Madagascar - Second Poverty Reduction Support Credit Project

Document of The WorldBank FOROFFICIAL USEONLY ReportNo. 32516-MG INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAMDOCUMENT FORA PROPOSEDCREDIT INTHE AMOUNT OFSDR53.9 MILLION (US$SO MILLIONEQUIVALENT) TO THE REPUBLIC OFMADAGASCAR FORA SECOND POVERTY REDUCTION SUPPORTOPERATION June 9,2005 PovertyReductionandEconomicManagement1 Africa Region This document hasarestricteddistribution andmay be usedbyrecipients only inthe performance of their official duties. Its contents may not otherwise be disclosed without Bank authorization.  CURRENCYEQUIVALENTS (as of June 7,2005) Currencyunit = M a r y US$1 =2012.70 Ariary FISCALYEAR January 1-December 31 WEIGHTSAND MEASURES Metric System ABBREVIATIONAND ACRONYMS AAA Analytical andAdvisory Activities AfDB African DevelopmentBank ACM CivilAviation Agency ADER Agency for the DevelopmentofRuralElectrification AGOA The African Growthand OpportunityAct APMF Maritime, Ports and RiverAgency AT1 African Trade InsuranceAgency CAPE SteeringCommittee for EnterprisePromotion CAS CountryAssistance Strategy CBM CentralBankof Madagascar CFAA CountryFinancialAccountabilityAssessment CGDIS General Commission for Development ofthe South CISCO School District Agency COMESA CommonMarketfor Eastemand SouthemAfrica CNFA NationalCenter for Administrative Training CPAR CountryProcurementAssessment Review CPI ConsumerPriceIndex CPIA CountryPolicy andInstitutionalAssessment CRESED Credit for Strengtheningthe EducationSysteminMadagascar CROCC TechnicalWorking Groupon Anticorruption CSLCC Anticorruption Commission DEA Directorateof Water and Sanitation EBFs ExtraBudgetary Funds EFA Educationfor All ENAM MalagasyNational Schoolfor Administration ENMG National School for Magistrates EPM HouseholdSurvey EPZ Export ProcessingZone EU EuropeanUnion FERHA Imgation MaintenanceFund FID CommunityDevelopmentFund FDI ForeignDirect Investment FMG Malagasy Franc FNE NationalFundfor Electricity GDP Gross DomesticProduct GOM Govemmentof Madagascar GTZ GermanTechnicalCooperationAgency GUIDE One Stop Shop for Investment andEnterpriseDevelopment HASYMA CottonCompany HIPC HighlyIndebtedPoor Countries - 11- ..  FOROFFICIAL USEONLY IDA IntemationalDevelopment Association IFC International Finance Corporation IGF General Inspectorate for Finances IMCI-C IntegratedManagement of Childhood Illness IMF IntemationalMonetary Fund JIRAMA Electricity and Water Company JSA Joint Staff Assessment MDG Millennium Development Goal MECIE National Environment Impact Legislation MEFB Ministry of Economy, Finance and Budget MENRS Ministry o f National Education and Scientific Research MENSUP Ministryof Higher Education METFP Ministryof Vocational andTechnical EducationandTraining MFA Multi-Fibre Agreement MIGA Multilateral Investment Guarantee Agency MINESEB Ministry o f Basic and Secondary Education M O H Ministry of Health MOU Memorandum of Understanding MTEF Medium Term Expenditures Framework NEAP National Environment Action Plan NER Net Enrolment Rate NGO Non-Govemment Organization NNP NationalNutrition Policy NPV Net Present Value ONE National Office of Environment ORE Regulatory Agency for Electricity PADR Action Plan for Rural Development PARP Budget Support Program for PovertyReduction PER Public Expenditure Review PGDI Governance and Institutional Development Project PIP Public Investment Program PRGF PovertyReduction and Growth Facility PRS Poverty Reduction Strategy PRSC PovertyReduction Support Credit PRSP PovertyReduction Support Paper PSIA Povertyand Social Impact Analysis RA Road Authority RMF Road Maintenance Fund RWSS Rural Water and Sanitation Supply SACU Southern African Customs Union SADC Southern African Development Community STA Technical Secretariat for Adjustment TCSP Technical Committee on Social Protection TSA Treasury Single Account UNDP UnitedNations Development Organization USAID United StatesAgency for International Development VAT Value Added Tax V P M Vice Prime Minister WASH Water, Sanitation and Hygiene Committee WB World Bank WBI World Bank Institute This document hasa restricted distributionand may be usedby recipientsonly in the performanceof their official duties. Its contentsmay not be otherwise'disclosed without World Bank authorization.  Vice President GobindNankani Country Director James Bond Sector Director ---Paula Donovan Sector Manager Emmanuel Akpa Task TeamLeader -- BenuBidani The PRSC Team includes Benu Bidani (Task Team Leader), Luc Razafimandimby (Macroeconomics); Guenter Heidenhof, D. Randriamanampisoa, Gervais Rakotoarimanana,Sylvain Rambeloson, Odile Keller (Public expenditure management and govemance); Sajitha Bashir, Patrick Ramanantoanina(Education); Jean-PierreManshande(Health); Claudia Rokx, Anne M. J. Bossuyt (Nutrition); Christophe Prevost, Patrice Rakotoniaina (Rural water supply); SusanneHolste, NoroarisoaRabefaniraka(Transport); Bienvenu Rajaonson(Environment); Ziva Razafintsalama (Rural development); Nadine T. Poupart, Hope Neighbor (Social protection); Risseme Gabdibe, Lanto Ramanankasinaand Emma FabienneRaharinjanahary(overall support) and Jean-Charles de Daruvar (Legal). Harold Alderman and Sanjay Pradhan(PRMPS) are the peer reviewers. - iv -  THEREPUBLICOFMADAGASCAR SECOND POVERTY REDUCTION SUPPORT CREDIT TABLEOFCONTENTS IIntroduction . ...................................................................................................................................... 1 I1 RecentEconomicDevelopments . ................................................................................................... A. Macroeconomic Performance....................................................................................................... 2 2 D.HIPCInitiative andDebtSustainability ............I........................................................................... C. MediumTermOutlook................................................................................................................. 3 6 I11 Madagascar'sPovertyReductionStrategy . ................................................................................ A. Poverty inMadagascar................................................................................................................. 7 B. The Government's Strategy for ReducingPoverty andits Implementation................................. 7 8 D. Donor CollaborationinSupporting the Implementationofthe PRSP........................................ C.World Bank Country Assistance Strategy and Support to the Implementationof the PRSP.....13 E. Donor Support for Capacity Building........................................................................................ 15 16 I V Poverty ReductionSupport CreditsProgram . StrategicAxis 1:IMPROVINGGOVERNANCE ...................................................... .......................................................................... ...................23 16 A. Public Expenditure Management................................................................................................ 23 i. B. FightingCorruption.................................................................................................................... 29 D. Customs...................................................................................................................................... C. Justice ......................................................................................................................................... 31 E. Decentralization.......................................................................................................................... 34 33 StrategicAxis 2: BROADBASEDGROWTH ................................................................................ A. Private Sector Development ....................................................................................................... 36 B. Transport..................................................................................................................................... 36 C. RuralDevelopmentandEnvironment........................................................................................ 37 40 StrategicAxis 3: PROVIDINGHUMANAND MATERIAL SECURITY ................................... A. Education.................................................................................................................................... 42 B. Nutrition..................................................................................................................................... 42 C. Health ......................................................................................................................................... 47 45 E. SocialProtection......................................................................................................................... D. RuralWater Supply.................................................................................................................... 50 52 StrengtheningMonitoringandEvaluationofthe PRSP ................................................................. 53 V . ........................................................................................... A. Credit Administration ................................................................................................................ CreditImplementationandRisks 55 B. Environmental Aspects............................................................................................................... 57 55 C. Risks........................................................................................................................................... 58 - v -  Annexes Annex 1: Chairman's SummingUp for SixthReview under the PRGFProgram...................................... 61 Annex 3:Letter o f Government Policy....................................................................................................... Annex 2: Policy and InstitutionalReformMatrix....................................................................................... 63 Annex 4: Madagascar at a Glance............................................................................................................... 80 86 Annex 6: MonitoringIndicatorsAnnex ...................................................................................................... Annex 5: Madagascar Key Economic Indicators........................................................................................ 93 95 Boxes Box 1:Vision 2015 .Madagascar Naturellement ........................................................................................ 9 Box 2: LessonsLearnt -Implementationof PRSC 1 .................................................................................. 18 Figures Figure 1:The Three Year PRSCProgram................................................................................................... 17 Tables .......................................................................................................................... Table 2: SelectedIndicators o f Real Sector Activity, 1997- 2008 .............................................................. Table 1:Exports 2003-2004 3 Table 3: Macroeconomic Framework 2003-2008 ......................................................................................... 5 6 Table 4: Madagascar Key Debt Sustainability Ratios Table 5: Implementationof the PovertyReduction Strategy, July 2004 onwards...................................... ................................................................................... 7 Table 6: Analytical and Advisory Activities............................................................................................... 12 Table 7: Status o f Indicative Triggers for PRSC 2...................................................................................... 14 19 Table 9: Broad-Based Growth-Key Policies ............................................................................................ Table 8: Key DevelopmentOutcomes 2003-2006 ...................................................................................... 22 39 Table 11:Key Intermediate Outputs of the NutritionProgram................................................................... Table 10: Expected Resultso f the EFA Program........................................................................................ 45 46 Table 12: Prior Actions for PRSC2 and Indicative Triggers for PRSC 3 .................................................. 56 .vi.  THE REPUBLIC OF MADAGASCAR SECONDPOVERTY REDUCTION SUPPORTCREDIT CREDIT SUMMARY Borrower: The Republic of Madagascar Amount: SDR 53.9 million (US$SO million equivalent) credit Terms: Standard IDAterms: 40-year maturity Description: A series of single tranche Poverty Reduction Support Credits (PRSCs), provided in the form o f budget support, i s envisaged to support implementation o f Madagascar's Poverty ReductionStrategy Paper (PRSP). PRSC 2 is consolidating and deepening support for policy and institutional reforms in governance and human development commenced under PRSC 1. On governance, PRSC 2 assists the Government incontinued implementation o f its 2004 Priority Action Plan for public expenditure managementreforms, and in developing the follow-on 2005 Priority Action Plan. The main achievements have included improved alignment o f the 2005 budget to the priorities o f the PRSP, introduction o f program budgets, which have both introduced a medium-term perspective and improve the link between sector priorities and budget allocations. There has been continued progress in implementing the new Procurement Code, with most o f the draft implementing rules and regulations ready, and the Procurement Oversight Institution established by decree. A transitional integrated financial management system i s functional in Tamatave and is expected to be functional in August 2005 in the central treasury and four other regional treasuries, and this will greatly facilitate budget execution and monitoring. The Auditor General has made strong efforts to clear the backlog o f the draft budget execution laws (Projet de Loi deRiglements) till 2001. TheProjet de Loi de Reglements for 2002 and 2003 are expected to be finalized by December 2005. The institutional and legal environment for anti-corruption has been significantly strengthened, and the Anti-Corruption Agency is now operational. Customs reform is now being guided by reform strategy and action plan. PRSC 2 continues to support the Government's Education for All Agenda with continued support to policy measures aimed at increasing access to, and quality of, primary education, including the update o f the EFA plan, elimination o f school fees, provision of learningmaterials to all primary students, teacher recruitment, reform o f the curricula and reinforcement o f management capacity at central and decentralized levels. Primary net enrolment rates have increased dramatically, beyond expectations, to well over 90 percent. Now, the challenge lies in improving the quality o f schooling and enhancing learning outcomes. PRSC 2 also supports policy andinstitutional reforminthe nutrition sector, including the establishment of a National Nutrition Council and its supporting secretariat, the Office National de Nutrition. PRSC 2 has also supported health reforms, through the updating o f the national policy on health and the introduction of a Medium Term Expenditure Framework for the sector. Health outcomes for immunization and infant and child mortality have improved significantly between 1997 and 2003, with the child mortality declining from 163.9 in 1997 to 94 in 200314, a 43 percent decline. PRSC 2 has also supported - vii -  improved access to rural water through the development o f a Water for All program, and scaling up implementation with higher budget allocations and increasedsector capacity. The Country Financial Accountability Assessment (CFAA, 2003), the Country Procurement Assessment Report (CPAR, 2003), and the 2005 Public Expenditure Review (PER) provide the analytical underpinnings for the public sector reform agenda, and updated analysis for the Education for All underpins education reforms. A Health Sector Note has provided the foundations for the health policy reforms. A supporting Governance and Institutional Development project is assisting the government to put in place systems to strengthen budget management, and finance technical assistance and capacity building. Benefits: The proposed series o f PRSCs will contribute to Madagascar reaching its development goals. The reforms supported will strengthen the institutional infrastructure needed to improve the public sector's capacity to carry out its role more effectively. In addition, strengthened monitoring and evaluation will lead to an enhancedaccountability and results focus. Improved delivery o f public services is essential if the Government is to reach its goals for poverty reductionand improve the quality o f life inMadagascar. Risks: The Bank sees the following risks in the implementation of the PRSP: (i) various external shocks including cyclones; (ii)political risk and deterioration o f popularity for the President and his reforms, and with forthcoming elections in eighteen months, short-term considerations could dominate, jeopardizing longer-term PRSP goals; (iii)unsatisfactory implementation o f budgetary and governance reforms could hamper the delivery o f results; (iv) erosion o f trade preferences and slow pace o f reforms allowing other developing countries to become more competitive; (v) low confidence o f private sector investors in the Malagasy economy; and (vi) difficulties in PRSP implementation, due to weak institutional capacity, under-financing or lack o fa coherent donor effort. The Government and Bank are undertakingseveral measuresto mitigate risk. A Risk Management and Social ProtectionReview by the Bank is underway to assess riskprevention and mitigationstrategies, andthe Bank has modified procedures for its Community Development Project to rapidly respond to emergencies. On governance reforms, the Bank is continuing to support reforms in the areas o f public financial management and capacity building through ongoing operations, the governance project and WBI capacity buildingsupport. The Bank proposes to mitigate political risk by trying to achieve quick successes, by accelerating disbursements, as was seen inFY03 and FY04. On trade, the government is accelerating reforms to improve competitiveness, and actively participating in trade negotiations. On the last risk, the donor community has intensified efforts at coordinating assistance programs, harmonizing disbursements and procurement procedures and developing common programmatic approaches around the PRSP. The donor community i s increasing its level o f financial aid to Madagascar, and is also providing technical assistance and support for capacity building for sustainability. Estimated Disbursement: SDR 53.9 million (US$SO equivalent) will be disbursedina single tranche following effectiveness. - Vlll - ...  ProjectIDNumber: PO83326 - ix -   THE REPUBLICOFMADAGASCAR SECONDPOVERTY REDUCTION SUPPORT CREDIT PROGRAMDOCUMENT I.INTRODUCTION 1. This ProgramDocumentproposesa second Poverty ReductionSupport Credit (PRSC) for Madagascar for US$SO million. This operation follows the first PRSC approved by the Board on July 20, 2004, and continues the implementation o f the three-year policy and institutional reform agenda as laid out inthe policy matrix. This operation i s an integral part o f the Bank's Country Assistance Strategy (CAS) to support the implementation o f the Government's poverty reduction strategy, as spelled out in the Poverty Reduction Strategy Paper (PRSP). The objective of Madagascar's PRSP i s to promote rapid and sustainable development to reduce poverty by half in ten years. To attain this objective, the PRSP lays out three key priorities: (i) improving governance; (ii) promoting broad based growth; and (iii) providing human and material security. A cross-cutting pillar of monitoring and evaluationunderpins the strategy. 2. The implementationof the programsupported under the first operation (PRSC 1) has been satisfactory. Most of the prior actions for PRSC 2 are broadly on track to be completed by mid-June 2004. The programdocument reviews the progress made inimplementing the poverty reduction strategy, with particular emphasis on the areas o f focus of PRSC support (governance and human development). The reform program supported under PRSC 2 has continued to deepen and consolidate reforms that commenced with PRSC 1infightingcorruption, improving public expenditure management and customs, and inimplementingthe Education for All and nutrition programs. Inaddition, reforms to expand access to safe drinkingwater, improve health outcomes andprovide protection from shockshave also advanced. 3. The PRSC program for the first three PRSCs focuses explicitly on the strategic axes of governance and human development as explained above, and includes specific policy actions inthese areas. The PRSC does not include any specific policy actions on the pillar of broad-based growth. While we do have a policy dialogue inthese areas as part o f the PRSC, the Bank support for growth is through our significant portfolio o f ongoing investmentprojects ininfrastructure, environment, rural development and the new Integrated GrowthPoles project beingpresented to the Board inFY06. Startingwith PRSC 4, the focus on growth will be enhanced, based on the analytical work that i s currently ongoing, on the investment climate, the financial sector, and landrights. 4. Madagascar has continued to make good progress in implementing its poverty reduction strategy over the last year, despitethe difficultyear markedby exogenous shocks. While 2004 has been a difficult year, with many external shocks, and the impact of the 2003 tax-exemptions taking effect, the Government has responded appropriately with policy adjustments aimed at maintaining macroeconomic stability. Two cyclones hit Madagascar in early 2004 causing widespread damage to infrastructure and agricultural land and leaving thousands homeless. The policy decision to give a two- year tax exemption in September 2003 for investment goods and unfortunately, a range of luxury consumer goods, spurred imports. In addition, imports increased due to the accelerated implementation of the investment program, and increase in the international price of oil, and contributed to a sharp depreciation o f the exchange rate in the first half o f 2004, leading to inflationary pressures. Erratic management inthe early part of the year by the Central Bank contributed to exchange rate volatility. The Government responded to these shocks quickly in May 2004 with a mix o f monetary and fiscal policy measures complemented by safety nets, and the exchange rate stabilized. But, the sharp increase in 1  international oil and rice prices continued to put pressureon inflation. The Government has continued to adjust its policy to manage inflation. Inflation for the year 2004 was 27 percent (year on year), but the inflation calculated for prices excluding oil and rice, was a more modest rate ofjust over 6 percent (end November 2004, year on year). Rice prices, which had continued to rise sharply during the first two months of 2005 contributed to 30 percent inflation inFebruary 2005 (year on year). But rice prices have started declining in March 2005 and overall inflation for 2005 is expected to decline to single digit figures. The latest inflationnumbers show a decline inApril 2005 to 21.9 percent (year-on-year). 