IMF Finds GOM Performance Satisfactory

UNCLAS SECTION 01 OF 02 ANTANANARIVO 000287

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SIPDIS
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PARIS FOR D'ELIA
DEPT FOR AF/E
DEPT FOR EB/IFD/OMA
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E.O. 12958: N/A
TAGS: ECON EFIN IMF PREL MA
SUBJECT: IMF Finds GOM Performance Satisfactory


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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
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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
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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
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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