should allow Madagascar to reach a GDP per capita o f US$467 and to reduce the poverty rate by 50%. The years 2007 and 2008 wil l be critical to reach these objectives, as they represent the period for the achievement o f the required "qualitative jumps" to reach these goals. The "qualitative jumps" are the results expected from the deep reforms that are to provide the conditions for an accelerated growth.

11. The most important qualitative jump that Madagascar has to quickly achieve i s the increase o f private investments. Thus, the Government i s expecting the effect o f FDI in the mining sector, particularly the nickel extraction amounting US$3 billion. Moreover, the Government i s preparing a new investment law to conserve and encourage private investments, including foreign investments. This new law wil l be submitted to Parliament before the end o f this year. The Economic Development Board of Muduguscur (EDBM) was set up to ensure the enforcement o f that law. This year and in the course o f 2008, the Government wi l l also undertake the revision o f the tax code in order to encourage private investments. By the implementation o f relevant currency exchange and monetary management policies, the Government wil l provide any required effort so that the positive shocks, consequences and inf low o f foreign investments would not be a factor leading to the loss o f competitiveness for our exports.

12. The financial sector will also be restructured to initiate more competition in the sector and to establish infrastructure and instruments fulfilling the needs o f the population, and o f the country. Moreover, the Government wi l l set - within the next two years - the required conditions to start the "green revolution", the "qualitative jump" that wi l l boost the economy o f the rural areas, where the majority o f the poor are located. Apart from the land access facilitation and conservation program, the reforms will include the strengthening o f institutions, as well as o f microcredit financial instruments.

13. As public resources wil l be very much in demand in the implementation o f the MAP, the Government wi l l continue the restructuring o f the management o f public finances that we have started since 2004. The reform o f the tax policy wi l l be an absolute priority. This reform wil l aim at implementing an action plan to increase and rationalize domestic resources. This plan considers the necessity to encourage investment, as mentioned above, as wel l as the need to substantially increase public resources, as required by the MAP. As for the customs, they wi l l continue to implement their reform strategy in order to reinforce the efficiency o f customs procedures (completion o f the distribution o f ASYCODA++ in 12 customs offices) and by the establishment o f efficient and strengthened control services (optimal use o f modern control tools for customs clearance: scanners, profilers, Valunet, Resus) and the improvement o f the prevention o f fraud by strengthening the mobile monitoring brigade. In addition, these reforms wil l integrate the expected decline o f revenues from international trade, which is due to regional integration programs.

14. The reform o f public finances wil l include the continuation o f the rationalization o f the expenditures. In the meantime, however, starting f rom 2007, the Government has already taken measures to align the budget with the MAP priorities. Thus, the four priority sectors o f the MAP have received important allocations, in comparison to the total amount o f the budget. The allocation for the education sector has reached more than 18% o f the total budget, and the share for the health sector i s 9%. The shares for transportation and agriculture have noticeably increased. Transportation, only receiving on average a share o f 14% o f the total budget for the 2003-2006 period, has received 16.2% in 2007, and agriculture increases from 5 to 8% o f the total budget.

15. A particular effort i s being made to enforce the law in the finance act o f 2004 initiating budget programs. The effective application o f budget programs wil l result in the improvement and in the rationalization o f the allocation o f resources within the implementation o f the MAP and wil l allow an efficient monitoring system. At the same time, the recent establishment o f a budget preparation schedule, which wi l l initiate a greater dialogue between the actors o f the budget, wi l l help the Government and the public service to reinforce the rationalization o f the allocations.

97

16. The execution o f expenditures wil l continue and wil l be improved in order to get better results in the field. The reform o f this area will be undertaken by deeply reviewing the expenditure chain, and by consolidating the Integrated Public Finances Management System (IPFMS). The consolidation o f the IPFMS will, as well, improve the monitoring o f the execution o f public expenditures. A s a consequence, a l l ministries wi l l henceforth submit a four-monthly budget execution monitoring report based on economic classification, one month after the closing o f accounts. The implementation o f the recommendations from the organizational and analytic audit o f the Control o f Committed Expenditures (CCE) wi l l allow to better control the execution o f budget expenditures, and to think about the new role that the CCE has to play in budget control.

17. In order to improve f ie ld results, as wel l as the quality and the level o f service provision, the Government wi l l implement the action plan to refine the enforcement o f the new public procurement code. An annual action plan has been developed to make the Public Procurement Officer and the Public Procurement Management Unit more professional and to build the professional capacities o f ministries and other institutions regarding procurement execution.