5. Despite these large shocks, GDP growth in 2004 is projected to remain robust at 5.3 percent due to strong growth of the Export Processing Zones (EPZs), tourism and increased public investment, especially for infrastructure. Madagascar has also maintained its focus on implementing its poverty reduction strategy, as documented in its First Annual PRSP Progress Report, with good results evident particularly in the implementation o f the roads program, Education for All, nutrition, and improving the institutional environment for anti-corruption. Madagascar reached the Heavily Indebted Poor Country (HIPC) Initiative Completion Point in October 2004 bringing significant debt relief and improved prospects to maintain sustainable debt levels inthe medium term. Madagascar has also recently become the first country to receivefinancing fromthe MillenniumChallenge Account. 11. RECENTECONOMICDEVELOPMENTS A. MACROECONOMIC PERFORMANCE 6. The macro-economic environment in 2004 has been difficult, marked by exogenous shocks, sharp depreciation o f the exchange rate, with high inflation but the reform program that Madagascar embarked upon after the economic and political crisis o f 2002 has continued to be implemented steadily, and growth is still projected to be a robust 5.3 percent in 2004. As noted in the PRSC 1 program document, Madagascar was hit by two back-to-back cyclones barely a month apart inearly 2004, which rendered over a third o f a million people homeless, destroyed 300,000 hectares (or 10 percent) of agricultural land and causedwidespread destruction of infrastructure, including around 4,600 damaged or destroyed schools and health centers. There was a huge increase in imports in the first part of 2004, linked to the tax-exemptions granted in Fall 2003, the impact of the cyclone, the scaled-up implementation of the investment program and an increase in the international price of oil. This put pressure on the exchange rate which depreciated strongly. Erratic and unsuccessful attempts by the Central Bank to maintain the value o f the FMG against the Euro, led to volatility in the exchange rate market. The Government responded with a series o f measures and since the middle of 2004, the exchange rate has stabilized. 7. Given the recent volatility of the exchange rate and its adverse impact on the economy, Madagascar has adopted measures to ensure exchange rate stability and competitiveness, and secure an adequate level of international reserves. These measures include the issuance of guidelines by the Central Bank in December 2004, with technical assistance from the IMF, for intervention in the foreign exchange market with the aim o f directing Central Bank interventions to achieving its foreign assets objectives and at dampening sharp swings that would create uncertainty'. The establishment o f a continuous inter-bank foreign exchange market with an electronic trading system is expected to provide accurate information to the operators and reduce the volatility o f the exchange rate. The transition to the Ariary, the newcurrency introduced fully inJanuary 2005, was orderly. ' Indeed, in2004 the Central Bank reduced considerably its international reserves to the equivalent 2.8 months of imports as opposed to 4 months in 2002 and 3.3 months in 2001, in an attempt to stabilize the nominal exchange rate. 2  8. But inflation poses a major risk. The depreciation of the exchange rate put pressure on prices. This combinedwith sharp increases ininternationaloil andrice prices has contributed to inflation of 27 percent year-on-year at the end of December 2004. The Government has made policy adjustments to manage inflation. The Government increased the Central Bank base rate inthree steps from 7 percent to 16percent andraisedreserverequirements from 12percent to 15 percent. Inmid-2004, non-wage current expenditures were reduced by 10 percent, while efforts were made to protect priority expenditures in education and health. The VAT on luxury consumer goods was also re-instated. But rice prices continued to rise through February 2004, on the heels o f highinternationalprices, and low imports inthe first halfo f the year, whichpromptedthe Government facilitation o frice imports with selectedcompanies for sale at a regulatedprice of FMG3500kg. A dual rice market existed, with the regulated rice available inlimitedquantities, and open market rice at around FMG 7-8,OOOkg. The highrice prices have likely caused hardship for local consumers, especially during the lean season of November-February 2005. Producer prices are reported to have been higher for the early harvest than previous years, which should be good for rural farmers. Consumer prices have finally started declining in March 2005, and inflation endApril 2005 stands at 21.9 percent (year-on-year). 9. The Government implemented safety net programs to help the poor deal with the negative economic shocks (cyclones, highrice prices and overall inflation). Donor and government financing for safety nets reached around US$16-18 million for these shocks inadditionto the regular fundingo f around US$2.8 million for safety nets through the Community Development Fundproject. The most important intervention was labor-intensive public works programs. But in response to the large increase in rice prices, towards the end of the year, the labor intensive public works included free health care and child care in highly affected areas o f Antananarivo and Toamasina. Emergency nutrition packages were also made available to childrenunder the age o f five, pregnant and lactatingwomen. B. MEDIUM TERMOUTLOOK 10. Growth has rebounded quickly after the 2002 crisis. After a sharp decline of 13 percent in 2002, growth was 9.8 percent in2003 and i s projected to reach 5.3 percent in2004. The macroeconomic projection o f the IMF under the PRGF forecasts an average growth rate o f 6.5 percent over the medium term (2005-2008). 11. The reforms adopted inthe last two years are expected to promote a private sector, export- led growth in the medium-term. Exports are projected to recover from the adverse impact of the 2002 crisis and average 20.6 percent of GDP over the forecast period. Recovery has already taken place with exports/GDP reaching 22 percent of GDP in 2004 thanks to a surge in tourism receipts and good performance o f textiles. Despite the expiration o f the Multi-Fibre Agreement (MFA) and the instability o f the prices o f primary products such as vanilla, exports are projected to remain stable at around 20 percent of GDP inthe medium-term. Textiles, tourism, miningand shrimps are still expected to account for the bulk o f Malagasy exports. Table 1:Exports 2003-2004 2003 1,595 284 758 468 5,767 2004 I 2,050 265 918 1,442 7,783 In%ofTot.Exp 2003 27.66 4.93 13.14 8.12 533 2004 II 26.34 3.40 11.79 18.53 60 Source: INSTAT-Ministryof Tourism- 2005. 3  12. Overall investment will average 23.7 percent of GDP against an average of 15.7 per cent over the 1997-2001 period and will be driven mainly by an increase in private investment. Private investment is projected to reach 15 percent of GDP for the year 2005, compared to an average of 8.1 per cent o f GDP between 1997 and 2001, and i s projectedto average 13.5 percent o f GDP over the forecast period. Although foreign direct investment (FDI) still remains low after the crisis, amountingto 1percent o f GDP in 2004, it i s expected to increase in the coming years with a projected average of 1.5 o f GDP'. The privatization of the cotton company, direct investment in tourism and mining and the investment related to the implementation of the management contracts in infrastructure (airports, ports, telecommunications, electricity and water) will give impetusto an increaseinFDI. 13. Government expenditures will average 21 percent of GDP over the forecast period, with public investment averaging 10.2 percent of GDP versus 7.4 percent of GDP over the 1997-2001 period. Government expenditures on capital reflect the 2004-2008 investments in roads, in irrigation (FERHA) and the planned investments under the Bank's Integrated Growth Poles Project on energy, water and sanitation investment in Nosy Be as well as additional infrastructure around the EPZ and information communicationand technology (ICT) parks of Antananarivo. 14. A few export-oriented sub-sectors will play a major role in driving growth although all sectors are expectedto improve their performance. The EPZ sector will grow at an average rate of 5 percent. Despite the extension o f the AGOA and Madagascar's price competitiveness, growth in the sector will gradually decrease due to the impact o f the expiration of the MFA and a projected decrease in intemational prices in textiles. Tourism and related activities are expected to grow further given the planned private investment in hotels3 and the increasing number o f tourists (254,000 tourists visited Madagascar in 2004 compared to 179,000 visitors in2001). Current reforms in air transport such as the implementation of the open-sky policy, the opening of additional gateway cities and the planned concessioning of the main airports in 2005 are expected to further increase the number o f tourists in the coming years. A number of large scale investments are expected to take place inminingfrom 2005. The sector i s projectedto grow by 5.6 percent in2005 but will experience a net increase from 2006 onwards at an annual rate of 8 percent with the planned investments inthe sector. Fisheries will grow at a stable rate of 3 percent thanks to a sustained growth in the shrimp sector. Madagascar still benefits from the niche export market for highquality farmed shrimp with the EuropeanUnion due to good farming practices and the stringent quality controls adopted by the large corporate firms. The creation o f certification in 2005 will also helpincreasethe value o fMadagascar's shrimp. 15. Agriculture i s projected to sustain the good performance initiated in 2003 and 2004 in the medium-term, with an annual growth rate of 3.5 percent. Despite the cyclones, agriculture grew by 3.5 percent in2004. A significant increase inproducer prices inrice in20044, the implementation of the FERHAprogram aimed at rehabilitating and establishing a viable maintenance mechanismfor the large scale irrigation in Madagascar from 2005 onwards and the impact o f the road program are expected to provide stronger incentives to producers. In addition, the emphasis on agriculture as spelled out in the vision, MadagascarNaturellement (see Section 110, and additional donor support for the sector provided by the MillenniumChallenge Account are expected to sustain the projected growth performance of the agriculture over the medium-term. FDIis expected to increase from SDR30 millionin2004 to SDR 61.7 millionin2008. The FrenchholdingACCOR has announced a significant investment inMadagascar. The restructuring of the state- owned hotels and the rksewes fonciers touristiques are starting in 2005 and the Integrated Growth Poles Project is expected to start by end-2005. I t was reported that producer prices increased from 700 Fmg on average in the previous years to 2000 Fmg in 2004. 4  16. The Government has started to implement a number of actions to increase tax revenues gradually and support the planned increase in public investment, with the goal of reaching 13 percentof GDP in 2008 from 10.9 percentof GDP in2004. The increase intax collection is necessary to support fiscal consolidation without imposing limitations on the required levels o f expenditures in relation to the growth and poverty reduction objectives. Inthe short-term, the Government will address tax administration weaknesses and broaden the tax base. Customs' reform will be at the core. In September 2004, The Government rescinded the VAT on the luxury consumption goods exempted for two years in September2003. Major reforms under way include actions to: (i) strengthen the Sewice des Grandes Entreprises (SGE) collecting tax fkom large enterprises; (ii) close loopholes that reduce tax collections and to recover arrears and amounts in dispute; (iii) rationalize the tax and tariff structure; (iv) install one-stop shops inthe mainports to speed up customs clearance. The Government has merged the customs and import taxes into a single tax; customs duties credit has been eliminated (crbdit de droit); payments o f the customs duties through the banking system is mandatory since April 2005; and the immunityofcustoms agents from enquiriesandprosecution hasbeenabolished. 17. In the medium term, the balance of payments is projected to improve with the level of international reserves recovering gradually and reaching the equivalent of 3.5 months of GNFS imports at the end of the forecast period compared to 2.7 months in 2004. Along with an improvement of the capital and financial account due to the net increase in FDI, the current account balance deficit, including grants, i s projected to decrease steadily from 10.6 percent of GDP in 2004 to 4.7 percent of GDP in2008, with the trade account deficit registering 5.5 percent o f GDP compared to 9 percent o f GDP in2004. Table 2: SelectedIndicatorsof Real Sector Activity, 1997 2008 - 199 2003 2004 2005 7 2008 2005-2008 GDP growth 4.6 -12.4 9.8 5.3 6.3 7.0 6.3 6.3 6.5 Primary 2.5 -1.3 1.3 3.1 3.6 3.5 3.2 3.2 3.4 ,..of which agriculture 1.8 0.8 2.6 3.5 4.0 3.5 3.5 3.5 3.6 Secondary 5.8 -20.7 14.5 6.5 6.1 6.8 6.9 6.9 6.7 ... ofwhichEPZ 22.9 -40.0 75.8 25.0 5.0 5.0 5.0 5.0 5.0 ... ofwhichmining -5.5 -34.2 10.2 7.7 5.6 8.0 8.0 8.0 7.4 Tertiary 5.3 -15.0 10.6 6.0 7.4 6.8 6.6 6.5 6.8 .,..of which construction 10.1 -36.3 22.9 29.0 18.2 17.0 17.0 17.0 17.3 .,.ofwhichtelecommunications 9.3 -5.7 8.4 5.0 6.6 6.0 6.0 6.0 6.1 5  Table 3: MacroeconomicFramework 2003-2008 (YOof GDP, unlessotherwiseindicated) 2003 2004 2005 2006 2007 2008 GDP Growth 12.8 5.3 6.3 7.0 6.3 6.0 Investment 17.9 23.7 27.5 24.3 24.2 23.7 Non-government 10.1 12.2 15 14 13.5 13.4 Central Government Account Total Revenue and Grants 15.4 20.3 17.5 18.1 18.3 18.4 Total Revenue 10.3 12.0 12.1 12.6 13 13.4 Grants 5.1 7.9 8.2 5.5 5.5 5.2 TaxRevenue 10.0 10.9 11.4 12.1 12.6 13 Total Expenditure 19.5 25.1 21.4 21.3 21.2 20.3 Current Expenditure 11.4 12.6 11.1 10.6 10.8 10.7 of which Interest Payment 2.2 2.9 2.8 1.9 1.7 1.6 Capital Expenditure 7.8 12.5 10.3 10.7 10.3 9.6 Domestic budgetary balance -2.7 -1.3 -2 -0.4 -0.5 -0.6 Primary balance 1.1 2.1 3.6 3.7 3.8 4.1 Overall Balance (on commitment basis) Excluding grants -9.3 -13.1 -9.3 -8.7 -8.1 -6.9 Includinggrants -4.2 -3.4 -4.9 -3.9 -3.2 -2.9 Change inarrears -0.6 -0.8 -0.5 -0.5 -0.3 -0.3 Total Overall Balance (cash basis, excl. grants) -9.9 -13.9 -9.8 -9.2 -8.5 -7.2 Total Overall Balance (cash basis, incl. grants) -4.8 -5.7 -4.3 -3.7 -3.2 -2.2 Trade balance Export, f.0.b 19.7 22.0 21.6 20.4 20.3 20.1 Imports, c.i.f 20.7 32.3 31.3 29.3 28.2 27.1 Current Account (incl. Grants) -4.9 -10.6 -8.8 -6.9 -5.8 -4.7 [GrossOfficial Reserves in months of imports of GNFS 2.7 2.8 2.7 3.0 3.2 3.51 Source: IMFMacroeconomicFrameworkfrom Article IV ConsultationReport (May2005) c. MPCINITIATIVE AND DEBT SUSTAINABILITY 18. Madagascar attained the Heavily Indebted Poor Countries W P C ) completion point in October 2004. Subsequent to the approval by the Executive Boards of IDA and the IMF, the Government met with representatives of the Paris Club group on November 16, 2004 to discuss the reduction of its stock of debt. The Paris Club cancelled its share of the debt in the framework of HIPC. After assuming full delivery o f HIPC debt relief, the NPV of external debt would be reduced to the equivalent to 194 percent of exports. At the request of the Malagasy authorities, most bilateral creditors have committed to grant additional debt relief to Madagascar. If this assistance is forthcoming, the NPV of external debt will represent the equivalent to 137 percent of exports at end-2003, restoring debt sustainability below the thresholds o f 150 percent (see Table 4). Madagascar is exiting from the enhanced HIPC Initiative with significantly improved chances to achieve and maintain sustainable debt levels over the medium term. 19. Debt Data Management. The authorities have undertaken steps to improve debt data management. All the loans for which the Central Bank and the Ministry of Finance were responsible had 6  been entered into the UNCTAD's (DMFAS) new database system (SYGADE) and an integrated data management system will be established between the Central Bank and the Ministry of Finance. In addition, the authorities have contacted relevant internationalagencies to buildcapacity on debt analysis5. Table 4: MadagascarKeyDebt SustainabilityRatios NPV of Debt Debt Service at end-2003 (Avg 2004-2023) I/ 2/ NPV of debt to expt Debt Serviceratio US million ratio (%) USmillion (%I After traditional debt relief 3,053 284 222 8.1 After Enhanced HIPC relief 2,079 194 168 5.8 After EnhancedHIPC reliefand 1,467 137 139 5.0 bilateral debt reliefbeyondHIPC Source: Bank and Fund staff estimates 1/Assumingfull delivery debtreliefundereachscenario. 2/ Includes estimateddebt serviceonnew borrowing. 111.MADAGASCAR'SPOVERTYREDUCTIONSTRATEGY A. POVERTYINMADAGASCAR 20. Between1960 and 2001, per capita incomeinMadagascar declinedfromUS3430to US$230, and as a consequence poverty increased, especially during the 1980s. The long economic decline impacted adversely onpeople's quality o f life as demonstrated by the low levels o f many social indicators and access to basic utilities. With the resumption o f sustained growth duringthe period 1997-2001, there was poverty reduction, but limited to urban areas. The poverty profile is available from the analysis of the 2001 household survey. A household survey has recently been completed (in March 2005) and the analysis i sjust commencing. Recent trends inhouseholdwelfare are available from a recently completed commune survey and the Demographic and Health Survey of 2003/2004 and the updated poverty profile from the 2004 household survey will be presented inthe next PRSC document. 21. Poverty in Madagascar is mainly prevalent in rural areas with 77 percent of the rural population being poor in 2001 compared to 44 percent in urban areas. In contrast to urban poverty, which had a strong correlation with economic performance, particularly during the last five years, the trends show that rural poverty has steadily increased, irrespective of the evolution o f the economic situation. 22. About 80 percent of the rural populationhas no reliabletransport services due to poor road conditions, and of these one third has no road access at all. Studies suggest that lack o f access to ~~ Options will be trainingprovidedby (i) UNCTAD to the staff of the Central Bank andthe Ministryof Financein DSM+; or alternatively by (ii) (Debt ReliefInternational) inDebt pro, the software currently usedby the IMF DRI andthe Bank's HIPCUnit 7  roads and markets, low agricultural productivity and rural poverty are closely associated. Inparticipatory investigations, as well as quantitative analysis of household surveys, rural families stress poor roads and the need to improve agricultural productivity among their major concerns. This is mirrored, for example, inthe relationship between yields and remoteness.Ruralhouseholds better connected to markets have a significantly higher productivity than those living inmore isolated areas and the same relationship holds for the use of modem inputs such as fertilizer. Isolation also implies lacking access to financial institutions and credit, forcing poor farmers to sell at times of low, post-harvest prices. 23. Education is negatively correlated with poverty. Individuals in households with few or no members who have completed primary education are more likely to be poor. The difference between urban and rural areas is significant interms of school enrolment, completion and literacy rates. But, the Government's priority to primary education and policy initiatives under the Education for All program, including the abolition o f school fees, recruitment of teachers for rural schools, rehabilitation and reconstruction of school establishments, payment o f FRAM teachers' salaries in the and distribution of materials and supplies have ledto a very large increaseinenrolment, andthis has beenpro-poor. 24. While there have been improvements in health status indicators, health services for the urban poor and rural population remain inadequate. While overall trends have improved for immunization, pre-natal consultation, and skilled attendance at delivery, low income populations remain inequitably served. For example, based on the recent DHS, only 32 percent of the lowest quintile of the population, based on an asset index, are completely immunized, compared with 80 percent among the better-off population. Furthermore, while the child mortality rate significantly decreased from 163.9 in 1997 to 94 in 2003 (a 43 percent drop), the poor-rich differential in child mortality remains highas 3.5. Low incomes are compounded by low effective health coverage (60 percent o f the population live within 5 km of a health facility) and an insufficient number of physicians and other health care providers in existing health facilities. While free access to drugs in2002 and 2003 boosted health facility utilization, the supply system failed to sustain drugavailability due to the absence of the demand-side "pull" from the patients and the peripheralhealth centers. B. THEGOVERNMENT'S STRATEGY FORREDUCINGPOVERTYAND ITSIMPLEMENTATION 25. Implementation of the PRSP is proceedingwell (see Table 5). The Government prepared its First Annual Progress Report outlining progress in implementing its PRSP in July 2004. The Government is preparing a Progress Report for the calendar year 2004, and is planning to prepare its Annual Report on a calendar year basis to correspond to the budget cycle with a mid-year report on implementation in July to inform the budget preparation for the following year. InNovember 2004, the Government articulated a vision up to 2015: Madagascar Naturellement (see Box 1). While recognizing the enormous potentialofMadagascar, this visionputsa renewedfocus onruraldevelopment, throughthe roads program, education and health and establishing better linkages between the urban and rural areas, and increasing the value added in agriculture. The vision sees a transformation o f Madagascar from a subsistence economy to a market economy, increased exports, and enhanced linkages between rural economy and the industrial economy through agro-industries, pharmaceuticals, textiles and the transformation of mineral products, and through economic services such as tourism and agricultural credit. Inline with its vision, the Government has presented a results-framework (LaPolitique Gdnkrale de I'Etat 2005) which aims for growth of at least 7 percent, inflation o f 6 percent or less and private investment of at least 14 percent. The key priorities identified include the reinforcement of the effectiveness of Government, good governance, infrastructure, education for all, rural development and environment, drinking water for all, health and AIDS prevention, private sector development, and tourism. These priorities are formulated as national programs, and there is a strong focus on integrating donor interventions into the national programs. The Government has prepared an update of the PRSP 8  incorporating this vision and this was discussed at a two-day workshop in early June 2005 involving a wide range of stakeholders. StrategicAxis I:Good Governance 26. Inthe area of governance, the main elements of the PRSP include the fight against corruption, improved public expenditure management, respecting democracy, establishing an equitable justice system, and implementingdecentralization. 