- The IMF and the World Bank today gave their support to grant Madagascar another US$ 836 million debt relief. Total debt relief for Madagascar by all creditors was estimated at US$ 1.9 billion, but this still needed to be achieved. The government had expected a larger debt relief.
A go-ahead nod for more debt cancellation from the International Monetary Fund (IMF) and the World Bank was widely expected these days, as Madagascar had applied for a total cancellation of the country's US $4 billion external debt. President Marc Ravalomanana last week met World Bank President James Wolfensohn in Antananarivo and announced that the Bank and IMF soon would cancel about US$ 2 billion of Madagascar's debt.
Campaigners and several Western governments had urged for a larger debt cancellation, saying it was necessary to write off Madagascar's entire external debt to enable the government to fight poverty. Madagascar was simply "too poor" to service the rest of its debt, campaigners said.
The limited debt cancellation by the World Bank and IMF came after the Malagasy government had "taken the necessary steps," according to the IMF, meaning sweeping economic reforms. President Ravalomanana has liberalised and deregulated the economy and introduced pro-poor reform programmes, closely following IMF prescriptions.
Total debt relief under the initiative from all of Madagascar's creditors is expected to amount to US $1.9 billion in nominal terms, according to a statement released by the IMF today. "This assistance is equivalent to US$ 836 million in net present value (NPV) terms," the statement added.
Of this debt relief, the World Bank contributes with US$ 444 million and the IMF with US$ 19 million. The rest is to be written off by creditor countries and other financial institutions. The so-called "Paris Club" of creditor nations - a grouping of the world's leading industrialised countries - was expected to write off "about US$ 392 million" following the World Bank recommendation.
- Most Paris Club creditors have also indicated that they will provide assistance beyond HIPC relief, estimated to present about US$ 612 million, the IMF statement said. This however yet has to be decided by these countries.
Since 1997, Madagascar has undertaken sweeping structural reforms, created a more favourable environment for private investment, and has taken steps to integrate into the world economy. These policies, which have sustained growth, were a prerequisite to obtain debt relief. In preceding decades, socialist inspired policies had led to economic decline.
Madagascar however has seen severe economic setbacks the last few years. Highly contested presidential elections in December 2001 triggered a political crisis in 2002 with severe economic and social consequences. GDP declined by nearly 13 percent and the poverty rate climbed from an estimated 69.6 percent in 2001 to 80.6 percent in 2002, according to the IMF.
In July 2002, President Ravalomanana's new government moved quickly to deal with the effects of the crisis, especially on the poor. The government implemented a poverty reduction strategy, which includes scaling up the roads program, expanding access to primary education, improving governance, and creating an enabling environment for the private sector. The economy rebounded with a real GDP growth of 9.8 percent in 2003.
However, 2004 was marked by further shocks - including two cyclones and a deterioration in the terms of trade - and a sharp depreciation of the currency. The authorities had now "taken corrective actions to maintain macroeconomic stability and are committed to containing inflation, accelerating the implementation of structural reforms, and diversifying the export base to boost exports and economic growth," the IMF notes.
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