18. In the same objective, the Government will refine the decentralization process. First, we have to set up a new legislation on the collectivities' resources. Indeed, according to the provisions o f the A c t # 2006-034, on December 19, 2006, impacting the 2007 Finance Act: the synthetic (all-encompassing) tax, full discharge tax for the professional tax, the tax on turnovers and the income tax will be modified resulting in an increase from the current 6 mi l l ion Ariary annual turnover threshold to 20 mi l l ion Ariary. In addition, the repartition o f the tax commodity between the general budget (25%), the communes (25%) and the regions (50%) will be rationalized. The Government has also established a new financial monitoring system for communes, in order to rationalize their management.

19. The Government plans to strengthen the role o f the regions. First, the capital resources o f the regions will be increased by transferring the resources previously allocated to the former autonomous provinces. Then, investment budgets required for the establishment o f infrastructure and equipment needed by the population wi l l be progressively transferred to the regions. Important needs, among others, include regional roads, rural roads, and hydro agricultural and drinking water conveyance infrastructures. In the beginning, the Government wi l l transfer the management o f credit budgets for these expenditures to the technical officers o f the regional services, and they will execute the expenditures under the supervision o f the regional authorities.

20. The strengthening o f the economic roles o f the regions wil l not be an obstacle to the development o f communes that will continue to be the flagship o f development at the basis and proximity levels. The resources o f the communes will indeed be consolidated with the direct transfer f rom the Local Development funds (FDL), which i s currently being established with a 4 bi l l ion Ariary credit in 2006 and 4.5 bi l l ion Ariary in 2007. The FDL will directly fund the investments required by the communes' economic and social development. Moreover, the increase o f the capital resources o f the communes is also underway by the effective recovery o f the resources that were mentioned in the existing tax provisions, among them the real estate taxes. With such measures, the Government plans to increase the transfer rate to decentralized collectivities by 25% o f the public resources by the year 2012.

2 1. The efforts for the moralization o f the public service and for the prevention o f corruption wil l be made in a new dimension. T o complete the different dispositions that were put in place to eradicate corruption, the Government wil l set up a new legislation to avoid conflicts o f interests. The objective i s to prevent the abuse o f a high public service rank and use the influence o f such rank as a source for the accumulation o f an unjustified wealth, or to introduce distortions in the functioning o f the rules o f competition, which i s characteristic to a market economy.

22. In the social area, the achievement o f the MDGs that are included in the MAP also requires the implementation o f reforms in order to complete the "qualitative jumps". After the start o f the Education for All (EFA) program more than three years ago, the actions o f which will be continued in the next two

98

years, the Government will have a task to develop a new post-primary education program. The EFA program has nearly achieved i t s objective as regards the enrollment rate, and now i s the time to ensure the accumulation and the consolidation o f the results to improve the quality o f the human resources. This program wil l be aiming at vocational training that the Government has committed to provide to the population, in the very provisions o f the Constitution. The program wil l then aim at the improvement o f the access to and o f the quality o f secondary education.

23. As regards health, in April 2007 the Government adopted the new Health Sector Development Plan, a sector-oriented plan derived from the M A P implementation. This program wil l emphasize the following points: (i) the improvement o f the access o f the population to quality services through the building and the rehabilitation o f basic health centers (CSB) and the improvement o f technical needs o f reference hospitals by providing and rehabilitating technical materials and equipment, (ii) the development o f human resources by recruiting medical, paramedical, and supporting staffs, as wel l as specialists, (iii) the establishment o f a hierarchy in the new structures and in the remote areas in the c i v i l service, as well as (iv) the assessment o f an incentive system for physicians in remote areas, (v) measures aiming at promoting mother and child's health and at the prevention o f diseases and malnutrition, (vi) HIV/AIDS, tuberculosis and malaria prevention and care; and (vii) the improvement o f access to drinking water and sanitation.

24. As a vital complement to health care, the improvement o f drinking water supply wil l be continued and reinforced. The objective o f the government in this area i s to reach a drinking water supply rate o f 65% by the year 2012. T o do so, we have made a particular effort to rationalize the expenses in the sector, by considering the recommendations o f our financial partners during the jo in t review o f this sector in 2006 when we developed the 2007-2009 program budget. Moreover, the program for the prevention o f malnutrition wi l l be boosted with the implementation o f a new plan following the recommendations o f an institutional assessment o f the nutrition sector.

25. With a l l these actions, the Government hopes to get tangible results by the end o f the year 2008, with a growth rate o f more than 7%, which i s close to the MAP objectives, as wel l as a control over inflation. As the country's resources are limited, Madagascar st i l l needs financial and technical support f rom the International Community in i t s efforts to achieve these goals.