27. The Government has continued to focus on fighting corruption and implementing public finance reforms. The Anti-Corruption Agency is now fully functional. The Government remains committed to implementingpublic finance reforms and improving the efficiency and equity of public funds (see Section IV for a detailed description of the reformprogram). The implementationofthe 2004 Priority Action Plan has been satisfactory, and based on this plan, the govemment has strengthened its budget preparationprocess (e.g. by aligning the budget closer to PRSP priorities) as well as introducing a medium term perspective into the budget (through the introduction o f program budgeting for all ministries). Other reforms include the implementation o f the key recommendations o f the independent audit o f the Treasury, and strengthened internal and external controls. The Government has established regions and competitively selected chefi de rkgions to co-ordinate development activities across communes. 28. There has been some progressinthe functioning of customs andjustice. The improvements in customs have been geared to speeding up clearance processes, combating corruption and improved revenue collection. The Govemment has prepared a strategy and action plan to implement customs reforms. Justice reformi s gearedtowards deterring corruption inthe sector, expediting the processing o f cases, and improving the legal environment for the economy. StrategicAxis 2: Broad-Based Growth 29. The Government's strategy for broad-based growth is geared toward maintaining macroeconomic stability and achievinghigh annualgrowth. The main elements of the Government's strategy for broad-based growth focus on facilitating private sector development, accelerating the roads program, rural development, fostering public-private partnerships and greater opening up o f the economy. 30. The ambitious transport sector program has been successful in rehabilitating the road network. However structural reforms have been slower. In 2004, the Government rehabilitated around 2,700 km o f road. The creation of the Agency for Terrestrial Support (ATT) and the Road Authority have been delayed and are expectedby end-2005 andmid-June 2006 respectively. 31. Ruraldevelopment and environment are criticalelements of the Government's strategy to fight poverty, since over four infive poor people live inruralareas. The Government has implementedits priorities, including institutional strengthening, the implementation of its Action Plan for Rural Development, and taken steps towards the establishment o f Fond d'Entretien des Rbeaux Hydro Agricoles (FERHA) to provide financing for the maintenance o f irrigation infkastructure. The Government has continued to implement the National Environment Action Plan (NEAP), focusing on institutionalreforms, improving governance, and improvingthe financing for the environment. 9  Box 1: Vision 2015 Madagascar Naturellement - Madagascar Naturellement, the vision for the country in 2015, was defined by the President of Madagascar during a Cabinet meeting on November 24,2004 :Madagascar will be a country known worldwide for the beauty o f its rich and well-protected biodiversity. The diversified and rich natural resource base (agriculture, favorable climate combined with the large surface o f available land, livestock and fisheries, mining) will contribute to the creation o f products with high value added such as essential oil, agri-business, pharmaceutical, mining etc. Madagascar will be a reputable destination for ecotourism. The rural areas will grow steadily, thanks to more diversified and transformed agricultural products and the development o f industrial infrastructure in the regions. Exports will be on a upward trend to support the current account balance and help stabilize the exchange rate. Broader impact o f growth and a progressive redistribution o f its benefits will help reduce poverty substantially. Education and health will be accessible to the population and infrastructure will be well developed allowing for free movement o f goods and people. The gap betweenthe rural andurbanareas willbe smaller and movements o fpeople from rural areas to urban areas will be limited. Investments will be secured and Madagascar will develop harmoniously. What is rewired to achieve the 2015 obiectives? The strengthening of the rural areas as a prerequisite to shared and accelerated growth. With the majority o f the population eaming their living from agriculture emphasis should be put on the strengthening o f the rural areas. This approach also entails indirect actions through the strengthening o f the linkages of the economy to the rural areas - development o f industrial activities related to agriculture (agri-business, pharmaceutical, textile, tourism, mining) to increasehigher value-added agricultural exports. Improved govemance and capacity; provision o f assets through infrastructure, education and health; enhanced openness to the world economy; promotion o f a market economy thiough the abolition o f monopolies, rent seeking andpredatory behavior. Better infrastructure through measures ranging from: (i) rehabilitation o f ports and airports to support the exports; (ii) the creation o f adequate storage facilities in regions, and: (iii) creation o f agro-cities aimed at the supporting the development o f specific product value chains. Education: introduction o f training on agriculture insecondary education; strengthening o fresearch andtraining on agri-business, tourism and textiles through partnership with international experts. Incentives through standards, regulation and tax system: acceleration o f land titling; improved rural credit; flexible landtaxation system depending on the use o f land; setting up o f norms and certification. L a Politique Gknkrale de 1'Etat in 2005 La Politique Gknkrale de I'Etat are the critical actions and results in2005 that are critical steps towards attaining the objectives o f Madagascar Naturellement in 2015. There are 3-5 results by Ministry which form part o f the result: agreement between the President and his Cabinet. Update of the PRSP: (i) Madagascar Naturellement vision into the PRSP ;(ii) coordination o f tht include improve donors' program to reflect the Government's vision; (iii) and elaborate on 2005 and 2006 action plan basec revise on the followings priority areas. Priority areas: (i)strengthen the capacity o f the Government and high officials; (ii) govemance; (iii good infrastructure ;(iv) education for all; (iv) rural development, agri-business and environment (v) water for all; (vi) health; HIV-AIDS; (vii) private sector development and (viii) tourism. 10  32. The Government has continued with public enterprise reform. TELMA, the telecommunications company was privatized in June 2004, and the cotton parastatal (HASYMA) was privatized in October 2004. A management contract for the sugar company (SIRAMA) commenced in June 2004 for the plant in Ambilobe, July 2004 for Namakia and October 2004 for Nosy Be and Brickaville. The energy parastatal (JIRAMA) was put under management contract inFebruary 2005. Air Madagascar i s continuing operations under a management contract, and the Government has announced a free sky policy inFebruary 2005. The NorthernRailway has been concessioned, and plans to concession the Southern Railway are underway. 33. The Government has continued to consolidate and simplify the tariff structure. The import tax and customs duty were consolidated into a single customs duty in the 2005 Loi des Finances. The two year exemption granted for luxury consumer goods and investment goods in September 2003 was partly rescinded by reinstating the VAT on luxury consumer goods in September 2004. The VAT will decrease from 20 percent to 18 percent in September 2005 when the import tariff and VAT are re- imposedon tax exempted goods. Tariffs on rice were reduced from 20 percent to 10percent. This was in responseto the new economic environment, where the depreciation o f the exchangerate and higher world prices of rice, mean that a lower tariff still ensures that at the prevailing producer price most farmers would be able to recuperate production costs, while ensuring a reasonable retail price for urban consumers. StrategicAxis 3: Human andMaterialSecurity 34. Under the strategic axis of human and material security, the main objective i s to enhance human capacity and strengthen each individual's assets, through education, health and nutrition. The PRSP views the commune as the main local service provider and the anchor for all interventions in this domain. 35. Ensuring a basic education for all Malagasies -Education for All (EFA) remains the top priority. Enrolment rates have continued to increase, with a net enrollment ratio of over 90 percent in the school year 200415 (see Section IV for details). The main policy initiatives include keeping the Madagascar EFA plan on track, gradually introducing a nine-year quality basic education; ensuring equality of access to education; and improving the cost-efficiency o f education, through reductions in grade repetition and improved primary completion rates. The enrolment increase in response to these policy initiatives has exceeded expectations and the Government has updated its EFA plan. Madagascar has also submitted its application for the EFA Fast Track Initiative, and it i s expected that Madagascar will receive incremental funding to support its EFA plan. But, while the enrollment increase has been remarkable, the challenge now lies inretaining the children inschool and ensuring they learn. Improving the quality of schoolingremains a bigchallenge. 36. The objective o f the Five Year Health Plan (2002-2006) o f the Ministry o f Health (MoH), as reflected in the PRSP, i s to improve the access o f the Malagasy people, especially the poor, to health services and protect them from diseases by immunizing all children; improving the access o f women to prenatal care and to assisted childbirth; combating public health problems; improved access to medical care and medicines, and improving the performance and financial viability of the health system. The Government's strategy for improved access to health care by the poor includes (i) institutingappropriate financing mechanisms based on solidarity for the indigents at health center level; (ii) establishing equity funds at hospital level to protect the poor from overwhelming expenditures; and (iii) piloting mutual insurance schemes inareas where seasonalvariations inincome hamper access to health care temporarily. 37. Specifically, in a context of scarce financial and human resources, the M o H will assure health care availability by: (i) making existing health facilities (health centers and first referral hospitals) fully 11  functional; (ii)boosting referrals from peripheral health centers to hospitals through improved communication and transport; (iii) setting up mobile preventive and curative clinics to reach populations lacking access to primary health care facilities; (iv) extending the range o f drugs and consumables available inpublic health facilities; and (v) guaranteeing free or subsidized treatment for life threatening diseasesor dissaseswith significant externalities. 38. M o H will also seek to ensure minimum levels of health care quality by: (i) strengthening the drug and consumables' supply system; (ii) providing regular on-the-job training opportunities for health staff; (iii)ensuring propermaintenance of buildings,equipments and vehicles; and (iv) setting up a proper quality assurance mechanism. It will seek to contain the growth of public health expenditure by: (i) promoting efficient healthcare delivery (good quality services at the least possible cost), notably through rationalizing human resources management (qualifications, incentives and geographical redeployment between urban and rural health facilities); (ii) targeting the poor for free or subsidized interventions; and (iii) informeddecisionondrugpolicyissuesandtechnologicalchoices. making Presidenthasestablishedresultsframework(as outlinedinPolitical General d'Etat)with Developed2005 Priority Action Planfor publicmanagementreforms. Note:This list includessomeprior actions for PRSC2 39. Strengthening the fight against malnutritionand continuation of the national AIDS awareness and prevention campaign are also important priorities in the PRSP. Communicable diseases targeted by the GOM include malaria, tuberculosis, leprosy, schistosomiasis, plague, STI and HIV/AIDS. Priority activities include supporting surveillance activities, prevention and improving patient care individually or through mass treatment. Activities to reduce non-communicable diseases include improved health infrastructure, referral and care programs, and prevention and community mobilization. The targeted illnesses include cardiovascular disease, cancers, mental disorders, and diabetes. The Government will 12  also implement activities for prevention of disabilities and improved access to public infrastructures for individuals with disabilities. 40. Inrural water supply, the Government's objective is to expand coverage to 80 percent of the rural population and 100percent of urban areas by 2015. Drinkingwater for all i s one o f the priorities of the Government, as outlined in the Politique Gdndrale de 1'Etat 2005. The Government has prepared a strategy for water and sanitation for all, and has significantly increased its allocations in the budget for 2005 to scale up the implementationof its drinkingwater program. c.WORLDBANKCOUNTRYASSISTANCESTRATEGY AND SUPPORT TO THE IMPLEMENTATIONOFTHE PRSP 41. The Bank's support to Madagascar, as outlined in the Country Assistance Strategy of November 2003, is geared towards the implementation of the PRSP, using ongoing and new investment lending and budget support, analytical work, and the services of the broader Bank Group (IFC, MIGA, and WBI). The FY05 program for Madagascar reflected the transition to programmatic lending with the first single-tranche annual Poverty Reduction Support Credit approved in July 2004. A supplemental credit for US$50million for the Community DevelopmentProject was also approved to aid Madagascar rebuild its infrastructure after the devastating back-to-back cyclones o f early 2004. A supplemental credit for health will also be approved in late FY05. InFY06, an Integrated Growth Poles Project and a secondHIV/AIDS project i s plannedalong with the PRSC 2. 42. As notedinPRSC 1Program Document,the CAS also outlines a program of analyticaland advisory activities (AAA) (see Table 6) to underpin its policy dialogue and programmatic lending. Two key analytical reports have been completed this year. The integrative Development Policy Review on Sustaining Growthfor Enhanced Poverty Reduction outlines the growth strategy and priorities for reform for Madagascar to achieve shared growth. The Public Expenditure Review, which provides recommendations on the public expenditure reform agenda and specific recommendations for the transport, education and environment sectors, also helped underpin the key reforms for PRSC 2. The findings of the Country Financial Accountability Assessment (CFAA, FY03) and the Country Procurement Assessment Review (CPAR, FY03) as noted before, have also been critical in defining the reform program of the Government. The Government remains committed to monitoring progress in implementingits public expenditure reformprogram under the HIPC Public Expenditure Assessment and Action Plan. Madagascar i s also a pilot country for the Public Expenditure and Financial Accountability (PEFA), which is ajoint initiative ofthe World Bank, EU, IMF,DFID, France, Norway and Switzerland, to develop a strengthened approach to public fmancial management. The PEFA approach includes a country-led strategy on public financial management reforms, a coordinated program o f assistance by donors and aperformance measurement framework. The EducationFor All program strategy and costing was updated and revisedto take into account the higher than expected enrolment increase and a plan has been submitted by Madagascar to the Fast Track Initiative inMay 2005. A Health Sector Note, currently being finalized informs the health sector dialogue and uses new analysis from two recently completed surveys (the Demographic and Health Survey, and the Study o f the efficiency and equity of health facilities). The ongoing Investment Climate Assessment, the Financial Sector Assessment Program and the landtenure review will underpinthe reforms under the growth pillar insubsequentPRSCs. 13  Table 6: Analyticaland AdvisoryActivities PRSC2 PRSC3/PRSC4 MemorandumJPoverty Assessment (FY07) Strategic Axis 1: Governance Public exDenditure I Countrv Procurement Assessment Review Public Expenditure Review (FY07) management (CPAR; FY03) Country Financial Accountability Assessment (CFAA, FY03) Public Expenditure Review ( PER FY05) HIPC AAP Tracking (FY03, FY04) Public Expenditure andFinancial Accountability (PEFA, FY05) Decentralization Decentralization Study (FY03) Sources o fGrowth Development Policy Review (FY05) Export Processing Zone Report (FY03) Tourism Sector Study (FY03) Private sector Investment Climate Assessment (FY06) development I Financial Sector Assessment Program (FY06) Rural development and Rural and Environment Sector Review (FY03) LandTenure Review (FY06) environment and PER FY05 includes a focus on environment. Transport PER FY05 includes focus on transport sector. Opening up to world IntegratedFramework (FY03) FY03) PER FYOS includes education chapter and PSIA background work includes focus on . expenditure management and institutional bottlenecks Health Health Sector Note (FY05) NationalHealthAccounts (FY06) Poverty and Social Impact Analysis of reinstatement o f cost recovery inhealth sector (FY06) Nutrition Impact Evaluationo fnutrition program RuralWater Water Sector Review (FYOl) Public Expenditure Review on rural water (FY05) Social Protection RiskManagement and SocialProtection Review (FY06) 14  D. DONOR COLLABORATIONINSUPPORTINGTHE IMPLEMENTATIONOFTHE PRSP Cooperationwiththe MultilateralandBilateralDonors 43. The donors are collaborating to support Madagascar inimplementing its development vision, by providing financial `and technical support in a coordinated way. The European Union (EU), France (Agence Frangaise de DCveloppement, and the French Co-operation) and the World Bank have initiated joint-donor missions in October 2004 to review the implementation of the PRSP and supervise their respective budget support operations. This i s part of the overall effort to harmonize our assistance and reduce the transactions cost for the Government. A follow-up joint donor mission i s plannedinFall 2005 to review the h u a l PRSP Progress Report for calendar year 2004, and the draft budget for 2006. The AfDB, EU, France and the World Bank have signed a Partnership Agreement with the Government to provide a framework and to lay out procedures and modalities for a multi-donor approach to budgetary support. The AfDB i s also in the process o f preparing its Country Assistance Strategy and we are discussing the possibility of coordinating our budget support closely, starting with PRSC 3. The AfDB will soon also have a localoffice which will greatly facilitate greater co-ordinationwith them. 44. Inthejoint supervisionmissions, commonareasofsupport withthe EUincludethepublic sector reform agenda, education and health with the EU's program o f budget support (Programme d'Appui Budge`taire a la Rkduction de la Pauvretk, PARP). The public expenditure reform agenda support i s co: ordinated to support the Government's Priority Action Plan. The Government has convened meetings periodically with the key donors to inform them o f progress on implementation. Key reforms in public financial management and against corruption are bringing financing from IDA together with technical assistance from the EU, GTZ and the French Cooperation. Donor coordination around implementing customs reforms has also improved. Ineducation, the donors coordinate support around the Educationfor All implementation. Inhealth, the key donors are also coordinating support usinga sector-wide approach. 45. Inaddition, transport, water, agriculturalandenvironmentalsectorreforms andinvestment needs continue to be approachedtogether with other partners through sector-wide approaches. As noted above, the Bank i s continuing to conduct joint supervision and evaluation missions o f Madagascar's (i) PRSP with all bilateral and multilateral donors present (and issuance of joint aide memoires); and (ii) HIPC progress together with all multilateral donors. Lastly, the Bank continues to work closely with other multilateral and bilateral donors and the UN family, in particular, on emergency efforts such as post- cyclone reconstruction projects, which are needed when natural disasters threaten the country's longer term poverty reduction. Coordinationwiththe IMF 46. The Bankclosely collaborates and coordinates activities with the IMFstaff. The staffs ofthe two institutions conduct joint assessments o f the PRSP implementation regularly. IMF and World Bank staff also work closely together on (i) reforms set out at the decision point of the Highly Indebted Poor Countries Initiatives (HIPC); (ii)analysis and reforms in public financial management; (iii)other governance reforms, including customs; (iv) support of the privatization program; and (v) participation in the integrated framework trade project. The Bank also contributes to the IMF's regular monitoring o f the Poverty Reduction and Growth Facility(PRGF). 