Identifier
Created
Classification
Origin
09ANTANANARIVO399
2009-06-04 07:40:00
CONFIDENTIAL
Embassy Antananarivo
Cable title:  

MADAGASCAR: HOW LONG CAN THE HAT GOVERNMENT

Tags:  ECON EAID ENRG EFIN PGOV MA 
pdf how-to read a cable
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P 040740Z JUN 09
FM AMEMBASSY ANTANANARIVO
TO RUEHC/SECSTATE WASHDC PRIORITY 2489
INFO RUEHZO/AFRICAN UNION COLLECTIVE PRIORITY
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C O N F I D E N T I A L SECTION 01 OF 03 ANTANANARIVO 000399 

SIPDIS


STATE FOR AF/EPS AND AF/E - MBEYZEROV
USDOC FOR BECKY ERKUL - DESK OFFICER
TREASURY FOR FBOYE

E.O. 12958: DECL: 06/03/2019
TAGS: ECON EAID ENRG EFIN PGOV MA
SUBJECT: MADAGASCAR: HOW LONG CAN THE HAT GOVERNMENT
SUSTAIN ITSELF?

REF: A. ANTANANARIVO 356

B. ANTANANARIVO 366

ANTANANARI 00000399 001.2 OF 003


Classified By: ECONOFF DOVIE HOLLAND FOR REASONS 1.4 B AND D.

C O N F I D E N T I A L SECTION 01 OF 03 ANTANANARIVO 000399

SIPDIS


STATE FOR AF/EPS AND AF/E - MBEYZEROV
USDOC FOR BECKY ERKUL - DESK OFFICER
TREASURY FOR FBOYE

E.O. 12958: DECL: 06/03/2019
TAGS: ECON EAID ENRG EFIN PGOV MA
SUBJECT: MADAGASCAR: HOW LONG CAN THE HAT GOVERNMENT
SUSTAIN ITSELF?

REF: A. ANTANANARIVO 356

B. ANTANANARIVO 366

ANTANANARI 00000399 001.2 OF 003


Classified By: ECONOFF DOVIE HOLLAND FOR REASONS 1.4 B AND D.


1. (C) Summary: The IMF predicts that Madagascar's transition
government (HAT) will likely be able to make payroll for its
workers and soldiers through July using normal fiscal
revenues. However, during the latter half of 2009, the HAT
will probably receive less tax and customs revenue, and
cannot rely on foreign borrowing to help it fill the gap.
Thus, it will be forced to issue high interest rate treasury
bonds, borrow directly from the Central Bank, seek rents by
granting monopolies, or profit from illicit trafficking of
all sorts. French funding continues to play a role in
sustaining the HAT. Madagascar's PRGF agreement with the IMF
will end on July 19, 2009. End summary.

Can the Government Pay Workers and Soldiers?
--------------


2. (C) At a meeting on June 2, IMF Resident Representative
Pierre van den Boogaerde explained to Emboff that the GOM
typically receives two-thirds of its annual income taxes
during the first half of the year, with a large chunk coming
in April and May when taxes are due. In addition, value
added tax (VAT) receipts were "not too shabby" in April,
although they were lower than usual, and the HAT forced the
national social security fund (CNAPS) to buy 50 billion
ariary (USD 25.6 million) of treasury bills. Thus, the HAT
was able to pay salaries in April and May. They will likely
be able to make all payments in June and probably in July.
For the second half of the year, they will be relying mostly
on VAT (rather than VAT and income taxes) so will be facing a
more difficult situation, especially given the downward trend
of VAT revenue.


3. (C) Total salary expenses run 39 billion ariary (USD 20
million) per month. If the HAT did not have any other
expenses, they should be able to pay salaries through

year-end, but they do have other expenses and have had to pay
a few extraordinary ones recently. For example, Ambatovy
mining companies were threatening to pull out if not given
their VAT reimbursements, so they, as well as several oil
companies, received VAT rebates.


4. (C) Salaries, including military ones, are being paid via
an automated system. However, promised "extras" -- for
supporting a coup -- are likely not all being paid; this
potentially explains the recurring rumors that Emboffs have
heard that certain segments of the military, particularly the
mutinous CAPSAT soldiers that supported the coup, are not
getting paid. Van den Boogaerde asserted that France has
footed the bill for CAPSAT "extras". Although he cannot
prove a direct link to the French government, there were
multitudinous transfers from citizens in France to the HAT.
Previously, remittances were next to nothing, and the
Malagasy expats in France are not believed to have large sums
of money. Many transfers were done by WesternQion, and
many were made by exiled president Ratsiraka,s son-in-law,
although other sources and means were used as well. The
Indo-Pakistani "Karana" business community also provided
significant funding to the HAT in the early stages of
demonstrations, according to various sources, in order to
throw off the yolk of Ravalomanana's economic monopolies.

