IMF Finds GOM Performance Satisfactory

UNCLAS SECTION 01 OF 02 ANTANANARIVO 000287 SIPDIS SIPDIS SENSITIVE PARIS FOR D'ELIA DEPT FOR AF/E DEPT FOR EB/IFD/OMA TREASURY FOR FBOYE E.O. 12958: N/A TAGS: ECON EFIN IMF PREL MA SUBJECT: IMF Finds GOM Performance Satisfactory ANTANANARI 00000287 001.2 OF 002 ¶1. (SBU) SUMMARY: A just-completed IMF Mission reviewed five major themes in Madagascar: the Madagascar Action Plan (MAP),trade competitiveness, institutional capacity at the Ministry of Finance and Central Bank, private sector reform (especially the electric utility),and fiscal / monetary policy. Overall IMF Country Director Ames is satisfied with the GOM's performance, and major donors, including those providing budget support, are sanguine about medium term economic policies. END SUMMARY. Slight "Dutch Disease" Effect -------------- ¶2. (SBU) IMF Country Director Ames briefed the donors March 21 following his dual mission to conduct an Article IV Review and a Second Review under Madagascar's current program. A notable change in six months, Ames said, was that in the second half of 2006 substantial investment for the Rio Tinto illmenite mining project in the southern city of Fort Dauphin began to hit the Malagasy economy. Total expected investment over several years is USD 700 million, roughly 20 percent of which affects the Malagasy economy in terms of domestic wages and other local payments. This shock has caused the Ariary to steadily appreciate between October 2006 and March 2007. Ames noted the Dynatech nickel and cobalt mine near Moramanga in central Madagascar is expected to be a USD 2.5 billion investment over the life of the project, starting in late 2007. ¶3. (SBU) The combined effects of mining investments will maintain pressure on the Ariary to appreciate in the medium term, Ames assessed, although exports and revenue are not expected until 2009 and 2010. Private operators, especially Export Processing Zone (EPZ) apparel producers, are already concerned about declining competitiveness from a "dutch disease" effect. While acknowledging this risk, Ames suggested that ongoing effectiveness keeping inflation low (near single digits in annual terms) and rapid productivity increases will offset currency appreciation disadvantages. ¶4. (SBU) Further implications for Ariary appreciation include potentially substantial shortfalls in Customs receipts collected on imports in local currency and potentially cheaper foreign debt interest payments. Given the appreciated Ariary rate is probably a permanent phenomenon, IMF and GOM economists are quantifying these and other impacts. 2007 Budget Better, But Still Lacking -------------- ¶5. (SBU) Having consulted closely with the GOM during the process to draft the 2007 Budget, the IMF believes it is an improvement on previous years in terms of revenue and spending targets. Still lacking, however, are provisions for unplanned eventualities. For example, in 2007 pension payments will exceed pension receipts, thus funding to pay pensioners must be allocated. Reimbursement payments for Value Added Tax (VAT) for EPZ companies and tax reimbursements to petroleum importers were underestimated for 2007. Provisions for interest payments on domestic debt, depending on the funding needed to cover the fiscal deficit, are also likely inadequate. The IMF is encouraging the GOM to cut spending temporarily until revenue improves later in 2007. Plans are also underway to overhaul the tax system by 2008, simplifying rates to improve collection and facilitate new investments. Ames concluded by noting that if GOM spending controls are effective and the fiscal deficit restrained during 2007, the IMF believes Madagascar's base interest rate -- currently at 18 percent or seven percent in real terms - will finally decline. At present, lack of credit suffocates new investment with only the shortest term, highest return projects meeting requirements to obtain expensive credit. JIRAMA: Fix The Electric Utility -------------- ¶6. (SBU) Turning to the long saga of Madagascar's water and electric utility (JIRAMA),Ames emphasized that the 10 or even seven percent GDP growth forecasts in the MAP are out of the question without permanent reform to deliver dependable and affordable electricity. Ames said President Ravalomanana's new cabinet is addressing many technical alternatives to revamp the utility in the near future; without which, he added, donor programs cannot succeed. The French Ambassador and World Bank Country Director, both of whom have funded JIRAMA bail-outs, expressed cautious optimism this story will have a happy ending. Madagascar Action Plan -------------- ANTANANARI 00000287 002.2 OF 002 ¶7. (SBU) Ames commented the GOM was reviewing feedback on the MAP and had revised downward total funding needed over five years from USD 11 billion to USD seven billion. IMF and GOM economists continue to assess Ravalomanana's aspirations in the MAP and attempt to draw direct ties to the budget and to overall financing requirements of this ambitious development program (Note: The Embassy's current temporary Budget Resident and soon-to-arrive permanent Budget Resident work closely with Presidency policymakers responsible for the MAP. The President's Chief of Staff Ivo told PolEcon Chief that advice so far has been very useful. End Note). ¶8. (SBU) COMMENT: Overall Ames' tone was upbeat and the press coverage the following day was relatively positive. EU Ambassador Boidin told PolEcon Chief afterward that after a rocky time in the relationship in 2005 and 2006, the GOM appears to be collaborating fully with the Fund. Other donors remain focused on the GOM's ability to control inflation, fund its deficit, and protect priority spending for health and education -- but in general express confidence for the remainder of 2007. END COMMENT. PATRICK