VZCZCXRO0371
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHAN #1162/01 2891359
ZNR UUUUU ZZH
R 161359Z OCT 06
FM AMEMBASSY ANTANANARIVO
TO RUEHC/SECSTATE WASHDC 3699
INFO RUEHFR/AMEMBASSY PARIS 0700
RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 03 ANTANANARIVO 001162 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR AF/E AND EB 
PASS TO USAID FOR AFR/SD AND EGAT 
ALSO PASS TO TREASURY 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EAID EINV PREL IMF MA
SUBJECT: MADAGASCAR AND IMF DISAGREE ON INVESTMENT LAW 
 
 
ANTANANARI 00001162  001.2 OF 003 
 
 
¶1. (SBU) SUMMARY.  A September 20-October 4 Mission from the 
International Monetary Fund (IMF) found Madagascar largely compliant 
with the terms of its Poverty Reduction and Growth Facility (PRGF) 
and praised the Government of Madagascar (GOM) for appropriate use 
of its debt relief windfall.  The GOM agreed to trim spending in a 
revised budget to compensate for reduced imports leading to 
below-forecast customs collections.  However the IMF and the GOM 
clashed over a proposed investment law; the IMF claimed the tax 
incentives would so distort the revenue picture as to invalidate the 
basis of the PRGF, while the GOM claimed that the incentives would 
attract investment spurring sufficient economic growth to offset the 
revenue losses.  It appears the investment law will be modified to 
meet IMF concerns, but GOM officials have told us privately they 
felt they had been "blackmailed" into accepting the change.  END 
SUMMARY. 
 
¶2. (U)  The IMF Mission, led by Brain Ames and composed of three 
economists and the IMF Resident Representative, had three main 
objectives:  1) To conduct a first review of the PRGF program by 
analyzing Madagascar's performance, accomplishments, and the 
macroeconomic indicators as of the end of July 2006; 2) To discuss 
the economic situation to determine whether there might be a need to 
adjust economic policy for the achievement of the objectives for 
2006 as projected; and, 3) To discuss the 2007 program, in 
particular the 2007 budget and its accompanying macroeconomic 
framework and policies, the new investment code, and financial 
sector reforms.  On October 4, Ames briefed the donor community on 
the outcome of the visit. 
 
THE GOOD NEWS FIRST:  LARGELY MEETING TARGETS 
--------------------------------------------- 
 
¶3. (U) Ames began by noting that the GOM is meeting or respecting 
all realization criteria and indicators under the PRGF.  For the 
period September to December 2006, the projected tax revenue (as 
forecast in May 2006) is expected to fall short by some 30 billion 
Ariary (approx. USD 14 million), mainly due to a decline in imports 
lowering customs revenue.  The Minister of Finance, with concurrence 
from President Ravalomanana, agreed to reduce expenditures by this 
amount and presented a belt-tightening budget amendment in the 
National Assembly on October 4.  The average inflation target for 
2006 was revised down by half a point to 10.8 per cent, mainly 
because of the decline in rice and oil prices. 
 
¶4. (U) Looking ahead to 2007, the GOM and the IMF reduced the tax 
revenue target by 0.3 points to 11.2 per cent of GDP.  Ames said 
they agreed it was better to set an achievable target than to fall 
short of an ambitious one.  The level of expenditures will be 
revised accordingly. 
 
¶5. (U) Ames cited one other highly positive result of the IMF 
Mission's analysis.  Some donors have criticized the GOM for 
misallocating the debt service windfall arising from Madagascar's 
debt relief through the Heavily Indebted Poor Countries Initiative 
(HIPC) and the Multilateral Debt Relief Initiative (MDRI).  Ames 
contradicted this view, stating that the increase in poverty 
reduction priority spending from 2005 to 2006 and budgeted into 2007 
exceeds the sum of the additional funds obtained through HIPC and 
MDRI. 
 
SOME CONCERNS: PUBLIC UTILITY, CENTRAL BANK, MANAGEMENT 
--------------------------------------------- ---------- 
 
¶6. (SBU) The IMF expressed concern that the budgeted operating 
subsidy to the water and electricity utility, JIRAMA, was 25 billion 
Ariary (just under USD 12 Million) whereas independent assessments 
(confirmed in the meeting by other donor representatives) suggested 
the true shortfall to be double that amount.  Ames wondered what 
this would mean in terms of power outages and corresponding 
constraints on economic growth. 
 
¶7. (U) The IMF also stressed the need to recapitalize the Central 
Bank to make it profitable.  This is expected to strengthen its 
independence and to provide it with the resources necessary to carry 
out effective monetary policy.  The GOM is discussing a 
recapitalization plan with the IMF that is expected to be 
implemented in March 2007 and included in the 2007 Budget Law. 
 