What are the HAT's Options after July?
--------------


5. (C) Some have placed their hopes on foreign saviors, but
these are unlikely to appear. The Saudi investors that came
recently and promised to deliver mountains of cheap goods
were not affiliated with the Saudi government (ref A). They
are a gang, likely affiliated with terrorist organizations,
that want to launder money through building hotels in Nosy
Be, according to Van den Boogaerde. The promised boatload of
cheap goods was merely a bribe, which has not, to date,
materialized. SAMIFIN, the financial intelligence unit
launched in 2008 which is still operating on seed money that
it got previously this year from Norway, is investigating the
case. (Note: Post's understanding of the identity and

ANTANANARI 00000399 002.2 OF 003


background of the "Saudi investors" has been reported in
other channels.)


6. (C) If the HAT cannot make payroll, their borrowing
options will be extremely limited -- issuing treasury bonds,
which would drive up interest rates and crowd out private
borrowing, or borrowing directly from the Central Bank, which
would increase the money supply and cause inflation (a la
Zimbabwe). The HAT predicts that they will only increase
domestic borrowing specifically to cover the deficit by 14
percent (ref B),but their projections seem overly
optimistic. There are legal limits on the amount they can
borrow from the Bank, but there are many other laws, limits
and paramaters that have not been respeced by the HAT either,
he noted.


7. (C) There is one other cash cow that can be milked --
gemstones. The raw stone export ban imposeQy Ravalomanana
in 2008 is still in place (while the black market
flourishes),but the HAT is seeking ways to exploit this
sector for its benefit. According to Van den Boogaerde, they
have contacted a gem dealer in Houston and offered to give
him a monopoly on the sector if he'll give Rajoelina USD 150
million (that would cover 7 months of payroll). Van den
Boogaerde has also heard anecdotal reports of an increase in
all sorts of illicit activities in the past few months as
well.


Future Engagement with the IMF
--------------


8. (C) Madagascar's poverty reduction and growth facility
agreement (PRGF) with the IMF ends July 19, 2009. It is too
late already to negotiate a new one to replace it. A PRGF is
based on the government having a development plan in place
with donors in sectors including energy, infrastructure,
health, and education. The acting World Bank director
pointed out May 29 that in a few months, 30 percent of
primary school teachers will not receive their salaries
because they were to be paid by the World Bank, which has
placed its programs on hold. Although health and education
activities will be relatively easy to restart, energy and
infrastructure require large up-front investments and will be
significantly delayed.


9. (C) The energy plan that had been agreed upon by the GOM
and donors was that large hydroelectric investments would be
made in 2012, reducing the reliance on antiquated thermal
generators, 80 percent of which are already past their useful
life. Given the current freeze in donor funding, this
project will already be delayed for at least a year, perhaps
several. The HAT will only aggravate an already dire
situation at the state company Jirama if/when it reduces
electricity and water tariffs by 10 percent, as announced in
early June. Jirama's cash flow situation has been
momentarily improved by the reduction in global oil prices
and by a 30 percent reduction in production. (Because the
company loses money for each unit of electricity it produces,
it saves, in relative terms anyway, by producing less.)
Thus, in the short term, Jirama can continue to operate (at
reduced capacity) with the cuts, but production is likely to
continue to diminish as the budget crunch worsens.

Comment
--------------


10. (C) Van den Boogaerde is not alone in making allegations
that the French backed the March coup. Such claims were
publicly made the last week of May by ousted President
Ravalomanana, are believed by many Malagasy people including
many of our local staff, and are given credence by other
diplomats as well, including the Norwegians who participated
in the recent EU dialogue with the HAT. Worker discontent is
growing, illustrated by short-lived strikes by Air
Madagascar, national social security fund, customs, and
paramedic staff this week alone. The HAT will face
increasing pressure as revenues diminish during the latter
half of 2009. They may buy some time by divvying up rents,
such as by granting a monopoly over the gemstone sector, but
the licit options, at least those that would not wreak havoc

ANTANANARI 00000399 003.2 OF 003


on the economy, are getting thin. End comment.
MARQUARDT