VZCZCXRO8429
RR RUEHLMC
DE RUEHAN #0524/01 2111029
ZNR UUUUU ZZH
R 291029Z JUL 08
FM AMEMBASSY ANTANANARIVO
TO RUEHC/SECSTATE WASHDC 1476
INFO RUCPDOC/USDOC WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEHSA/AMEMBASSY PRETORIA 1273

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 
 
ANTANANARI 00000524  002 OF 002 
 
 
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