47. The IMF completed its Poverty Reduction and Growth Facility (PRGF) arrangement with Madagascar inFebruary 2005, presented its Article IV consultation along with their Ex-Post Assessment to their Board inearly June 2005, and will be beginning discussions on a newprogram shortly. The staffs 15  o f IDA and IMF will continue to coordinate the content of the PRSC and PRGF to ensure that the instrumentscomplement one another. Ingeneral, the structural and social benchmarks will be covered by the PRSC, while the PRGF will cover macroeconomic issues. E. DONOR SUPPORT FOR CAPACITY BUILDING 48. Capacity constraints can hamper Madagascar's ability to achieve its development objectives. The donor community is supportingMadagascar in strengthening capacity, through a range of technical assistance grants and training initiatives designed to enhance the implementationof the PRSP. The key donors involved insupporting the strategic pillar of governance, include the World Bank, European Union, UNDP, French Co-operation, the African Development Bank, GTZ, and USAID. A number of donors are very active insupporting education (UNICEF, French Co-operation, AfDB, AFD, Japan, USAID and World Bank). Donor coordination, to support capacity buildingefforts, are also being enhanced through the round table for public expenditure management reforms, and through the proposed Budget Support Group. IV. POVERTYREDUCTIONSUPPORT CREDITS PROGRAM 49. The first Poverty ReductionSupport Credit approvedin July 2004 was the first of a series of annual single tranche development policy lendingoperations provided as budget support for the implementationof key elements of the PRSP. The design o f the PRSC program comprising the first three PRSCs (see Figure 1) to support the PRSP was basedon discussions with the Government, the pace o f the reform agenda, the existing knowledge base and analysis of development issues, other donor programs, and IDA resources. The objective o f the first three PRSCs (2004-2006) is to consolidate reforms underway in the public sector, fight corruption, improve transparency and accountability, and improve service delivery in education, health, water supply and nutrition. As outlined in the PRSC 1 ProgramDocument, a set of clear, well-defined milestones, policy actions or indicators have been defined to transitionto PRSC 2. 50. The implementationof the program supportedunder the first operation(PRSC 1)hasbeen satisfactory. While there have been delays, the indicative triggers for PRSC 2 are broadly on track to being completed (see Box 2 for lessons learned from PRSC 1). Inthe area o f public finance reform, the implementation of the 2004 Priority Action Plan was satisfactory, though there have been delays in operationalizingthe new Procurement code and ininstallingthe integrated financial management system. The Education for All program is being implemented steadily. The enrolment increase has exceeded expectations, but the implementation of some key measures, such as the delays in schools getting the school grants and partial implementation o f the planned school constructionprogram has likely impacted on the quality o f service delivery. The institutional structure for delivering nutrition services has been strengthened. The Government i s working on updating its national policy on health, and has prepared a medium term expenditure framework (MTEF) for the health sector. As part o f this MTEF, they are also costing attainingthe healthMDGs, usinga marginalbottlenecks approach. 5 1. ExpectedResults: The policy matrix inthe PRSC 1program document outlines the sequencing o f policy actions and institutional reform measures until 2006. The Government team has updated the policy matrix, both to streamline it, and to extend it out one year. Table 8 reviews progress in Madagascar towards achieving the key development objectives, as outlined in Table 6 and Annex IX of the PRSC 1program document. 16  Figure1: The ThreeYear PRSCProgram 1 BROADBASED2 Objectives GR0WII-I - I I Note: The striped blocks inthe PRSC I-PRSC 3 rows indicate that that it is an area of focus under the respective PRSC. 52. Based on the data available to date, the Government's strategy is delivering results. The Government i s using its budget in line with its strategic priorities - roads and education command large shares. These resources are being translated into results on the ground. More children are inschool today than ever before (over 90 percent), and a larger percentage are likely to complete primary school. With the implementation of the roads program in rural areas, the percentage o f rural population with reliable access to transport has increased from 45 percent in2003 to 52 percent in2004, and the condition of the main road network has improved too. Rice productivity has increased from 1.8 tonshectare in 2003 to 2.4 tonsihectare in 2004, achieving the target set for 2006. Access to safe drinking water in rural areas has also improved. Immunization rates have remained stable and more women give birth in health centers than before. Infant and child mortality rates have declined significantly between 1997 and 2003/04, with the child mortality rate declining from 163.9 to 94 per 1000 over this period. 17  Box 2: LessonsLearned-Implementationof PRSC 1 The overall implementation o f the reformprogramsupported under PRSC 1has been satisfactory, but several lessons have been learned inthe transition to budgetary support. What worked Enhanced inter-ministerial dialogue with the supervision missions fostering dialogue between the Ministryo f Finance and other sector ministries, but there i s still scope for improvement. Improved donor eo-ordination among budget support donors, with the launching o f joint donor missions (fiist in October 2004, and a second planned for Fall 2005). A Partnership Agreement betweenthe Government and budget support donors (EU, WB, France with the U S and IMF as participants but not signatories) which outlines the principles o f collaboration with the objective o f harmonizing our assistance and reducing transactions costs to the Government has been signed. Sustained co-ordination and harmonization especially in the areas o f public financial management, education, nutrition and health. Much o f this co-ordination was ongoing before the PRSC, but this was sustained and strengthened with the transition to budget support. Increased budgetary allocations to priority sectors (especially, education) with the transition to budget support in 2004. In 2005, the high allocations to education were sustained and health, nutrition and rural water supply received significant increases inbudgetary allocations, inline withthe Government's priorities. What worked lesswell Unpredictableflow of funds: 2004 was a volatile and difficult economic environment. With the sharp depreciation o f the FMG and the cyclone needs, the expenditure needs increased, specially the cost o f imports. In addition, revenue collections were below expectations and there was a delay in donor aid flows. The main adjustment came through reduced expenditures, with a freeze in commitments in March 2004, reduction in expenditures mid- year, and a shortened expenditure cycle. While the Government attempted to protect expenditures in priority sectors, the unpredictability and stop-and-go cycles likely affected service delivery in all sectors, and delays (e.g. in school construction, payment o f the caisse &cole,delivery ofnutrition services). Reforms took longer than anticipated: Ingeneral, the reforms took longer to accomplish than originally envisaged, highlighting the over-optimism o f the results, capacity constraints, a greater needto prioritize, andneed for timely delivery o f donor technical assistance. Capacity for procurement and financial management in sector ministries needs to be improved. Despite technical assistance to prepare the sectors to transition to budget support, capacity constraints remain and " f i e fighting" was needed to ensure that key programs remainedontrack. Moving forward Better align donor disbursements with the budget cycle of the Government: The donors, including the EU and the WB are seeking ways to better align their budget support disbursementswith the Government's budget cycle, to ensure that the Government has the resourcesupfront to implement their development priorities. Continue support for public Jinancial management reforms, with particular focus on improvingbudgetexecution and implementation, andbetter revenue forecasting and especially greater attention to capacity buildinginsector ministries for budget formulation, procurement, and financial management. Greater realism in setting targets: Being more realistic about what is achievable, and working with the Government to prioritize its existing capacity to scale up implementation Greater needfor monitoring and co-ordination among the Government to monitor the reform program. 18  IndicativePRSC2 trigger FinalPRSC2 Prior Comments inPRSCl Board Actions Document Satisfactory implementationo f Satisfactory implementation rrigger fulfilled. Financial Priority Action Planfor 2004, o f PriorityAction Planfor Management inparticular: 2004 Budget Budget for 2005 allocates Budget for 2005 allocates rrigger fulfilled. Inthe Loi des Formulation greater share o f resources to greater share o fresources to Finances o fOctober 2004, the PRSP priority sectors PRSPpriority sectors allocations to the Ministryo f relative to 2004, with relative to 2004, with Educationincreased from 18.3 adequate funding allocated to adequatefinding allocated percent o fthe budget in2004 to key priorities (such as to key priorities (such as 20.9 percent in2005; for Ministry education, health, nutrition). education, health, nutrition) o f Healthfrom 6.3 to 7.8 percent andfor the transport sector from 13.3 to 22.1 percent over this period Budget Progressive implementation Execution o fthe recommendations o f the audit o f the treasury in particular (i) accountsproduced monthly Monthly accounts produced Trigger fulfilled inone Treasury untilthe 15' ofthe following untilthe 15' ofthe (Toamasina) where the transitional month inthe treasuries that following month in financial management systemis installed the transitional Toamasina, where the operational. The financial financial management transitional financial management system facilitates the system management system is production o ftimely monthly operational. accounts. The equipment is in place, but due to problems with some o f the equipment ordered there are delays inthe effective functioning o fthe system in Antananarivo and four additional provincial treasuries. The system i s expected to be h c t i o n a lby August 2005. This is proposed as a trigger for PRSC 3 for six treasuries. (ii) accountsfor2003 final Final accounts for 2003 Trigger fulfilled inJune 2005. prepared by the Treasury. prepared by the Treasury. Transitional financial See action onproduction o f See above. management system timely monthly accounts installed infour sites. above. Procurement Implementing rules and See explanation in Trigger mostly implemented. regulations for the new comments column. The draft implementing rules and Procurement code issue- -y regulations will be producedby Government June 2005, and will be validated following stakeholder consultations. This reformwill be 19  IndicativePRSC 2 trigger FinalPRSC2 Prior Comments inPRSClBoard Actions Document ollowedunder PRSC 3 with a rigger that the new procurement ystem is applied inGovernment rfter the implementing regulations rre issued and the necessary raining of staff is completed. Establishthe new 1 I Establishthe new rrigger fulfilled. Decree procurement oversight procurement oversight establishing the ARMP issued in institution ("Autoritt de institution ("AutoritC de May 2005. RCgulation des Marches RCgulation des MarchCs Accountability Projet de loi de rbglement for Projet de loi de Rbglement Trigger partially implemented; 2002 and 2003 examined by for 2002 and 2003 sent to expected by December 2005. ~ the Auditor General the Auditor General. Adjusted prior action met. The Auditor General examinedthe draft budget executionlaws (Projet I de L o ide Rbglement) sequentially, andhas completed the backlog. The 1998Projet de L o ide Rbglement has been examinedby Parliament. The 1999law will be submitted to Parliament inJune 2005. The 2000 law has been sent to MinistryofEconomy, Finance and Budget (MEFB) for onward submission to Parliament. The 2001law is expected to be sent to MEFBby end-June 2005. For 2002 and 2003, it is anticipated this will be done by December 2005. The finalization o f accounts from 2000 was delayed due to difficulties inestablishing the final account balances as requiredby the law. customs Adopt a time-bound actionplan Adopt a time-bound action Trigger fulfilled. The draft action ~ for 2005 for customs reform plan for 2005 for customs planhas beenunder and start implementation. reformand start implementation since 2004 and an implementation. updated strategy and action plan was formally adopted inJune 2005. terial Security Education Implementation o fthe National 1 Implementation o fthe Trigger fulfilled. Large increases Education for All (EFA) on NationalEducation for All inenrolment. Some delays are track. (EFA) ontrack. observed inimplementing school construction andproviding school grants. A joint-donor assessment o fthe revisedEFApreparedby Government inApril 2005, using guidelines issuedby the EFA FTI secretariat, has beencompleted. 20  IndicativePRSC2 trigger FinalPRSC2 Prior Comments inPRSClBoard Actions Document The overall assessment is that the 3FA plan is sound, that the 3ovemment is adjusting its strategy to focus on quality and mproving completion rates. MENRS will prepare and Completed Human rrigger fulfilled. The HR submita sustainable Human Resources(HR) 7ationalization study was prepared Resources(HR) rationalization rationalization study. u1 March 2005 plan. Nutrition Creation o fNational Council Creationo f National rrigger fulfilled with the creation for Nutrition and establishment Councilfor Nutrition and 3 f the National Council for o f the secretariat (Office establishment o f the Nutritionand ONN inNovember National de Nutrition) and secretariat (Office National 2004, and the appointment o fthe appointment o f its coordinator. de Nutrition) and :oordinator o fthe ONN inMay appointment o f its 2005. coordinator. Health Update health sector strategy. Update national policy for Trigger fulfilled inJune 2005. health. The policy is being updated and a workshop withkey stakeholders, including EU, WHO, UNICEF, USAID, France Japanandthe WB will be held inlate June 2005 to validate the document. Introduction o f Medium Term Introduction o f Medium Trigger fulfilled with the adoption Expenditure Framework for the TermExpenditure o fthe L o i des Finances 2005. In health sector commencing in Framework for the health addition, a draft MTEF for FY06- C Y 2005. sector commencing inC Y 08 has beenproduced for 2005. informingthe Loi des Finances 2006. Water Supply The Directorate o fWater and The Directorate o fWater Trigger mostly implemented; Sanitation inAntananarivo and and Sanitation in adjustedprior action met. The the six Faritany RWSS units Antananarivo andthe six Water and Sanitation Strategy for are adequately staffed and decentralized departments All was presented to the donors in equippedto implement inthe provinces have February 2005 and a study on the successfully the proposed started to adequately staff institutional strengthening to RWSS nationalprogram and equip themselves to deliver on the strategy was "Water and Sanitation for All" implement successfully the undertaken. Basedon the endorsedby GOM and donors "Water for All" program. recommendations o f this study, a inOctober 2004 monitoring unit for the program budgets has beenestablished, the equipment is inplace for the provincial Directorates of Water and Sanitation; and recruitment to reinforce capacity at the decentralized levels is inprocess. 21  Table 8: Key DevelopmentOutcomes2003-2006 Cey M o n i t o r i n n Status in 2003 Status in 2004 Expectedoutcomein 2006 1 Povertyreduction - TBC Zood Governance 1 Budgetmanagement benchmarks 3 out of 15 benchmarks 4 out of 16benchmarks. 10out of 16benchmarksmet met as definedinthe HIPCAAP (includingreformsin the Treasury, Auditor General, budget execution, and procurement) 1 Budget (2004-2006) includesproper Budgetplanningprocess Budgetfor 2004 led to Increasedallocationofpublic planningandmonitoringfor public for 2004 ledto increased increasedresourcesfor resourcesinline with strategic spendinginhighpovertyrelevant allocationfor key PRSP key PRSPsectors objectives ofthe PRSP areas sectors(education, (education, health, health, infrastructure) infrastructure, drinking water andnutrition). I Govemmenthas introducedand No standards TBD Transparency and service delivery publishedservice deliverystandards significantly improvedas inkeyserviceswith alargepublic- evidencedby independentaudits privateinterface(especiallycustoms, landtitling, primary education, courts, etc) - Broad-basedGrowth D Percentageofthe (main) road 49% 61% 80%' networkingoodandfair condition B Percentageof rural populationwith 45% 52% 65% reliableaccess to transport Increasingrice productivity Average rice yield = 1.8 Averagerice yield = 2.4 Average rice yield = 2.4 tonsiha tonsiha tonsiha Decreasethe average annual Deforestationratein NA Average 2004-2006deforestation deforestationrate 2003 = 1.2% ratereducedto 0.6% -- Nationally protectedareas % of land 1.9% TBD 4% area -- Human and materialsecurity - ~rimarvnet enrolment rate' 82%3 97% Increaseinprimary school 39.5% 47% completionrate' Number oftextbooks per primary 1book per 3 students 0.9 school student HIV prevalencerate insex workers', n.a. n.a. TBD 2 DTP3vaccinationrate ofchildren 85.8% 75.14 80% below 1year' =7 Skilled attendance at birthinCentre 28% 26.1%4 28.5% SantC Base(CSB) and Centre Hosaitalierde District (CHDl) ' Utilization rate inCSB',6 0.57 0.44~ Reductionin childunderweightrate 43% (1997) 35% 30% (MDG indicator) ' Percentageof peoplewith access to 12.7% 13.6% 20.8% safe drinking water Note:' I 1 These are indicators that are common \ hthe EU's budget supportoperation (PARP) and the level of ir :atom and objectivesare based on the revisednumbersproducedby the Govemmentfor the P A hinMay 2005. 'Annual survey will be conductedstartingwith 2005. TBD means 'to be determined'. '2003 refers to school year 2002/2003; 2004 refers to school year 2003/2004 and so on. Basedon 94% ofhealth facilities reporting. 'Based on Anthropometricsurveysby INSTAT for 2004 and2007. Total number of curative outpatient visits out of the total population; Targets for 2005 and 2006 to beupdated. ' 22  STRATEGICAXIS 1:IMPROVINGGOVERNANCE 53. PRSC 2 will continue to support the first strategic axis of the PRSP, and consolidate reforms initiated under PRSC 1, inpublic finance, anti-corruption and strengthening the judiciary. Assistance by the Bank will also focus on deepening reforms in the areas o f customs, decentralization, and capacity building. The reform program is based on strong analytical underpinnings, in particular the recently completedPER. The Governance and InstitutionalDevelopment Project (PGDI), which became effective inMarch2004, isprovidingtechnical assistance for the implementationofthesereforms. A. PUBLIC EXPENDITURE MANAGEMENT 54. The budget is the Government's main instrument for implementing its development strategy. However, weak budget and expenditure management has been a main characteristic of the Madagascar system for many years. The recently completed PER identified the following key issues that continue to hamper effective budget preparation and execution: 0 Budgetary allocationsare notyetfully aligned with PRSPpriorities. The 2004 and2005 budgets are broadly inline with PRSP priorities - allocations for primary education increased by 39 percent and for primary healthcare by around 15 percent over the period 1997-2004. Public resourcesallocated to the transport sector increased by annually 18 percent on average over the past five years. Inline with government policy to withdraw from productive sectors allocations in particular for energy, agriculture and environment fell substantively - from 33 percent o f non-interest expenditures in 1997 to 26 percent in2004. At the same time, the distribution o fbudgetary allocationsto sectors i s not yet in line with the administration's intention to "bring Government closer to the people". The central Government maintains control over the bulk of budgetary resources; only 3 to 4 percent o f the national budget i s managedby the communes. 0 Budgetpreparationfaces significant challenges. These are: (i)lackofreliable macroeconomic and a fiscal parameters guiding the preparation process; (ii) little involvement of sector ministries in the preparation process, (iii)no systematic mechanism to discuss budgetary disputes--inter-governmental consultation about the budget i s limited to budgetary conferences; and (iv) strategic discussion and decision-making on fiscal and budgetary policies at the Cabinet level i s limited and ad-hoc. In addition, the gap between revenue forecasts and revenue inflows is substantial: revenues had to be adjusted downwards by 22 percent in2001 and 44 percent in2002. The main problems include lack of a clear methodology and lack of capacity inthe relevant departments to accurately project inflows. 0 The problem of separate recurrent and capital budgets. Although a consolidated budget i s presented to Parliament, the Government i s still operating on a dual budget system with different procedures, timelines and institutional responsibilities for recurrent and investment expenditures. This dual budget system reinforces the inconsistencies betweeninvestment and (non-salary) recurrent expenditures. 0 Budget execution rates need to be closely monitored. Budget execution rates have deteriorated since the end o f the 1990s from 96 percent in 1998 to 75 percent in2001, mainly because of weak revenue collection and budget implementation problems. Estimates for the 2003 budget execution show a 92 percent execution rate, which would indicate that Government's efforts to streamline the execution process have begunto bear fruit. HIPC funds (representing 6 percent o f the Government's budget in 2003) which were executed based on simplifiedprocedures reached an execution rate of 99 percent. 23  Budget execution problems, notably of capital expenditures, are mainly causedby cumbersome and complex disbursement procedures. Budget execution is hampered by administrative bottlenecks. As processing payments in Madagascar is complex with around 11 different stages that each requires a formal approval, "simplified procedures" to release funds are frequently applied. These procedures should, however, be reserved for exceptional cases. In addition, shortcomings in the procurement and control system increase the administration's transaction costs. A flawed system ofJinanciaf monitoring. Key information is not available, in particular execution data on investment projects financed by donors. Since 2000 the social sectors (education and health) have produced regular budget execution reports. In 2003, additional reports were prepared by the ministries o f agriculture, justice, water and forest, and public works to fulfill a Government commitment inthe HIPC context. There i s no systematic reconciliation processbetween the Treasury and the Central Bank. As a result of these deficiencies, the Treasury faces difficulties in closing the annual accounts within the statutory timeframe and the Auditor General i s not able to validate these accounts as required by the law. Over the past two years, the treasury accounting system was strengthened to improve the closing o f Government accounts in a timely manner. As a result the final accounts for the years 1997 to 2000 and 2002 have been sent for review to the Auditor General. The accounts for the years 2001and 2003 are expected to be submittedin2005. The need to transform the budget into a management instrument. The budget is not yet seen as a reliable planning instrument because actual releases typically vary substantially from the allocated amount. As a consequence, the budget is not used as a management instrument that guides the implementation of policies and programs. There is also no effective monitoring and evaluation mechanism inplace that systematically tracks implementation o f Govemment policies and programs. ReformProgram 55. The Governmenthas prepareda Priority Action Plan for public finance reforms for 2005 which incorporates some key recommendations of the PER. This sustains the Government's operationalization of its public expenditure reform program, in the priority action plan for 2004, which was developed in conjunction with all key donors and validated in early 2004. Since the medium term reform program i s wide in scope, the priority action plan i s an important step towards prioritizing and sequencing public finance reforms. The plan builds on the findings and recommendations o f previous analytical work and i s closely linked to the annual business plan o f the Ministry o f Finance which was first developed in 2003. In 2004, the donors and the Government also set up a round table to jointly monitor the implementation o f the reforms as well as to discuss problems, solutions and necessary technical assistance. For the World Bank, as noted above, this technical assistance i s provided through the PGDI, whose main focus i s to strengthen the existing system of public finance inMadagascar. 