The Minister of Finance and Budget

Benjamin Andriamparany RADAVIDSON

99

Annex 8: Country at a Glance

Madagascar a t a glance 2/12/07

Key Development Indicators

(2005)

Population, mid-year (millions) Surface area (thousand sq. km) Population growth (%) Urban population (% of total population)

GNI (Atlas method, US$ billions) GNI per capita (Atlas method, US$) GNI per capita (PPP, international $)

GDP growth (%) GDP per capita growth (%)

(most recent estimate, 200&2005)

Poverty headwunt ratio at $1 a day (PPP, %) Poverty headcount ratio at $2 a day (PPP. %) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition (% of children under 5)

Adult literacy, male (% of ages 15 and older) Adult literacy, female (% of ages 15 and older) Gross primary enrollment, male (% of age group) Gross primary enrollment, female (% of age group)

Access to an improved water source (% of population) Access to improved sanitation facilities (% of population)

Madagascar

18.6 587 2.7 27

5.4 290 880

4.6 1 .a

61 85 56 78 42

77 65

136 131

46 32

sub- Saharan

Africa

741 24,265

2.1 35

552 745

1,981

5.3 3.1

44 75 46

100 29

99 87

56 37

Low incme

2,353 29,265

1.8 30

1,364 580

2,486

7.5 5.6

59 80 39

73 50

110 99

75 38

Net Aid Flows

(US$ millions) Net ODA and official aid Top 3 donors (in 2004):

France Italy United States

Aid (56 of GNI) Aid per capita (US$)

Long-Term Economic Trends

Consumer prices (annual % change) GDP implicit deflator (annual % change)

Exchange rate (annual average, local per US$) Terms of trade index (2000 = 100)

Population, mid-year (millions) GDP (US$ millions)

Agriculture Industry

Services

Household final consumption expenditure General gov't final consumption expenditure Gross capital formation

Exports of goods and services Imports of goods and services Gross savings

Manufacturing

1980

230

54 0

10

5.7 25

18.2 15.0

42.3

9.1 4,042

30.1 16.1

53.9

89.3 12.1 15.0

13.3 29.7 -2.4

1990 2000

398 322

143 46 6 1

22 32

13.5 8.5 33 20

11.8 10.7 11.5 7.2

298.8 1,353.5 79 100

12.0 16.2 3,081 3,878

(% of GDP) 28.6 29.2 12.8 14.2 11.2 12.2 58.6 56.6

86.4 83.2 8.0 9.0

17.0 15.0

16.6 30.7 28.0 38.0 9.2 9.4

2005 '

1,236

485 43 41

28.8 68

18.4 18.4

2,003.0 72

18.6 5,041

28.1 15.5 14.0 56.4

82.7 8.4

22.5

26.5 40.1 12.1

Age distribution, 2005 I Male Female

Under-5 mortality rate (per 1,000)

I 200 1

150

i o 0

50

0 I 1990 1995 2000 2004

OMadagascar mSubSaharan Africa

I IGrowth of GDP and GDP per capita (Oh)

tlLGDP 95 - 00 051

GDP per capita

198C-90 1990-2000 2000-05 (average annual growth %) 2.8 3.0 2.8 1.1 2.0 2.0

2.5 1.8 1.7 0.9 2.4 1 .o 2.1 2.0 1 .o 0.3 2.3 1.6

0.7 2.2 2.8 0.5 0.0 4.0 4.9 3.3 12.1

-0.8 3.8 -3.7 -5.7 4.1 8.7

Note: Figures in italics are for years other than those specified. 2005 data are preliminary estimates. .. indicates data are not available a. Aid data are for 2004.

Development Economics, Development Data Group (DECDG).

100

Madagascar

Balance of Payments and Trade

(US% millions) Total merchandise exports (fob) Total merchandise imports (cif) Net trade in goods and services

Workers' remittances and compensation of employees (receipts)

Current account balance as a % of GDP

Reserves, including gold

Central Government Finance

(% of GDP) Revenue

Expense

Cash surplus/deflcit

Highest marginal tax rate (%)

Tax revenue

Individual Corporate

External Debt and Resource Flows

(US% millions) Total debt outstanding and disbursed Total debt service HlPC and MDRl debt relief (expected; flow)

Total debt (% of GDP) Total debt service (% of exports)

Foreign direct investment (net inflows) Portfolio equity (net inflows)

2000

829 1,097 -283

11

-218 -5.6

288

11.7 11.3 15.9

-3.5

35 35

4,691 117

1,900

121.0 9.7

70 0

___

2005

837 1,652 -688

16

-524 -1 0.4

498

10.9 10.1 21.3

-8.9

30 30

3,465 78

68.7 5.7

86

IGovernance indicators, 2000 and 2005

voice and accountability

Political stability

Regulatory quality

Rule of law

Control of corruption

Country's percentile rank (0-100) higher veluei mplyb9nerratings

Technology and Infrastructure 2000 2004

Paved roads (% of total) Fixed line and mobile phone

High technology exports subscribers (per 1,000 people)

(56 of manufactured exports)