¶8. (U) The GOM's management of public finance was the third concern 
the IMF raised.  This was a problem in 2005, and the World Bank is 
funding four French visiting experts to audit and explain the 
reasons for the overrun in expenditures, in order to prevent the 
problem from recurring.  In the meantime the GOM, encouraged by the 
IMF, will introduce a monthly tracking system, tied to quarterly 
targets, to better calibrate revenue with expenses 
ministry-by-ministry. 
 
ANTANANARI 00001162  002.2 OF 003 
 
 
 
¶9. (SBU) On this subject, the EU interjected to express concern over 
the delay in budget execution, particularly fund disbursement in the 
social sectors.  If not addressed properly, this would affect their 
indicators, which in turn regulate the disbursement of their 
budgetary support.  The resultant delay could then have a negative 
impact on the GOM's budget. 
 
THE BIGGEST CONCERN OF ALL:  THE INVESTMENT CODE 
--------------------------------------------- --- 
 
¶10. (SBU) Ames acknowledged that the only really contentious 
discussion had centered on the GOM's proposed new investment code. 
This is a centerpiece of President Ravalomanana's Madagascar Action 
Plan (MAP), his five-year program to accelerate the country's 
development beginning in 2007.  The MAP targets double-digit 
economic growth, to be achieved in large measure through dramatic 
expansion in foreign direct investment (FDI) in the order of USD 
500-800 million per year.  The FDI would be channeled through a new 
facilitating institution, the Economic Development Board of 
Madagascar (EDBM).  The EDBM proposed a new law that would provide 
up to 200 billion Ariary (approx. 93 million USD) in fiscal 
incentives including a two-year exemption in the profit tax and a 
reduction in the profit tax rate from 30 to 20 per cent. 
 
¶11. (SBU) Ames expressed strong support for investment promotion and 
facilitation, but was skeptical that the fiscal incentives would 
achieve anything other than to throw the budget severely out of 
balance.  He supported simplification of the tax and customs laws as 
helpful to attract investment, as well as being intrinsically 
desirable, but argued strongly that such simplification should be 
carefully studied and modeled in advance so as to be strictly 
revenue neutral.  Should the GOM agree to follow this path, with a 
goal of launching the new laws in October 2007 for the 2008 budget, 
he had offered IMF and other donor technical assistance in carrying 
out such studies. 
 
¶12. (SBU) The GOM, however, was pushing for fast solutions, Ames 
said, expressing frustration that the investment team within the 
Presidency was looking only at investment and not considering the 
implications for revenue, poverty reduction, or anything else.  He 
had finally told the GOM that if the investment law were passed 
unchanged then the IMF would have to withdraw the PRGF.  This was 
not a threat, according to Ames, but a reality, because it would 
change all of the parameters upon which the PRGF had been based. 
 
THE GOM FEELS ITS ARM TWISTED 
----------------------------- 
 
¶13. (SBU)  Meeting separately with the Ambassador on October 6, Dr. 
Prega Ramsamy, the Mauritian selected by President Ravalomanana to 
head the EDBM, reflected the GOM's frustration at the IMF's 
position.  Ramsamy suggested the IMF was merely "balancing the 
books" and performing static analysis in a fluid situation.  They 
were not including the economic benefits, including government 
revenues, which will accrue once the investment arrives.  The GOM 
and IMF agreed on the need for investment promotion and 
facilitation, as well as assistance in securing safe title to land 
for investment, but diverged sharply on fiscal incentives.  He 
pointed out that Madagascar "is not the easiest country to do 
business in" and therefore, if nearby countries with better 
infrastructure such as Mauritius offer fiscal incentives, then 
Madagascar's offer must be a little sweeter.  According to Ramsamy, 
the IMF initially proposed an extended budget impact study to be 
concluded in 2010.  The GOM felt "blackmailed" since it feared a 
donor backlash if the PRGF were to be withdrawn, so it agreed to the 
study but accelerated it to mid-2007.  Ramsamy asked whether the USG 
could offer any economic modeling assistance to the GOM so that it 
could also do its own studies of this issue. 
 
COMMENT:  TOO RUSHED, OR TOO MEASURED? 
-------------------------------------- 
 
¶14. (SBU) COMMENT: Post sees merit on both sides of the investment 
argument, but is perhaps slightly more sympathetic to the GOM 
position.  For one thing, Madagascar tends to be a highly 
traditional, conservative society; it is refreshing to hear them 
accused of rushing into anything.  This urgency reflects several 
realities:  Madagascar is woefully short of FDI, its GDP growth 
barely exceeds its population growth, and the process of 
globalization has tended to reward the more nimble and fast-reacting 
countries in the competition for investment.  This leads the GOM to 
fear it will miss the train while the IMF forces it to examine the 
timetable.  Perhaps, for a country as poor as Madagascar, missing 
the train altogether is a greater danger than boarding the wrong 
one, the danger the IMF seems to fear.  In any case, this dispute 
 
ANTANANARI 00001162  003.2 OF 003 
 
 
has strained relations between the IMF and the GOM and has 
overshadowed the generally positive report the IMF issued regarding 
the GOM's performance.  END COMMENT. 
 
SIBLEY