56. To better benchmark the implementation of the public finance reform program, an extended set of indicators, developed by the Joint Secretariaton Public ExpenditureManagement and FinancialAccountability(PEFA-Secretariat), was introducedin early 2005. Madagascar is one of the pilot countries for the introduction o f these indicators which ultimately aim at harmonizing public finance reform indicators used by multilateral and bilateral development partners. The Government has made a self-assessment on the basis o f these indicators. It i s anticipated that the Govemment will fully apply these indicators inthe year 2006. 24  57. The PRSC process is supporting the Government public reform program ina sequencedway, all o f which are key steps inthe implementation o f the priority action plan. The realization under PRSC 2, which builds on the reforms started under PRSC 1include: (i) Co-ordination of the Reform Program a The Government implementedsatisfactorily the priority actionplan for 2004 (see Table 9). e The Government developed a priority actionplan for 2005 to sustain the reforms started in2004. e The co-ordination committee (Cellule de Suivi et de Coordination des Rdformes des Finances Publiques) established in the Ministry o f Finance to co-ordinate, monitor and evaluate reforms i s operational. (ii) EnhancingBudget Formuiation The 2005 Loi des Finances allocates a higher share of resources to key PRSP priorities (education, health, nutrition, transport, rural water supply), but there are reductions in the allocations to justice. In the Loi des Finances 2005, the allocations to the Ministry of Education increased from 18.3 percent of the budget in 2004 to 20.9 percent in 2005; for Ministry o f Health from 6.3 to 7.8 percent and for the transport sector from 13.3 to 22.1 percent. A new calendar for the budget preparation for the year 2005 was introduced, which advanced the timetable for the preparation of the budget. The objective is to strengthen the involvement of the sector ministries inthe budgetpreparationprocess. Program budgets were introducedfor all ministries with the budget year 2005, a year ahead of schedule. The sector ministries were required to align budgetary allocations with policy objectives. These budgets were prepared for a three year period to ensure a medium-term perspective o f budgetary allocations. The new system intends to improve the presentation of the budget and its alignment with policy priorities of the government as specified in the PRSP. The introduction of program budgets posed a significant challenge for the administration - the finalization of the budget document was delayed because of difficulties in implementing the new system. Experience from other countries indicates that these reforms will take time to yield the intendedresults; they should be complemented by a systematic program o f training and capacity buildingwhich aims at establishing or enhancing relevant capacities inline ministries. The reform agenda ahead includes further improvement in the allocations to priority sectors, and enhancingstrategic decision-making during the budget formulation process.Inline withthe recommendations of the PER, the Government i s considering (i) introducing a Budget Framework Paper, which outlines - early in the budget preparation process - the macroeconomic framework under which the budget is being developed; (ii) enhancing the role o f Cabinet by systematically ensuring strategic decision-making at the different stages o f the budget preparation process, (iii) strengthening the participation of line ministries based on an effective planning and consultation process, and (iv) refocusingbudgetary conferences onpolicy objectives, prioritization of needswithin the hardbudget constraints andresults achieved onthe bases ofresources allocated. To accommodate these changes, further adjustments to the calendar for the preparation of the annual budget are under review. (iii) Strengtheningbudget execution 0 The Treasury is implementing the recommendations of an independent audit which was conducted in 2003. In 2004/2005 treasury accounts were updated and the final accounts (Comptes des gestions) for the year 2000 and 2002 have been submitted to the Auditor General. The accounts for 2003 will be submitted by June 2005, and for 2001 in December 2005. Significant 25  investments in training and capacity building have improved efficiency and quality of the treasury operations. Table9: KeyPolicyandInstitutionalReformsinGovernancesinceJuly 2004 4rea I Actions taken by the Government sinceJuly 2004 PublicFinancialManagement jverall implementation Satisfactorilyimplemented2004 Priority Action Planfor public finance reforms. Developed2005 Priority Action Planfor public finance reforms. StrengthenedreformcoordinationinMEFB. BudgetFormulation Allocatedgreater share ofresourcesto PRSPpriority sectorsin2005 budgetrelativeto 2004. Introducedprogrambudgetsin2005 with amedium-termperspective andbetter linkbetween sectorpriorities andbudgets. Strengthenedcapacityof sector ministries. Budget Execution Simplifiedexpendituremanagementprocessandstrengthenedbudgetexecution capacityof key spendingministries. Madefully operationalthe transitionalintegratedfinancialmanagementsysteminTamatave; andexpectedto beoperationalinAntananarivoand four additionalprovincial treasuries shortly. Procurement Preparedmost of the implementingrules andregulationsfor new ProcurementCode. Preparedstandard biddingdocuments. EstablishedProcurementOversightInstitution. Accountability Submittedfinal accounts for 2000 and2002 to the Chambredes Comptes. Loi de Rkglementfor 1998 votedby Parliament Loi de Rkglementfor 1999sent to MEFB by Chambredes Comptesfor onwardtransmission to Parliament. Loi de R6glement for 2000 examinedby Chambredes Comptesandsent to MEFB for onward transmissionto Parliament. Results- Establishedresultsframework(as outlinedinPolitique Ginirulede I'Etut) for the focushlonitoring Administration andfor eachministry. ConductedindicativePEFAofpublic financialmanagementsystemin2005. Other GovemanceAreas Anti-Corruption MadeoperationalindependentAnti-Corruption Agency (BIANCO) inOctober 2004. PreparedandpassedAnti-cormption law, including key implementationdecrees. Newregulationfor declarationof assets to improve compliancerate(as ofmid-May 2005, 60% ofpublic and electedofficials requiredto fill declarations haddone so). Preparedandpassedanti-money launderinglegislation. Submittedto Parliamentlaw regulatingpolitical parties andtheir financing. Conducted independentauditof landtitling system. Justice Preparedandpassedlaw regulatingcommercialenterprises. Preparedandpassedlaw rationalizingcivil and commercialcourt procedures. Set up two modelcourts (TPI Antananarivoand Ambatolampy). Reducedbacklogofcases inAntananarivofrom 22,000 in2002 to almost zero. customs Preparedcustoms strategy and actionplan. Mergedcustomstax andimport duty into singlecustoms duty. Eliminatedcustoms duty credit (cridit dedroit). Mandatedpayment of customsduty throughbankingsystem. Abolishedimmunity of customsagentsfrom enquiriesandprosecution. Rotated430 customs agents in2004/2005. Madeoperationalautomateddataprocessingsystem(SYDONIA++) inTamatave. Improvedcustoms clearanceprocedures. Note: n l i s list includessome prior actions for PRSC2 The development of an integrated financial management system, which will encompass a budget preparation sub-system as well as budget execution and control sub-systems, i s ongoing. The new system will be deployed to the entire country; it will cover all treasuries and integrate the expenditure 26  management operations at the deconcentrated levels o f Government. As the implementation of the integratedfinancial managementsystemwill take several years, the Government has decided to put in place, with World Bank support, an interim core accounting system which was developed in the provincial treasury of Tamatave. The systemis fully operational inTamatave, and will be operational inthe maintreasury office inAntananarivo, and four additional treasuries (Mahajanga, Antsiranana, Toliara, Fianarantsoa) by August 2005. The installation has been delayed due to problems with the equipment. This interimsystem covers 80 percent of the treasury operations. The Treasury has also improved its internal control system by strengthening the operational efficiency of the Brigade de Trtsor. 0 Implementationrules and regulations and standard bidding documents (SBDs) are presently being prepared for the new Procurement Code adopted by Parliament in 2004. Most of the implementation documents and SBDs, and are expected to be completed by June 2005, but the process o f validation and adoption will take place after that. The new Procurement law, which i s line with international best practice, incorporates the findings and recommendations of the CPAR of the year 2003. There has been a delay with the preparationo f the implementation decrees and standard bidding documents mainly due to difficulties in finding a suitable consultant. The work on the institutional framework for the new procurement code has commenced and the decree establishing the new procurement oversight institution was issued inearly May 2005. Inview of the implementation delays the new procurement code is likely to be fully applied only towards early 2006 after the training for the ministerial staff i s completed inapplyingthe new code andaccompanying regulations. Inthe teams view, despitethe delay, the reformis well ontrack to beingcompleted, andwe propose to follow this in PRSC 3 with a trigger that the Procurement reform i s fully operational. With the fully functional procurement framework, we expect atransparent procurement systemwhich includes inter alia, that the oversight mechanism i s able to measurethe performance of the national system and the performance o f implementing agencies inaccordance with the new code, the appeal mechanism i s operational andbidderscomplaints are fairly andprofessional treated ina timely manner. 0 To improve debt management the Central Bank i s presently implementing a modem debt management system which shouldbe operational inthe secondhalfof 2005. (iv) Strengthening Accountability Progress with regard to the improvement o f the intemal and external control functions has been mixed: 0 A General Inspectorate for Finances (IGF) was established in 2004, as the principal controller of the Ministry of Finance, in line with the recommendations of the CFAA. Difficulties in recruiting adequate personnel have, however, delayed the commencement of the work of the IGF. But the internal control function has been ensured by the Inspection Gtntrale de 1'Etat (IGE) during this transition period. The internal control cadre of the treasury (Brigade du Trtsor) was strengthened by recruiting additional staff and modernizing its operations. The Government i s in the process o f makingthe IGF fully operational. 0 The oversight function of Parliament has been further strengthened through capacity building and training o f the Public Finance Committee. 0 The Auditor General has cleared the backlog o f accounts and prepared draft budget execution laws ("projet de loi de r2glement") for the years 1998 until 2001. The 1998 law has been examined by Parliament, and 1999 will be submitted to Parliamentshortly. For those from 2000 onwards, the final production was delayed due to difficulties inestablishing the overall balance, as requiredby law. The decree and supporting balances were prepared inmid-May 2005, which has enabled the production of theprojet de loi de r2glement for 2000 and 2001. The "catching up" meant that the laws for 2002 and 2003 have been delayed. It i s presently envisaged to finalize the examination o f the draft budget execution laws for 2002 and 2003 by December 2005. 27  (v) ResultsFocus: Introduction of basicperformance management under way, 0 The Government hasintroduceda results matrix for all ministries and departmentsin2005 (la Politique Gdnkrale de 1`Etatpour 2005") to monitor the implementation o f policies and programs. This builds on the results orientationthat the Government introduced in2003, with businessplans for all line ministries which outline the work program for the respective year. Many business plans, however, lack realismand detailed costing; they also do not feed into the programbudgets, which are prepared in a separate exercise. The results matrix for 2005 will be tracked on a regular basis, and implementation progress and bottlenecks will be discussed at the Cabinet level. As a next step, the Government intents to integrate the different activities into a coherent results-based management framework. Under such a systempolicy-related information is systematically collectedat all levels of Government, consolidated by a well-functioning mechanism at the centre of Government and scrutinizedfor potential follow-up. The system shouldgenerate regularreports about the status of the implementation of the Government program, which should be sent to Cabinet for discussion and strategic decision-making. 58. The indicative triggers for the PRSC 2 for public expenditure management include the satisfactory implementationof the priority action plan for 2004. The overall implementationof the priority action plan is considered satisfactory as the majority of the intended reforms are well under way. The implementationstatus of the triggers for PRSC 2 are as follows: 0 Budget for 2005 allocates greater shareofresourcesto PRSPpriority sectors relative to 2004, with adequate fundingallocated to key priorities (such as education, health, nutrition) -this action has beenaccomplished. 0 Transitional financial management system installedinfour sites (Antsiranana, Fianarantsoa, Mahajanga, Toliara) -this actioni s inprogress and is expectedto be completedinAugust 2005. . 0 Progressive implementationo f the recommendations of the independent audit o f the Treasury, in particular monthly accounts produceduntilthe 15' o f the following month inthe treasuries that . installedthe transitional financial management system-this actionhasbeenaccomplished for Tamatave, where the transitional financial management systemif operational. final accounts for 2003 preparedby the Treasury -this actionwill be accomplished inJune 2005 0 Implementingrules and regulations for the new procurement code issued by Government -this activity is expectedto be substantiallyaccomplished by June 2005, with the productionof these rules and regulations,but the stakeholder consultationfor validation and adoptionwill be outstanding. 0 Establishnew Procurement Oversight Institution ("`Autoritdde R&ulation des Marchb Publics") - Completed. 0 "Projet de loi de rkglement" for 2002 and 2003 examined by Auditor General -this activitywill be fully accomplishedinDecember 2005. 59. To sustain the public expenditure reforms, the indicative triggers for PRSC 3 include the satisfactory implementationof the 2005 Priority Action Plan, including, in particular the following reforms/outcomes: 0 Budget for 2006 allocates adequateresources to PRSPpriority sectors. 0 Monthly accounts produced by the 15' o f the following month in the five regional treasuries and central treasury where the transitional financial management system i s fully operational. 28  New procurement code applied, Procurement Oversight Institution, procurement entities inthe sector ministries, and the Appeal system operational. ExpectedResults 60. At the endofthe PRSC 3, the expectedresults include: An increase inthe number of HIPC AAP benchmarks met from four in2004 to six in2005 to ten in2006. Budget Formulation: Budget preparation processadjusted to allow for better strategic decision making and implication o f the sector ministries, and ensuregreater consistency betweenrecurrent and investmentbudgets. This has been partially accomplished with a budget calendar which allows for more meaningfuldiscussionsbetweenthe MEFBand sector ministries. Preparation processes for the recurrent and the investment budgets aligned and integrated to improve consistency o f the budget. This is outstanding. Deviation between planned and actual spending reduced by 50 percent between 2003 and 2006. This is inprocess. Budget Execution Treasury produces monthly accountsby the 15thof the following month. Partially accomplished -thisistrueinToamasinawherethetransitoryintegratedfinancialmanagementsystemis fully operational. For the other treasuries, monthlyaccounts can be producedin 25 days. e Treasury submits quarterly accounts no later than four weeks after the close of the previous month. e Treasury submits final accounts within the statutory timeframe to the Auditor General. Not yet accomplished. Procurement e New Procurement Code inline with international standards. New ProcurementCode passedby Parliament inJuly 2004. Applicationdecrees and SBDs are currently under preparation to fully operationalize code. e Institutional framework put in place. Partially accomplished with establishment of ARMP and some sectoralprocurementunits. e Adequate capacity to implement new procurement regulations exists. Partially accomplished with commencement of capacitybuildingprogram. Strengthening Accountability e Internal and external control functions (IGF, Brigade duTrCsor, Auditor General) significantly strengthened. e Auditor General submits auditedaccountsto Parliament within the legal timeframe. Partially accomplished, with Auditor General clearingbacklogof auditedaccounts. B. FIGHTINGCORRUPTION 61. There has been steady progress in the fight against corruption. In the Transparency International Corruption Perception Index o f 2004 Madagascar was ranked 82nd out of 145 countries 29  (after no. 88 out o f 133 in2003 and no. 98 out o f 102 in2002). The new WBI governance indicators6for 2004 confirm that Madagascar i s well above Sub-Saharan African average in all examined areas, in particular the control of corruption, regulatory quality as well as voice and accountability. The Government was elected on an anti-corruption platform, and has made it the cornerstone o f its PRSP. The Government sees corruption as one of the main sources for the lack of progress in the socio- economic development o fthe country. The key issues include: e Pervasive corruption in a number of sectors (i.e. mining, judiciary) and public services (i.e. customs, medical services, traffic police), which severely affects overall efficiency and delivery o f services. e The lack o f ethical standards in the public services with widespread non-application of formal rules and regulations by public servants. e Informalandor corrupt behaviorremains by-and-large unpunished. ReformAgenda 62. Reforms started under PRSC 1 have been deepened and extended, with important improvements in the regulatory framework for the fight against corruption. The Anti-Corruption Commission (Conseil Supirieur de Lutte Contre la Corruption, CSLCQ, which was established in2002, to raise awareness about corruption, and co-ordinate all governance and anti-corruption efforts prepared a new general "anti-corruption law" which becameeffective inSeptember 2004. This law aims to improve investigation and prosecution of corruption cases as well as to establish the institutional framework for the fight against corruption. Based on the new law the government has adopted several implementation decrees since July 2004 including: (i) a new regulation for the declaration of assets which intends to improve the compliance rate of public and elected officials based on the experience with the initial decree of the year 20027 and (ii)the decree to establish the independent Anti-Comption Agency (with investigative authority), which will operationalize the Government's anti-corruption strategy. Inaddition the government passed "anti money laundering" legislation. A new law regulating political parties and their financing has been submitted to Parliament. Other decrees that will be prepared in 2005/2006 include (i)a decree to regulate recruitment into the public sector', and (ii)an application decree specifying the rules andregulations concerning conflict-of-interest issues. 63, The key instrumentto fight corruption,the independent Anti-Corruption Agency (Bureau IndCpendant Anti-Corruption, BIANCO) became operational in October 2004. Since its inception BIANCO has focused on three areas (i) examination o f corruption complaints (the the office has received over 850 complaints, the majority o f which deal with land titling and the judiciary), (ii) prevention, inparticular training and sensitization of public servants o f the police, customs and land titling services. Inthis context, BIANCO has also provided support to manage several recruitment processes into the public sector; and (iii) further investigation. This includes the preparation of independent audits o f public services (the audit of the land titling service is under way; a draft audit report has been submitted and is awaiting validation). Two additional audits are planned for 2005/2006 - an audit o f customs and a review o f the mining sector. In addition, independent procurement reviews are planned for the "education for all program" and o f investment programs inthe transport sector. 'The Govemance Research Indicators 1996-2004 experiences with the new decree are encouraging: inMay 2005, about 60 percent o f the public and elected officials required (intotal 4,328 individuals) have submitted their declaration o fassets. BIANCO is presently considering various options to fiuther increase compliance. 'Theexisting recruitment process is a source of significant Corruption. To address this problem, BIANCO has been providing advisory support to recruitment process in2004/2005. 