17.6

7 19

1.0 0.8

Environment

Agriwltural land (Oh of land area) 47 47 Forest area (% of land area, 2000 and 2005) 22.4 22.1 Nationally protected areas (Oh of land area) .. 4.3

Freshwater withdrawal (% of internal resources) .. 4.4 Freshwater resources per capita (cu. meters) .. 18,606

C02 emissions per capita (mt) 0.14 0.73

GDP per unit of anergy use (2000 PPP $ per kg of oil equivalent)

Energy use per capita (kg of oil equivalent) ICompositlon of total external debt, 2005 I

US$ millions

Private Sector Development 2000 2006

Time required to start a business (days) - 21

Time required to register properly (days) - 134 Cost to start a business (% of GNI per capita) - 35.0

Ranked as a major constraint to business (% of managers surveyed who agreed)

Cost of financing Macroeconomic instability

.. 66.9

.. 64.4

Stock market capitalization (% of GDP) Bank branches (per 100,000 people) .. 0.7

(US% mi/lions)

IBRD Total debt outstanding and disbursed 0 - Disbursements 0 - Principal repayments 0 - Interest payments 0 -

IDA Total debt outstanding and disbursed 1,378 2,298 Disbursements 94 221 Total debt service 27 29

IFC (fiscal year) Total disbursed and outstanding portfolio 8 6

of which IFC own account 8 6 Disbursements for IFC own account 1 0 Portfolio sales, prepayments and

repayments for IFC own amount 2 1

MlGA Gross exposure 1 1

Note: Figures in italics are for years other than those specified. 2005 data are preliminary estimates .. indicates data are not available. -indicates observation is not applicable.

Development Economics, Development Data Group (DECDG).

2/12/07

101

Millennium Development Goals Madagascar

With selected targets to achieve between 1990 and 2015 (estimate dosest to date shown, +/- 2 years)

Goal 1: halve the rates for $1 a day poverty and malnutrition 1990 1995 2000 2004 Poverty headcount ratio at $1 a day (PPP, % of population) 46 3 61 0 Poverty headcount ratio at national poverty line (% of population) 73 3 69 7 68 7

4 9 Prevalence of malnutnbon (56 of children under 5) 41 34 42 Share of income or consumption to the poorest qunitile (%)

Goal 2: ensure that children are able to complete prlmatyschooling Pnmary school enrollment (net. %) 64 65 89 Pnmaiy complebon rate (% of relevant age group) 35 28 36 47 Secondary school enrollment (gross, %) 17 14 Youth literacy rate (% of people ages 15-24) 70

Goal 3: eliminate gender disparity In education and empower women Rabo of girls to boys in pnmaiy and secondary educabon (%)

Proporbon of seats held by women in nabonal parliament (%) 7 4 8 7

98 97 24 Women employed in the nonagncultural sector (% of nonagnculturai employment)

Goal 4: reduce under-5 mortality bytwo-thlrds Under4 mortality rate (per 1,000) 163

93 47

Infant mortality rate (per 1,000 live births) Measles immunization (proportion of one-year olds immunized, %)

Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate. per 100,000 live births) Births attended by skilled health staff (% of total)

660 57

Goal 6: halt and begin to reverse the spread of HIWAIDS and other major diseases Prevalence of HIV (% of population ages 1549)

incidence of tuberculosis (per 100,000 people) Tuberculosis cases detected under DOTS (%)

Contraceptive prevalence (% of women ages 15-49) 17 192

159 94 96 56 55 56 59

488 469 47 46 51

0 5 19 19 27

218 51 70 74

Goal 7: halve the pmpottlon of people without sustainable access to basic needs Access to an improved water source (% of population) 40 46 Access to improved sanitation facilities (% of population) 14 32

4 3 Forest area (% of total land area) 23 5 22 4 22 1 Nationally protected areas (% of total land area) C02 emissions (metnc tons per capita) 0 1 0 1 0 1 0 1 GDP per unit of energy use (constant 2000 PPP S per kg of oil equivalent)

Goal 8: develop a global partnership for development Fixed line and mobile phone subscnbers (per 1,000 people) 3 3 7 19 Internet users (per 1,000 people) 0 0 2 5 Personal computers (per 1,000 people) 1 2 5 Youth unemployment (% of total labor f o m ages 15-24)

iducatlon Indicators (K)

lwl 0

5 0 1 l9se 2w0 2w2 2w4

+Primary net enrollment ratio

-0- Ratio of girls to boys in primary 8 secondary education

leasles immunization (X of I-year olds)

7 75

50

25

0 1990 1995 20w mw

0 Madagascar USub-Saharan A h a

CT Indicators (per 1,000 people)

2wo 2w2 Z w 4

0 Fixed + mabile subscnbers FS Internet users

Note: Figures in italics are for years other than those specified. .. indicates data are not available.

Development Economics. Development Data Group (DECDG).

211 2/07

102