MADAGASCAR'S FLAWED BUDGET PROCESS

UNCLAS SECTION 01 OF 02 ANTANANARIVO 000524

SIPDIS
SENSITIVE

STATE FOR AF/EPS AND AF/E - MBEYZEROV
STATE FOR EB/IPE - JENNIFER BOGER
USDOC FOR ITA/MAC/OIPR - CASSIE PETERS
USDOC FOR BECKY ERKUL - DESK OFFICER
TREASURY FOR FBOYE

E.O. 12958: N/A
TAGS: ECON ETRD KIPR MA
SUBJECT: MADAGASCAR'S FLAWED BUDGET PROCESS

REF: A) ANTAN 326
B) ANTAN 419


1. (SBU) SUMMARY: The National Assembly of the Republic of
Madagascar passed a supplemental budget to pay off arrears and to
address the rising costs of food and fuel on the local population
(REF A). The supplemental budget is financed by
higher-than-expected local tax revenues as well as an influx of
additional donor funds not originally programmed in the 2008 budget.
While it is a positive sign that Madagascar has been successful in
improving revenue collections, the supplemental budget also reveals
many continued weaknesses in its system of public financial
management. It also suggests a budding rivalry between the Ministry
of Finance and Budget and the Office of the Prime Minister. END
SUMMARY.

PAYING ARREARS OR PROTECTING THE VULNERABLE?
--------------


2. (SBU) The documents prepared by the Ministry of Finance and
Budget, presented to the government and ultimately to the
Parliament, show a lack of attention to detail. In particular there
are certain figures that do not properly sum together in the various
schedules presented. In addition there is little coherence between
the schedules presented and the narrative included. This lack of
coherence may be a result of an emerging rivalry for control over
the budget process and communication of financial issues between the
office of the Minister of Finance and Budget and the Prime
Minister.


3. (SBU) Based on inconsistencies between the language in the
narrative and the associated supplemental budget law, it would
appear they were drafted by two separate parties. For example, the
narrative emphasizes the current rise in food prices on the
international markets and higher world petroleum prices as a reason
for the need for the increases. However, the detail of the budget
documents show most increased expenditures can be attributed to
satisfying arrears to a variety of suppliers to the government for
past goods and services provided. Those expenditures can and will
occur in a very short period of time; the other measures taken to
ease the cost of higher food and petroleum prices, by contrast, will
almost certainly be put in place over a long period of time. In
this case the supplemental budget, while allocating increased
appropriations to some sincere positive new programs, is really more
an opportunity to square the books for past mismanagement of
finances. It is on this point that the narrative may have been
prepared by the Office of the Prime Minister to control the public
message of the supplemental budget rather than by the Minister of
Finance and Budget.


4. (SBU) From a political angle, the production of the supplemental
budget coincided with the end of a series of "Donor Roundtables on
Financing the MAP (Madagascar Action Plan)". This process also
suggests the Prime Minister's office is attempting to consolidate
control over the budget by establishing within its office a sort of
donor funds coordination group (REF B).

BUDGET DETAILS - IMPACT OF THE SUPPLEMENTAL
--------------


5. (U) According to the narrative accompanying the supplemental
budget, the need for adjustments to the budget is the result of
changes from both the external and internal economic environment.
Externally, the increase in prices for oil in the international
market and the recent price shocks to the market for basic
foodstuffs has led to higher than expected inflation (currently
estimated at 10 percent annually compared to seven percent in the
initial budget for 2008). Internally the impact of cyclones FAME
and IVAN on agricultural production, combined with the external
effects of the surge in oil prices, has resulted in lower economic
growth than previously anticipated (7.0 percent compared to 7.3
percent). Rising fuel prices has had a dual, contradictory impact
on public finances. The recent price increases raises revenue
earned from customs duties and taxes assessed on petroleum products;
however, at the same time it increases the government's budget needs
for spending in this category to carry out its operations.


6. (U) The supplemental budget reflects an increase in estimated
revenues of 154.4 billion MGA (USD 98.2 million),from higher tax
collections (USD 66.2 million) and donor funds (USD 32 million).
The government decided through this supplemental budget to create an
exemption from the value added tax (VAT) on rice and lamp oil as

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well as a customs tariff reduction on agricultural equipment which
presumably have a minor fiscal impact incorporated into the revised
revenue estimates. The financial impact of these changes is only
assumed to be factored into the new revenue estimates; no explicit
explanation of fiscal impact is contained in the documents prepared
by the Ministry of Finance and Budget. The purpose of these
exemptions is to relieve the impact of higher food prices and
petroleum prices on the population.


7. (U) The supplemental budget increases the budget for public
expenditures by 144.6 billion MGA (USD 92 million). However, the
breakdown of operations and investment allocations reported are not
consistent. Narratives and budget tables released do not sum.
Priority spending items include a reported USD 10 million investment
in the national airline Air Madagascar. Arrears payments are also
budgeted to the national electric and water company (JIRAMA),the
national telephone company (TELMA),and to vendors who provided
services in preparation for the Indian Ocean Games in August of

2007. New operating expenditures will also provide subsidies to the
urban transportation sector, off-season rice production efforts,
school nutrition programs, and labor-intensive public works. An
allocation was also created to fund preparations for hosting the
African Union Summit in the summer of 2009.


8. (U) All new unrestricted donor funds (USD 32 million) will
reportedly be allocated to investment, including new public works
projects as well as expenditures in the energy sector. This account
will also reportedly include arrears payments on VAT reimbursement
for investment projects.


9. (U) According to the Ministry of Finance, the supplemental
budget results in a net decrease in the budget deficit, from 4.9
percent to 4.4 percent of GDP. Tax collections will rise to 12.2
percent of GDP and grants and donations from foreign sources to 4.9
percent of GDP. Total expenditures as a percent of GDP will
increase by 0.2 percentage points from 20.9 percent to 21.1 percent.
Post cannot confirm these estimates given inadequate data
reported.

ALREADY FALLING BEHIND FOR NEXT YEAR
--------------


10. (SBU) The budget process for the 2009 calendar year has not yet
begun in practical terms for the Government of Madagascar. It would
appear that "Donor Roundtable" meetings and other unidentified
reasons have led to a delay in the start of this process. The Donor
Roundtable was designed to coordinate with donors on their long-term
commitments to the country and was organized by the Prime Minister
but has instead evolved into a sort of quasi-budget planning
exercise which has removed from the Minister of Finance his role in
organizing and developing the 2009 budget process. The result is
that the 2009 budget will be developed through a hurried and
non-consultative process if it is to be delivered to parliament by
the October 31 constitutional deadline. If this is the case the
budget document and financial plan for 2009 will be of inferior
quality to the 2008 budget which was prepared in a more consultative
method.


11. (SBU) COMMENT. It is difficult reading the tea leaves of
Malagasy intra-governmental rivalry. It is not clear, for example,
if the Prime Minister is trying to usurp the budget process, or
simply control the message and manage relations with the
international donors. It is not a bad thing to correct past
mismanagement by clearing arrears, but a different explanation must
be sought when those arrears -- and that mismanagement -- have never
been openly acknowledged. END COMMENT.

SIBLEY