30  64. public services ("clean"/ "not clean") "), to pilot citizens' report cards for suitable public services ,as Moving ahead, in 2005/2006, the governmentintendsto introducethe concept of labelingof well as to conduct a baseline survey to assess the prevalence of corruption in the public and the private sectors. Expectedresults 65. Themainresults at the endofPRSC 3, andtheir current status, include: 0 Adopt sectoral anti-corruption strategiesand beginimplementation- this activity is under way: a general anti-corruption strategy hasbeen validated which includes the establishment o f an independent anti-corruptionagency (BIANCO). Sectoral strategy will complement these activities. 0 The regulatory framework for the fight against corruption improved-this activity i s underway; a new anti-corruption and money launderinglegislationhas already beenpassed;next steps includeregulations concerning conflict-of-interest andpublic recruitment 0 Independent audits and evaluations have been commissioned to address corruption intargeted sectors/public services-this activity is under way. 0 An anti-corruption survey confirms areduction ofcorruption inMadagascar -this activityis plannedfor 2005/2006. C. JUSTICE 66. Beginninginthe mid-90sYMadagascar launched a vast legal andjudicial reformprogram which included the consolidation and publication o f existing laws, review and modernization of its business laws, training of judges and court personnel, review o f judicial procedures and review of the work environment o fjudges. Among the most noteworthy achievements o f the program are the establishment o f the Ecole Nationale de la Magistrature (ENMG) and the new generation o fjudges and court personnel that it has produced, publication o f a complete set o f business laws which had previously been largely inaccessible, preparation and adoption of several key pieces o f business laws and completion of a comprehensive study o fthejudicial process. 67. The Government has made judicial reform an important element of its overall governance strategy. The main issues to be addressedinclude: Lack of credibility of the judiciary The credibility o f the judiciary has been seriously underminedby widespread corruption and inefficiencies. Thejudiciary is one of the main targets o f the newly created Anti-Corruption Commission. The new Government also put under investigation anumber o f magistrates becauseof corruption charges. Low performance of the judiciary: This is due to procedural and institutional inefficiencies as well as lack of performance orientation of the existing staff. This problem affects all areas of the judiciary and has lead to a significant backlog of cases, inparticular at the lower courts. A key reason i s the lack of service standards and evaluation methods to examine judicial work. Inmany areas the case load handled by magistrates and other personnel is not in line with international standards. Inareas that require specialization such as commercial proceedings not enough trained magistrates are available to deal with existing cases. 31  Reform Program 68. As noted inthe PRSC 1document, the Government has identifiedfive broadpriority areas which form the basis for its reform strategy: (i) fight against corruption, (ii) expedition of proceedings, (iii) reform of business laws, (iv) rehabilitation of court and prison infrastructure, and (v) humanization of detention facilities. The reforms intend to further deepen previous reforms and to consolidate the achievements, in particular in the areas of training, capacity building and codification of texts and regulations. The needs of the private sector are a major consideration in the legal and judicial reform strategy. 69. The implementation of this strategy is severely hampered by budgetary constraints; the year 2005 has seen a net reduction of the (already low) recurrent budget of the Ministry of Justice whichraises concerns about feasibility and sustainability of the government strategy. 70. PRSC 1 supported the development of the reform strategy which would form the basis for the implementation of the reform program. The implementation of this strategy has seen mixed results in 2004/2005. To improve efficiency of the judiciary and simplify judicial proceedings, the Ministry of Justice prepared new legislation, in particular a law regulating the affairs of commercial enterprises (loi sur les sociktks commerciales), including an implementation decree, and a law rationalizing the procedures o f the civil courts (loi sur les prockdures collectives). To address deficiencies at the level of the commercial sections o f the courts a number o f magistrates were trained in commercial proceedings. The Ministry has also established "model courts" in Antananarivo and Ambatolampy which would serve as a reference for the reform o f other jurisdictions. To reduce the existing backlog o f cases (22,000 inAntananarivo alone) the government recruited a task-force; the work of this group has reduced the number of open cases to almost zero in Antananarivo. The government programto reduce the backlog o f cases will be extended to other jurisdictions inthe country. 71. The introduction of service standards, however, which is seen as a key instrument to improve individual performance and the performance of the jurisdiction has made little progress. At present, only for the lower courts service standards have been proposed and are awaiting validation. Standards for the higher courts are still outstanding. Key problems include resistance in the judiciary as well as lack o f reliable statistical data which could serve as the basis to systematically monitor and evaluate performance. In addition, the internal control of the Ministry o f Justice remains weak and fragmented. Further technical assistance will assist the Government to improve the statistical service as well as the efficiency o fthe internal controlcadre. Another area of concern is the fight against corruption in the judiciary: while the disciplinary commission in the Ministry of Justice has begun to address corruption complaints and the Ministry of Justice has asked for support of the Anti-Corruption Agency, BIANCO, corruption remains a key problem in the judiciary. To address this problem the Government intends to improve operational efficiency of the disciplinary commission as well as to strengthen self- regulation mechanisms inthe different brancheso fthejudiciary. Expected Results: 72. The expectedresults at the end o f PRSC 3 and their current status include the following: 0 Backlogof pendingcourt decisions reduced-this activity i s inprogress. The year 2004/5 has seen a net reductionof the backlogof cases of about 22.000 inthe capital. The programwill be expanded in2005/2006 to other lower courts. 32  0 Significant increase of outputs inthejudicial systemwith the introductiono f service standards-this activity is under way; a study to establish service standardsfor the lower courts hasbeen completedand is awaitingimplementation. 0 Reductiono f corruption as confirmedby an independent anti-corruption survey - an anti-corruption Establishfinancial and administrative tribunals inthe provinces -this activity i s well under way: in surveyis plannedfor the year 2005/2006 0 2004/2005 the Government established these tribunals in4 provinces; for the remaining 2 provinces this activity will be completed in2005/2006. D. CUSTOMS 73. Despite some progress in 2004/2005 customs reforms i s lagging behind expectations. Key problems include revenue generation significantly below projections as well as the perception that corruption has not yet been effectively addressed. In addition, service standards (i.e. time for the clearance o f shipments) are not systematically enforced. The poorly functioning customs service raises transactions costs and is a constraint for the functioning of the private sector. ReformProgram 74. There has been some progress in the functioning of customs since July 2004. Customs reforms are geared towards speeding up the clearance process, combat corruption and improve revenue collection. The Government has repeatedly stated its commitment to enhance the performance of customs. An ambitious reformprogramto restructure customs services was developed inApril 2003. Its objective i s to build capacity (modernization, computerization, training and accountability) for the customs administration to fulfill its role as a transparent revenue collector and facilitator of trade. A contract was signed with a private service provider to enhance the system of pre-shipment inspections. It i s envisaged that over the next three years, inspection rates will decrease from 100 percent to 10 percent, with inspections focused on highrisk imports. A platform for a systematic dialogue with the private sector was established which serves as the basis to discuss reformprogress. 75. Since July 2004, the following reforms have been undertaken. The tariff system was simplifiedwith the merger of the customs and import duty inthe 2005 Loi des Finances. The customs regulations were modernized, including the elimination o f the customs duties credit (crkdit de droit); institutingmandatory payments o f the customs duties through the banking system since April 2005; and abolishing the immunityof customs agents from enquiries and prosecution. The customs administration is also expanding the coverage of its automated data processing system (SYDONIA) to improve operational efficiency. The new system has been installed in the main customs office in Tamatave in 2005. To accelerate customs clearance process a `one stop' customs service (guichet unique) was established in Mahajangaand Diego Suarez; two additional `guichets' will be established inAntananarivo and Tulear in 2005. According to statistics produced by the customs service the time for customs clearance of containers has been reduced from an average o f 10 days in 2002 to about 48 hours in 2004 in the main customs office in Tamatave. To address corruption more effectively the customs directorate is worlung closely with the Anti-Corruption Agency BIANCO with activities focusing primarily on training, sensitization as well as the application o f administrative sanctions (Le. regular rotation of customs agents, in2004/2005, 430 agents). These measures have ledto a notableincrease of satisfaction among private sector operators. 76. At the same time, revenuegenerationby the customs directorateremainsfragile. Inthe first quarter o f the year 2005 customs was able to generate only 65 percent of the revenues projected in the budget 2005 - main reasons include a lower than expected inflow of merchandise but also continuing 33  governance problems inthe customs directorate. To address existing problems the Government intends to further streamline customs operations as well as to intensify the collaboration with the pre-shipment agent and the port authorities. 77. Another key issue has been the lack of a coherent vision for customs reforms, in particular the implication of the private sector in customs operations. To address the Govemment has produced, with assistancefrom the World Customs Union, a reform strategy and action plan designed to improve revenue generation, introduce service standards and reduce corruption. The Government i s also considering introducing `Tradenet' to improve revenue generation; a feasibility study will be launched in2005. 78. The trigger under PRSC 2 for customs i s the adoption o f a time-bound action plan for the year 2005 and to begin implementation. This trigger was completed inJune 2005 with the formal adoption of the actionplan. As mentionedabove, implementationofthe reforms hasbeen under way. 79. The indicative trigger for PRSC 3 is the satisfactory implementation of the customs action plan. E. DECENTRALIZATION 80. In2004, the Governmentputinplace the new regions which have become (together with the communes) the second operational level below the central government. The main functions of the regions are to facilitate commune development and to represent the central government. The new legal framework for the regions also stipulates that the deconcentrated services of the central government report to the regional chiefs. These chiefs were selected on a competitive basis and nominatedby the President. As a first step the regions were required to prepare Regional Development Plans: these plans were validated for the majority o f the regions by the relevant stakeholders in early 2005. A training plan for the regional chiefs and their staff has been developed which focuses on development planning, public financial management and monitoring and evaluation. A first training seminar was organized in April 2005. 81. Public finances in Madagascar are heavily centralized with about 95% of revenues and expenditures managedby central authorities. Financial capacities at the communal and regional levels are constrained by insufficient and poorly targeted transfers and a regulatory framework that leaves the collection of most local revenues in the hands o f inefficient deconcentrated state agents. Budgetary allocations to the communes inthe 2005 budget have remainedat the 2004 level which i s not inline with the Govemment commitment to increase resources allocated and managed by the communes. Government reforms are under way to strengthen revenue collection as the communal levels. It is also envisaged to intensify the collaboration between specific sectors (Le. health, education), the regions and the communes inview of increasingcommunal service delivery. 82. Under the PRSC reform program, the Government i s proposing to address these shortcoming through three major interventions: (i) reforming the transfer system and formula and scaling up of pilot experiences with decentralized tax collection; (ii) establishing a local development f h d that will provide block-grants to communes for local investments and capacity building; (iii)reinforcing communal capacities and create synergies between communes by supporting the creation o f inter-communal associations and regional training and resource centers. Future PRSCs will continue to support and deepenour dialogue inthis area. 83. The indicative trigger for PRSC 3 is the increase of resource allocations for the communes. 34  ExpectedResults: 84. The expected results at the end PRSC 3 include the following: 0 Resource allocations to the communes have increased - this activity has not been accomplished. 0 Review the system o f fiscal transfers to communes - this activity has been partially accomplished: a proposal for the adjustment o f the transfer (ESW) was prepared by the World Bank in2003/2004 and validated by the Government but is awaiting implementation 0 A local development fundhasbeen set upto provide investment and capacity buildingsupport to the national level - this activity is in process; a baseline study for the establishment of the fund which outlines different design options was prepared in May 2005; discussions about these options are ongoing. F. TRAININGAND CAPACITY BUILDING 85. The implementationof the governance reform programwill require substantialinvestments in training and capacity building, in particular in the areas of public financial management, planning, change management and monitoring and evaluation. In collaboration with the World Bank, the Government i s implementing an innovative capacity building and change management strategy that consists of the following elements: a Cabinet retreats focus on better defining the overall vision and implementation strategy. In 2004, the first retreat took place with participants from all over the world who commented on the Government strategy, as well as shared experiences and best practice. The results fi-om these events were used to refine the Government program. The second retreat focused on improving service delivery. A thirdretreat, heldinMay 2005, was designed to foster cross-sectoral collaboration within the government ministries, and included a focus on using a rapid results initiative to improve implementation (see below). The rice crisis motivated a focus on the entire rice chain, and included internationalbest practice onprice stabilization mechanisms. a Leadership training for the senior management level within government is aimed at strengthening consistency and cohesion of the core government leadership team (President, Prime Minister, Vice Prime Minister, Ministers and Permanent Secretaries) as well as to strengthen their ability to manage and direct rapid change. A series of workshops in Madagascar and Canada were organized to improve the effectiveness of the Government team and to share experience. Additional training i s programmed for 2005 to assist senior government officials in implementing complex changes. This program will be directed by a change management expert from Harvard University. Complementary leadership training will enhancethe capacity ofthe Regonal Chiefs. a Additional capacitybuilding activitieswilltarget the middlemanagementinthe public sectorto improve overall performance orientation and the link between political decision making and developed by the Presidency (`Politique Gdndralede I'Etat 7. administrative implementation. The basis for the training will be the new results framework a To improve cross-sectoral collaborationand the focus on tangible resultsthe Government has decided to build on the experiences with "rapid results" in other countries. A first exercise, launched in early 2005, is focusing on the production, importation and distribution of rice. Cross- sectoral teams have been created who worked out `rapid results action plans' which were presented to 35  Cabinet. The team are supported by international experts for the `rapid results' methodology. It is envisaged to use this approach also inother areas. To better institutionalizethe comprehensive changes in the area of public finance the Ministry of Economy, Finance and Budget (MEFB) has set up a task force that organizes professional training for the public finance personnel at the central and deconcentrated levels of Government. The training will primarily focus on the big spending ministries (education, transport, health) and will comprise planning and execution o f expenditures as well as monitoring and evaluation. First training sessions have been conducted for the Ministries o f education and health. It i s anticipated to further deepen public financial management capacity over the course of the year 2005. In parallel the Government is strengthening quality and effectiveness of local training institutions,in particular in high priority areas such as development planning, publicfinancial management and monitoring and evaluation. The two professional training institutions for the public sector (Centre National de Formation Administrative, CNFA, and Ecole Nationale de 1'Administration Malgache, ENAM) have received substantive support to modernize their curricula and equipment as well as to improve quality and quantity o f their trainers. ExpectedResults: 86. The expected results at the end of PRSC 3 include the following: 0 Effectiveness of the Govemment leadership team enhanced; consistency between political decision malung and administrativeimplementationimproved-this activityhasbeenpartially achieved; additional activities are plannedfor 2005 and 2006. 0 Capacity incritical areas incore government services strengthened -training and capacity building inthe areas of public financialmanagement, developmentplanning, change managementand monitoring and evaluationis ongoing. 0 Capacity and quality of local training institutions improved-this activity is ongoing; it i s anticipatedthat capacityand quality ofENAMand CNFA will be significantly strengthenedby the endof 2005. STRATEGICAXIS 2: BROADBASEDGROWTH 87. The Bank's support for the second strategic axis of the PRSP on broad-based growth includes a significant portfolio o f investment lending, and policy dialogue. But the first three PRSCs do not include any specific policy actions as triggers. The engagement in these areas will be deepened under hture PRSCs, starting with PRSC 4, and implementation of these reforms continues to also be supported through investment lending operations. As noted inthe PRSC 1Program Document, the Bank's support for the growth pillar i s also provided through our significant investment lending operations in private sector development; transport, rural development and environment (see Table 7). A. PRIVATE SECTOR DEVELOPMENT 88. The PRSP emphasizes the importance of creating an investment climate that is conducive for private-sector led growth, and some steps have been taken in 2004 to improve the investment climate, to implementpublic-private partnerships (PPP), and to improve co-ordination of policies and to give voice to the private sector and civil society, more broadly. GUIDE, the one-stop shop for enterprise creation, has continued to perform well and facilitates setting up enterprises, with the time neededto set up an enterprise reduced to just 3 days in 2004. As noted before, the reform o f public enterprises has 36  advanced since July 2004 with the privatization o f the cotton company, and management contracts for operating the energy and sugar companies. 89. Reformsinthe energy sector have advancedin2004, but muchremainsto be done, and the energy situation is critical. As noted before, the energy company JIRAMA, has been put under management contract since February 2004. The energy sector strategy was prepared in late 2004 and aims at liberalizing the sector by enhancing competition in the medium term through the breakdown of electricity provision (production, transport and distribution) andregulation of activities. The Government has set up a supervisory and regulatory agency L 'Ofice de Rdgulation de Electricitd (ORE) to regulate and monitor activities inthe energy sector. The Fonds National de 1'Electricitd (FNE), set up to support rural electrification by providing subsidies to rural electrification providers, is also operational. The Agence pour le Ddveloppement de 1'Electr$cation Rurale (ADER) has been created to promote service provision, including rural electrification by the private sector, supervise and finance rural electrification through the FNE, and monitor the environmental impact o f projects. About 150 rural electrification plants are expected to be completed on an annual basis. 90. There has also been some progress in improving prospects for the key export-oriented driving sectors for growth. The tourism sector, which has grown strongly in2004, will benefit from an investment from a French company ACCOR which will invest in several hotels in Madagascar. The development o f the rkservesfoncidres touristiques, clusters where investment in ecotourism and resorts, i s expected to start in 2005. The shrimp sector which i s an important earner of foreign exchange, has introduced a certification systeminDecember 2004 for Madagascar shrimp certifying that it follows good environmentalpractices. 91. The Bank is conducting an Investment Climate Assessment (ICA) and Financial Sector Assessment (FSAP) in FY05 which will further help in formulating and refining the strategy in these areas to underpin future reforms. B. TRANSPORT 92. The transport sector, and in particular, the roads program plays a key role in Madagascar'sgrowth and povertyalleviationstrategy. As notedbefore, remotenessis associatedwith poverty, and improving access is critical for many aspects - enhancing productivity in rural areas, improving access to social services and expanded access to markets. Three decades of inappropriate sector policies have led to serious deterioration o f the country's transport infrastructure. It is estimated that from 1970 onwards the country lost on average 1,000 kilometers o f roads per year due to lack o f maintenance, or the loss and deterioration of over 80 percent o f the network over the last 30 years. In April 2000, after almost ten years of sector dialogue and very little lending, the country adopted a comprehensive transport sector policy which aims at (i)focusing the Government's role on strategic planning, sector oversight and coordination; (ii)creating agencies for sub-sector management and regulatory functions that are jointly controlled by the public and private sectors and gradually user- financed; (iii)divesting operational activities to the private sector, through privatization and concessioning arrangements; (iv) developing the local private sector for works design and execution; and (v) rehabilitatingtransport infrastructure to appropriate levels and ensuring their maintenance thereafter. Reform Program 93. After the 2002 crisis, the Government launched an ambitious road rehabilitation and maintenance program (2003 - 2008) with the objective to rehabilitate or provide periodic maintenancefor approximately2,000 kmper year. Since 2003, nearly 2000 kmo fnational roads have been improved increasing the percentage of the national road network in fair and good condition from 49 percent in 2003 to 61 percent in 2004. For rural roads, the least cost design, such as spot improvements for basic access, was not systematically applied to rehabilitate roads with low traffic, leading to 37  significantly higher costs per km, and reducing by one-third the length of rural roads that could be improved. Hence, only 900 kmhave been rehabilitated in 2004. To rationalize the management of the rural roads, the Ministry of Public Works and Transport (MTPT) is developing a technical design approach for rural road improvements according to the specific levels of service needed for each type of rural road. In 2004, the Road Maintenance Fund (RMF) contracted for the maintenance of 7,300 km, which utilized 70 percent of the funding. Ofthe remaining 30 percent, 20 percent was allocated to routine maintenance ofrural roads and 10percent to emergency works. 94. There hasbeendelay in settingup the autonomoussub-sector agencies. The Maritime, Ports and River Agency (APMF)has been operational since October 2004 and its boardhas been able to install a measure o f independency. The appointment o f the agency's key personnel, however, i s still incomplete. The Civil Aviation Agency (ACM), which has been operational since 2000, has been restructured based on an organizational audit, to be more efficient and to enhance the capacity of the technical personnel. Laws creating the Roads Authority (AR) and the Land Transport Agency (ATT) were voted by the Parliament inDecember 2004. A workshop involving the main stakeholders was held inFebruary 2005 to review the progress made inthese institutionalreforms and it i s expected that ATT will be operational by end of 2005 and AR by mid-2006. Inthe meantime, since 2003, a National Roads Databasehas been developed which stores information on all aspects of the main road network as well as a computerized system for monitoringprojects undertakenby the Ministry. A draft transport statistical yearbook was also producedin2004. 95. In March 2005, the Vice Primature Office in charge of Economic Programs, Ministry of Transport, Public Works, and Regional Planning was dissolved, and two separate ministries were created: the Ministry o f Public Works and Transport and the Ministry of Decentralization and Regional Planning. This reorganization seems appropriate and i s likely to provide a better focus for policy and planning. There i s concern, however, that this development and the associated personnel changes will bringfurther delays to the institutionalreforms that were initiatedin2000. 96. The Government is using public-private partnerships for managing the transport infrastructure. As noted before, Air Madagascar is operating under a management contract and Northern Railway as a concession. The concessioning o f Southern Railways i s ongoing, and is expected by end-2005. The main port of Toamasina, which handles more that 80 percent o f the total traffic, has been restructured its container terminal i s beingconcessioned, with the helpof the IFC and it i s expected that the concession will be inplace inJuly 2005. The Government i s also planningto concession 12 main airports. 38  Table 10: Broad-Based Growth Key Policies - Broad based World Bank Project Support Actions Growth Creating conditions Integrated GrowthPoles (FY06) Remove Administrative barriers for growth ProposedWatershed (creation o fGUIDE) Management Increase Investment promotion Transport Foster Dialogue with private sector Public enterprise reform (CAPE) to identify and remove ProposedEnergyproject bottlenecks ProposedMulti-sector investment Increase service delivery intelecom, project transport (airports andports), water and electricity, cotton and sugar production through the reform o fthe public enterprises ImproveMadagascar's image through marketing campaigns, active participation intrade fairs Improve performance o f large-scale irrigationschemes through integrated package o finvestments at watershed level. Address politicalrisks concerns through provision o f guarantees(ATI) Improve access to finance through provision o f leasing services, SME finance Improve trade links with strategic partners (Agreement on Textiles and Clothing (ATC), SADC and COMESA trade agreements) Making growth e Transport program Improve supply chains through inclusive Proposed Watershed management rehabilitation o f national andregional (irrigation) roads e IntegratedGrowthPoles (FY06) Rehabilitation o fports (Toamasina, Fort Environment projects Dauphin) e Rural development project Upgrading airports e Microfmance project Focus on decentralizing growth through Proposed Energy project creation o f growth poles around tourism, industrial zones and mining Improve productive assets o f poor rural households through matching grants for demand-driven agricultural investments. Capture economic benefits associated with natural resource conservation through investments inprotectedareas, natural forest protection and community management transfers. bte: UpdatesTable 7 in PFC 1ProgramDocument. 39  c. RURALDEVELOPMENT ENVIRONMENT AND 97. Rural development and environment are critical elements of the Government's strategy to fight poverty, since over four in five poor people live in rural areas. Agricultural productivity is low andnaturalresource degradation is widespread. 98. The main elements of the Government's rural development sector strategy reform agenda adopted under the Rural Development Policy letter recognizes the need for approaches to provide integrated solutions to multiple problems simultaneously (e.g. through growth poles, value chains etc). The strategy aims to address four mainchallenges: (i) improvingfood securityandfood production,inparticularriceproductivitythroughimproved applied research to produce locally produced high yielding rice varieties; scaling up communal village granaries to facilitate access to working capital; appropriate management of rice import tariffs and taxes to balance producer and consumer interests (ii) sustainable intensijkation and diversifzcation of agricultural production through rural roads, agricultural technology, landpropertyrightsandwater management (iii) improving the value-added of natural resources as providers of extractive products and environmental services through puttinginplace a comprehensive forest zoning plan, establishing a transparent, competitive system for the allocation o f long-term concessions to technically qualified companies; extending the current ban on the provision of logging permits untilthe new licensing system i s operational; improving governance in the forest sector by simplifylng the framework o f exploitation and taxation, strengthening o f the field presence of the Water and Forests Department, and collaborating with the Ministry of Finance on improving forest tax regulations and tax collection; and scaling-up forest management transfers to communities while assuring adequate long-term support and monitoring; and (iv) making the sector institutionalframework more effective and efJicient by linking the Action Plan for Rural Development (PADR) and NEAP to a national and regional land use planning process to facilitate an integrated approach towards public sector investments at the regional level aimed at optimizing synergy between sector-specific interventions. 99. In the vision, Madagascar Naturellement, there is a renewed focus on rural development. The year 2005 has been declared the "Year o f Rural Development" by the President of Madagascar, with the intended objective of self-sufficiency inrice production by the end of the year. The initial objective o f increasing rice yields by 8 percent annually has been increased to 13 percent per year. In2004, despite the losses associated with the cyclones, agricultural growth was 3.5 percent, significantly higher than the 1.3 percent in 2003. Rice policy was a dominant policy issue in Madagascar since mid-2004. In early '2004, the reduction inthe rice production due to the cyclone, the sharp depreciation in the local currency and an increase in the international price of rice contributed to price increases. Early announcements o f state intervention in case o f a steep increase inthe price o f rice created uncertainty among private sector importers. Rice imports in the first half of the year in 2004 were only 59,000 tons as compared to 150,000 tons in 2003 during the same period. The shortage in rice with high prices triggered a Government facilitated rice import operation with selected private operators with this rice sold to consumers at 3,500 FMGkg. Finally, inMarch 2004 rice prices have started to decline with the harvest coming in. In2005, as notedbefore, rice tariffs were reduced to 10percent, giventhe higher international prices o f rice and the depreciation in the exchange rate, which provided added protection for local producers. The Government i s focusing on the entire rice value chain and intends to improve access to agricultural inputs, revitalize the seedmultiplication centers and rehabilitate the irrigation schemes inhigh potential agricultural areas. 40  Reform Program 100. The implementationof the Government's institutional reformprogram for the Ministry has commenced since its adoption in June 2004 and is aimed at supporting the decentralization process and improving the quality of services. Inthis connection, the re-assignment o f staff and budget towards the regions has begun. The 2005 budget for goods and services for the Ministryhas been re-aligned, and 80 percent i s allocated to the newly established regonal divisions and 20 percent to the Central ministry. 101. The Government has developed its LandPolicy Letter which was validated by a wide range of stakeholders in February 2005. The Government adopted this letter on May 3, 2005. The Government's objective i s to put in place a land rights registration system based on the principles of (i) decentralization o f the land administrationto the lowest level of local government; and (ii) designing and implementing policy reforms following a process o f piloting and learning by doing. Pilot activities are underway in two areas (guichet foncier communal in the Lac Alaotra and skcurisationfonciire in the Haut Bassin du Mandrare). The Bank i s undertaking AAA on Land and Property Rights Review which will serve as aninputto the National LandTenure Program. 102. The implementationissues for making the maintenance fund for irrigation schemes (Fonds d'Entretien des Rbseaux Hydro Agricoles, FERHA) which was established in September 2003 fully operational are being addressed. A Task Force is finalizing the operations manual for FERHA. A national workshop on the maintenance of irrigation schemes was held in April 2004. Financing mechanisms for funding FERHA are under discussion, and will be finalized as part o f the preparation for the Watershed Management Project. 103. The competitive research fund (Fonds CompbtitiJs de Recherche Appliqube, FCRA) established by decree in June 2004, is operational. It is beingmanaged by an autonomous body made up of a wide range of stakeholders (Ministry representatives, producer organizations, private sector and universities). This committee has selected 30 proposals, based on a request for proposals in the second halfo f 2004, for financing before December 2005. 104. The locust early warning system (LEWS) has been developed and implementation has commenced. The National Locus Control Center has been restructured and a capacity buildingprogram for the staff and local governments, and rural communities i s under implementation. A rural radio program is also beingpiloted inselected communities at riskto facilitate communication. The program i s well on track to beingfully operational by end-2005. 105. The Government has continued to implement the National Environment Action Plan (NEAP) in 2004. The Government has sustained and improved the forest exploitation adjudication system, by publishingthe status o f forest exploitation permits for the years 2002, 2003, and 2004 inthe newspapers once every quarter during 2004. Mining and forest exploitation has been prohibited in sensitive areas. Fire monitoring committees have been created and are operational at commune level, allowing the forest service to know the status o f bushfires per commune. The list of commune vertehouges is now available and used as a daily tool within the Directorate General o f Water and Forests. 106. The decreemaking the Office Nationale pour 1'Environnement (ONE) the one-stop shop for enforcing the MECIE(National EnvironmentalImpact) law was passed in February 2005. The one stop shop is now operational and extension to regions i s under preparation. The Foundation for Protected Areas and Biodiversity (FPAB) was created inNovember 2004. The options to transfer tourist revenues for the operations and management o f protected areas i s under discussion by a committee set in 2005 up for makingthe environment financially sustainable. 41  STRATEGIC AXIS 3: PROVIDINGHUMANAND MATERIALSECURITY 107. The three PRSCs will support the Third Strategic Axis of the PRSP on human development through a sequenced and gradual process. PRSC 1 supported the implementation o f the Government's Education for All (EFA) program and improved service delivery innutrition. PRSC 2 has deepenedthe engagement by supporting policy and institutional reforms in health, rural water supply and social protection, and continues to consolidate the reforms started under PRSC 1, A. EDUCATION 108. Basic education is an important priority of the Government. The PRSP commits the govemment to allocating 25 percent o f the domestic budget to education. In 2003, the Government prepared a Strategic Plan for the Reform and Development o f the Education Sector along with a detailed plan o f action for Education for All, which covers the first nine grades o f school (called "Education Fondamentale"), with concrete proposals for achieving the target o f universal completion of the primary cycle (grades 1-5). These documents, which were in line with PRSP priorities, were presented at a meeting of the Friends of Madagascar in October 2003, which was attended by donors, the leading representatives o f the Education Ministries as well as the Minister o f Finance and the Vice-Prime Minister. 109. Despite a relatively high gross enrolment ratio at the primary level, most children do not complete even the primary cycle. Insufficient provision o f schooling facilities (classrooms and teachers) i s a significant constraint on expanding access and improving quality. The average pupil-teacher ratio i s close to 60, but inpoorer localities, the ratio rises to 70 or 80. The repetition rates inthe primary cycle - around 30 percent - are among the highestinsub-Saharan Africa, leading to tremendous inefficiencies in the use o f scarce public resources. Less than 40 percent o f students who enter class 1complete grade 5. Achievement levels in the primary cycle, as measured by student performance on standardized tests in language and mathematics, are low. 110. The inadequacy of teachers reflects both an absolute shortage as well as problems with a rational deployment of teachers (based on pupilnumbers) and a highproportion o f teachers who are in administrative jobs in either the Central Ministry or in local education offices. Communities have responded to this shortage by hiringteachers at the school level; these teachers, however, are of variable quality and there are no criteria for their recruitment. 111. In 2002, the government abolished all student charges for primary school. Free textbooks and pupil materials were also provided under the World Bank education project and were later financed bythe domestic budget. Further,the Govemmentextended financial contributions to communities for the hiringof local teachers. This ledto atremendous surge inenrolments, not only innew entrantsinto class 1but the retum of children who had earlier dropped out or had never enrolled. This unexpected surge in enrolments has compounded the problem of rapidly expanding access while ensuring that quality improves. 112. Inearly 2004, the three ministries of Educationwere mergedinto a single Ministry inorder to ensure that there was an overall strategic direction to the education sector and that sub-sectoral priorities andtrade-offs couldbe undertaken with greater ease. 42  ReformProgram 113. The most dramatic progress has occurred in enrolments at the primary stage. Against an expected target o f about 2.89 million students in 2003/04, an estimated 3.37 million students were enrolled. As a result, the net enrolment rate i s over 90 percent. This large increase was supported by the measures taken by the Government, such as the free supply o f textbooks and pupil materials, enhancements in the subsidies for community teachers and provision of funds to schools, all o f which were financedby the enhancedallocations inthe domestic budget supported by the PRSC. 114. However, progress on other indicators for the implementationof the EFA Plan has been relatively limited. There has been no significant reduction in the repetition rate, which continues to hover around 30 percent. The completion rate also continues to be low. Recent achievement surveys indicate either a stagnation or even a reduction in average achievement levels, compared to 1999. This partly reflects the fact that the effects of recent reforms and measures will take some time to produce results onthe ground. 115. Significant progress has been made in expanding schooling facilities but they fall short of the targets set. About 1413 classrooms were constructed, against a target of 2000; the 30 percent shortfall was due to difficulties in construction management, lack of timely availability o f budgetary allocations and the rising unit cost causedby the devaluation of the FMG and consequent increase inthe price o f imported materials. The shortfall in the realization o f targets for teacher hiring are even larger. Only 50 percent o f the 1800 new planned teachers could be recruited. There has been no progress made in redeploying teachers from the areas with low pupil-teacher ratios to those with high pupil-teacher ratios. Recently, the Government has introduced measures to ensure that new recruits are assigned to a specific school inorder to ensurethat they do not move back to another region. 116. Measures have been taken to improve quality but more is required: A major quality improvement program has been launched with the help of UNICEF (Approche Pur les Competences), which includes training of teachers, providing support in classrooms and the development o f teacher guides. A provisional training plan for pre-service and in-service training of teachers has been prepared and about 5 percent of the salary expenditure for 2005 has been budgeted for training. Revision of the training curricula and o f rehabilitation o f training facilities has been undertaken. Nevertheless, there has been no significant progress on key issues identified inthe EFA plan: training o f teachers inpedagogical methods for multi-grade teaching, or teaching inlarge groups, establishment o f a multi-year training plan, or improving the mastery o f the language of instruction by teachers. Although the Government has adopted inprinciple a measure to reduce repetitionrates within the 2-year cycles o f the primary stage, the results are affected by the lack o f effective communication o f the new strategy to teachers and communities. The difficulties inredeploying teachers to bringdown pupil-teacher ratios and the variable quality o f the community teachers are among the main factors which impede progress on quality. The proposal to raise the subsidies for community teachers to about 2.5 times per capita GDP, against the current level of 0.7 of per capita GDP (a level which is too low to attract quality teachers), has also not been implementeddue to lack o f availability o f the budget. 117. The Ministry has started to address the issue of improving management and implementationcapacity.Followingthe merger o f the three Ministries, the Ministry has commissioned a study on the functional reorganizationof the Ministry.A study to develop a planfor the rationalization of human resources within the Ministryhas also been commissioned (this i s a PRSC 2 trigger as well). The Ministryis also undertaking studies on strengthening the statistical capacity and on improving financial management and procurement capacity. Introduction o f information technology inthe Ministryhas begun with the appointment of an ICT director inthe Ministry,the supply o f computers to provincial offices and the development o f an intranet. Most o f the measures for improving management in key areas, such as 43  construction management, textbook management, and personnel management remain to be elaborated in detail. 118. Budget executionand budget preparationcontinue to face problems. Apart from the general problems o f budget execution (for example, an effective execution period of 9 months), the problems of the execution of the 2004 budget were reflected in delayed payments for community teachers, caisses scolaires, and for construction. Final data on the execution o f the budget for 2004 are not yet available. The execution problems partly reflect overall budgetary constraints, which led to suspension of commitments inmid-year, and also the lack o f budget execution capacity within the Ministry to prepare, monitor and modify quarterly cash flow and procurement plans. In line with the overall program of the government, the Ministry has now adopted programbudgets. The preparation of the 2005 budget posed significant problems due to lack o f clarity about these program budgets and the difficulties of coordination between the MENRS and the MEFB. Another issue i s the lack o f effective linkage between the mediumterm projections for educational expenditures, based on the strategic goals and objectives of the Ministry, and the annual budget preparation, leading to shortfalls in the allocation of resources for some key inputs. 119. Madagascaris on the list of potentialcandidates to receive funding from the Educationfor All-Fast Track Initiative. In2005, Madagascar i s expected to receive interim grant financing from the EFA-FTICatalytic Fund, basedon its updated EFA plan of April 2005, which has been endorsedby the local donors (see next para). 120. Theprior actionsfor educationunderPRSC2 include: 0 The implementationof the EFA Plan is sound as assessed by a joint-donor evaluation: As noted above, while there has been significant increase inenrolments, many of the other expected results of the plan have not been met, nor have many key strategies been implemented. The Government prepared a revised EFA plan in April 2005, taking into account the lessons learnt over the last two years, and submitted it to the EFA FTICatalytic Fundto access additional grant funds. The local donors have preparedajoint assessmento f this plan and its implementationover the last two years, using a tool prepared by the EFA-FTI. The assessment was undertaken in early May 2005. The overall assessment is that the EFA plan i s sound, and that the Government i s adjusting its strategy appropriately to focus on quality and improving completionrates. 0 Preparation of HR rationalization study: The study on HR rationalization has been completedinMarch2005. The issues that are to be addressedinthis planare highly contentious (for example, the redeployment of teachers from administrative positions, a more rational deployment of teachers across schools) and linked to overall reform o f the civil service. Careful thought will have to be given to implementreforms in a participatory manner, involvingteachers and communities, andperhaps pilotingthem insome areas. 121. The indicativetrigger for PRSC3 is that the implementationof the EFA remains on track. ExpectedResults 122. The enrolment rates have increased beyond expectations, and the current primary net enrolment rateis projectedto bewell over 90 percent. 44  2002103 2003104 2004105 2005106 (actual) (actual) (objectives) (objectives) Attaining the EFA Goals Primary school completion rate 38 47 53 60 Net enrolment rate (%) 82 97 97 97 (upfrom 70% in2001102) Percentage of 6 year olds enrolled 80 94 94 94 inprimary school (upfrom 66% in2001102) Number o f textbooks per primary n.a. 0.9 0.9 1.o school student Textbooks distributed 3 million 6 million 2 million 2 million School and teacher kits distributed 3 million 1.2 million 1.2 million 1.2 million Classrooms constructed 700 1500 2000 2000 Teachers recruited and trained 600 600 2000 2000 Number o f FRAMteachers for 8,000 1 17,650 23,450 22,950 Percentage o frepeaters 29 30 15 12 B. NUTRITION 123. Malnutrition rates remain high in Madagascar, but the negative trend since 1997 has been reversed. The results of the anthropometric survey, conducted by INSTAT between May and August 2004 show a reduction inthe national underweightmalnutrition rates among children under five from 43 percent in 1997 to 35 percent in 2004. Stunting, or chronic malnutrition rates remain very high at 47.5 percent. Decreasing stunting takes long-term commitment and intensified attention towards pregnant women in order to reduce low birth weight. Impressive improvements have been made concerning exclusive breastfeeding o f children under six months (from 43 percent in 1997 to 67 percent in2003/04 based on the DHS) and Vitamin A supplementation among children under five (from 4 percent to 76 percent over the same period). However, micronutrient deficiencies, especially iron-deficiency among young children remains very high, with more than two-thirds o f children under the age o f five suffering from anemia. In addition, seasonal short-term hunger among school-aged children has been highlighted as a major impediment to learning. 124. The quality of nutrition services, integration of basic health services at the community-level, and strengthening of the referral system for severely malnourished children, has improved in recent years, but requires more attention to address the remaining challenges, iron deficiency anemia among young children, seasonal hunger - especially among school-aged children - and systematic nutrition surveillance. 125. The reversal of the negative trends and improvements in the nutrition situation in Madagascar are the results of strengthened capacity to develop policies, implement programs at the 45  community level and improved quality of nutritionservices. Under Government leadership, all the nutrition partners have adopted a harmonized approach for community based nutrition activities, and a National Community Nutrition Program was developed and i s being piloted in 22 regions. Further progress though is needed to consolidate capacity and coordinate within the key-sectors, such as health and agriculture. The National Council for Malnutrition and Office National de Nutrition (0") which represent all stakeholders innutrition inMadagascar, are very well placed to take on these extra efforts. ReformProgram 126. The Government is highly committed to continuing the reduction of malnutrition as evidencedby the adoptionof the first NationalNutritionPolicy inApril of 2004 under PRSC 1and the creationof the NationalCouncilfor Malnutrition(C") and its secretariat, the Office NutionuE de Nutrition (0") inNovember2004 to lead the implementationofthe NutritionPolicy andprograms. A NationalNutritionAction Planwas developed over the last months of 2004 andtechnically validated in March 2005. The Government of Madagascar and Parliament also demonstrated very strong political commitment by approving a US$23 million budget for nutrition programs in 2005; this i s significantly higher than inearlier years. 127. Significant progress has been made in the fight against malnutrition, with continued support fromthe Government to 3600 nutritionsitesin2004, reachingover 650,000 childrenunder the age of 3 for growth promotion and counseling services. Impact survey data shows significant decreases in severe and moderate underweight malnutrition rates in the program areas, with an improvement o f 43 percent inthe moderately underweightrate inthe Seecaline sites versus 32 percent in the non-Seecaline sites. Furthermore, a more detailed analysis o f the monitoring data of the Seecaline project shows that the underweight rate improved on average between 18 percent and 40 percent during 1999-2002 inthe Seecaline sites. Moreover, the sites which were exposed longer to the program have a differential advantageon the malnutrition rate (approximately 8.0 percentagepoints per additional year of exposure to the program). As a result of the demonstrated achievements o f 10-year investment in nutrition services at the community-level and the renewed political attention to the issue, extensions of nutrition sites, integration of basic health services and improved referral systems are being established under the ongoing programs supported through PRSC 1and is foreseeninfuture financing. 128. A comprehensiveschool nutritionand healthprogramis reaching almost 2 million school- aged children in the program areas and is programmedto be extended nation-widein the next years. Seasonal school-feeding programs are foreseen to address the short-term hunger problem during the leanperiodinfood-insecure areas of Madagascar. 129. The first two triggers for PRSC 2, the creation o f the National Council for Nutrition and the establishment o f its secretariat (Office National de Nutrition), were fulfilled inNovember 2004 (creation bydecree). The coordinator ofthe ONNwas appointed inMay 2005. ExpectedResults 130. The mainoverall outcome is areductioninthe childunderweightrate of 20 percent between2004 and 2007, based on the results o f anthropometric surveys (2004 & 2007). In addition, the institutionalizationo fnutrition and the development o fthe National Community NutritionProgramwould lead to sustained commitment and investment innutrition for the long term at the national, regional and commune level (integration o fnutrition indicators inthe Regional and Commune DevelopmentPlans). 46  Table 12: Key Intermediate Outputsof the Nutrition Program 2001 2002 2003 2004 2005 Children (0-3 years) in 344,000 493,000 625,300 650,000 812,000' Coverage 19% 27% 33% 35% 42% No. o fnutritionworkers 1947 3198 3608 3606 5550 and volunteers 25,000 28,000 28,800 38,850 School children inde- 424,000 1,382,000 1,326,000 1,500,000 1,815,000 worming and iron- supplementation Coverage (%) 16 50 48 52 60 Nofe:'Another 848,000 children aged 4 to 5 will be integrated inthe program over 2005. C. HEALTH 131. Recent progress on several key outputs in child health' has significantly improved infant (mostly post-neonatal) and juvenile mortality rates. Despite the absence o f a formal health sector policy document, constant changes in organization and personnel within the Ministry of Health and Family Planning (MoH), and insufficient medical specialists and paramedical staff, the sector continues to implement a number o f effective interventions while promoting several promising public-private initiatives. Under M o H direction, for example, based on the Demographic and Health Survey (DHS) between 1997 and 2003104, the vaccination rate for DTC3 increased from 46 to 61 percent. By highly subsidizingthe price o f insecticides, impregnated bednets and home treatment for malaria inchildren and by complementing delivery through public health services with an effective social marketing program through the private sector, prevention and care for malaria have been made available nationwide at an affordable price. For example, financial accessibility of bednets greatly improved, resultinginalmost no difference betweenthe four lowest quintiles inbednet ownership". However, as has been demonstrated elsewhere" IMCI (integrated management o f child illnesses) has remained limited to a few pilot sites without providingconvincing evidence o f its effectiveness. 132. Safe motherhood remained largely unaffected over the last years-the maternal mortality ratio (MMR)was 489 and 469 respectively in 1997 and 2003/04--jeopardizing the likelihoodthat Madagascarwill reachthis MDGby 2015. While antenatal care increased77 percent to 80 percent and the presence of skilled staff at birthhas increased from 47 percent to 54 percent over the same period, the lack of progress of health care at first referral level, inparticular at the district hospital level, servingthe large majority of the rural population, precluded any improvement in maternal care. Deaths due to abortioncontributed significantly to the MMR (40 percent inrural areas, and approximately 52 percent in Antananarivo), andbetter family planning interventions would considerably improve maternalhealth. Between 1997 and 2004 (DHS 1997 andDHS 2003-2004), the immunization rate increased from 46% to 61% and the modern contraceptive prevalence rate increased from 9.7% to 18.3%; a national measles campaign covering approx. 7 millions children and youths took place inOctober 2004, vitamin A distribution campaigns take place bi- annually nationwide; 360,000 permanently impregnatedbednets and more than one millionhome treatment for malaria inchildrenunder five were sold at a highly subsidizedprice. loPercentagesamong 4 lowest quintiles, DHS 2003 "refmulticountryevaluationIMCI 47  133. Control of malaria, tuberculosis and leprosy made significant progress due mainly to increasedavailability of resources. Indoor sprayings with insecticide combined with implementationof a sophisticated surveillance system" in recent years has helped contain the number of malaria cases to a minimum on the highlands. Intermittent Presumptive Therapy with Fansidar in pregnant women was scaled up last year. Social marketing of highly subsidized permanently impregnated bed nets increased mother and child prevention in the coastal regions. Furthermore, social marketing o f highly subsidized permanently impregnated bednets and of pre-dosedpre-packed chloroquine for home treatment increased mother and child protection against malaria in the coastal endemic regions. Diagnosis and treatment o f tuberculosis improved with the expansion of DOTS (directly observed therapy system) and increased drugavailability nationwide. 134. Although variable, control of other transmissible diseases (schistosomiasis, plague and filariasis) is lagging behind. While mass treatment of hyperendemic villages for schistosomiasis with Praziquantel was initiated as early as 1997, the MOHwas not able to decentralize the capacity to organize these mass treatments at district level. Despite major advances in the diagnosis of plague through the development o f a specific rapid field test, the number of deaths due to plague didnot decrease, and only major progress in urban sanitation will improve the situation. Regarding filariasis, the M o H i s still consideringwhich strategy to use to scale up its control. 135. With 0.93 percent of HIV positivepregnantwomen nationwide, the HIV/AIDS epidemicis close to generalization, necessitating major Government and partner efforts to contain the epidemic. While occurring later than most o f its neighbors, the Madagascar epidemic has increased sharply. The population i s at higher risk due mainly to the very highsexually transmitted infection (STI) prevalence rate. Highly subsidized pre-packed pre-dosed STI treatment kits are sold through social marketing through both the public and private sectors, allowing to effectively cover all areas. Since the establishment of the ComitC National de Lutte contre le Sida (CNLS) to implement the MAP, numerous activities (information, education and communication, peer education, mass media communication, cinemobiles in villages, etc.). However, while knowledge of HIV/AIDS satisfactorily progressed from 1997 to 2003J04 (from 69 percent to 79 percent for women, and to 88 percent for men), behavior change has laggedbehindamong high-riskgroups inhot spot areas as well as among the generalpopulation. 136. While the quality of basic health care is acceptable, the health system performs poorly at hospitallevel, limiting referralto urban areas and only then when it is not further compounded by financial barriers. Population coverage (<5km) is limited to 60 percent of the country. Further, approximately 25 percent o f health facilities in covered areas suffer from inadequate medical and paramedical staff (~nderstaffing/absenteeism)'~.While quality issues at the periphery pertain mainly to staffs lack o f skills (only 32.3 percent o f healthproviders measured the respiratory frequency inchildren with acute respiratory infection with no difference public and private provider^'^), quality o f services at hospital level i s affected by the lack o f proper medical specialists, lack o f equipment, of maintenance, of proper drugs and consumables, etc." ReformProgram 137. Over the past year, the health sector, a number of initiatives are underway to prepare the health sector to transition to programmatic support. These have been summarized in a recent health `'Detection of epidemics using malaria rapidtests with Lot Quality Assurance Sampling (LQAS). l3 EEEFS: Study o fthe efficiency and equity o fhealth facilities, INSTAT 2003. l4 EEEFS: Study o fthe efficiency and equity o fhealth facilities, INSTAT 2003. l5 Out of 32 district hospitals only 3 meet a set o f minimumcriteria to be fully functional. 48  sector note, and include the following. In2003, technical assistance was provided to strengthen district- level planning and budgeting capabilities, and two international NGOs have provided hands-on support over two budgeting exercises. Since October 2004, the Bank has (along with the technical assistance) provided additional financing for the health districts, approximately doubling the existing recurrent expenditure budget. Inaddition, UNICEF i s progressively introducingMarginal Bottleneck Budgetingat the district level and will cover about 50 percent of the districts by the end of the calendar year. The sector has also benefited from a significant amount of analytical work, including the efficiency and equity inhealth facilities study in2003 duringthe gratuity period (which will berepeatedina few months after more than one year implementationof the new cost-recovery scheme) and the DHS 2003-2004. A health sector MTEF has beenprepared within the context of the Government's public finance reforms, and two important studies (a national health accounts and a human resources study will begin in 2005 and be completedby the end of the calendar year. 138. Health service delivery will be improved both at peripheral and hospital levels in order to help reach the MDGs. Mother and child health should benefit from: (i) a more equitable repartition o f health manpower between urban and rural areas; and (ii)further increase in effective preventive interventions (increased immunization and oral re-hydration therapyI6 coverage, introduction of community based treatment of acute respiratory infections (ART) with antibiotics, zinc supplementation, etc.). Regarding safe motherhood, significant progress should be expected through the strengtheningof the regional hospitals (in addition to the 6 provincial hospitals 16 district hospitals will be upgraded as regional hospitals) and the installation of 38 ambulance inreferralhospitals connected to large scale radio communication network (currently under installation). The already improved contraceptive prevalence rate should benefit from the creation o f a Secretariat ExCcutif for Family Planning which will prioritize the 24 percent women categorized as unmet needs for contraception. Furthermore, the M O H will launch the delivery o f a revolutionary contraceptive im~lant'~,which i s much more easily inserted and removed than Norplant and which can be targeted to the poorest women, for whom payments for oral or injectable contraceptives constitute a barrier, even if the cost i s minor. The number of treatment centers for tuberculosis will be dramatically increased inorder to improve compliance with treatment and to reduce the proportion of lost to treatment. 139. Madagascar's efforts to provide services to the poor have been based on increasing the availability of quality services and ensuring the financial accessibilityof these services. With respect to availability, in addition to the ongoing program of infrastructure rehabilitation, the Ministry has taken steps to formalize a benefit package for staff working in remote/difficult locations in order to provide incentives for physicians, who were redeployed inrural health centers in 1998, and other staff to remain intheir posts. Adequate supply of drugs was restoredwith the reintroduction of costrecovery inJanuary 2004 (after a period of free distribution during the 2002 crisis), and the 35 percent markup on generic drugs is among the lowest in Africa. However, this low level of mark-up does not leave much room for additional resources to improve quality (incentives, etc.) and will be probably reconsidered after the current crisis i s over. While the Government has succeeded in maintaining low drug prices through subsidies to compensate for the high devaluation during 2004, it will have to carefully manage the restoration of prices reflecting drugs' real cost inthe upcoming months. Moreover, a substantial number o f drugs and products (mainly the ones with the highest externalities) distributedinthe public as well as inthe private sector arehighly subsidized'*. Given that drugs and consumables are cheap, free or highly subsidized at first contact level, health care i s affordable for most of the people at the periphery, allowing l6Using the latest ORT package developed by UNICEF l7Implanon l8Vaccines, prenatalvitamins and malaria chemoprophylaxis, TB and leprosy drugs, malaria treatment for children; plague treatment, STItreatment kits, permanently impregnatedbednets, contraceptives. 49  for a relatively simple exemption system. Inaddition, special services have been organized for the poor in several areas, including free nutritional rehabilitation services for severely malnourishedchildren and mothers in35 hospitals nationwide (contracted out to NGOs). 140. Cost-recovery was reinitiated at health center level, but with accompanying exemption policy measures for the poor at this level. Despite the documented highprevalence o f poverty among the general population and the introduction of payment mechanisms to assist those who have been identified as poor to have access to basic health services Cfonds d'dquite!, the small number of persons who claim to be indigent indicates that there may be significant cultural barriers to identifying oneself publicly as poor or indigent. Similar measures are gradually being introduced in hospitals, given the impoverishing effects o fhospitalization, where most surgical and other consumables are not available and must be purchased in private outlets, ending up in unreasonably expensive bills. MOH has begun studying the creation of equity funds at hospital level which could be complemented with a mutual insurance scheme where feasible. 141. Thetriggersfor PRSC2 inhealthare: 0 updating of the national policy on health-this was completedinJune 2005. 0 introduction of Medium TermExpenditure Framework for the health sector commencing inCY 2005 as anelement oftheMinistry'sbudgetpreparationprocess: the MTEFwould strengthen health sector planning and budgetingby estimating sectoral financial needs and resources over a three-year period; by fixing budget allocations for all budget holders basedon strategic priorities; and establishing a process for systematic review of proposed programactivities -this hasbeencompleted. D. RURAL WATERSUPPLY 142. The provision of drinking water services figures prominently in the PRSP as part of the objective to promote Human Development in particular for the poor and is among the top five priorities of the President agenda in "Madagascar Naturellement". Water and sanitation are o f prime importance for the development o f Madagascar because of their complementary role inpreventingdisease and reaching the Millennium Development Goals. Access to improved water supply and sanitation, accompanied by effective hygiene education, can be effective inimproving both health and productivity, improving the quality o f life and providing increased opportunities for education and employment, especially for women and girls. 143. In2004, the access to safe drinking water was only 14 percentinrural areasand 66 percent in urban areas. Diarrhea is the third cause of morbidity and mortality in Madagascar. The active population lost 6 million work days per year, estimated at 50 billion Ariary and primary students lost 3.5 million days o f school per year due to water borne diseases and an environment of inadequatehygiene. 144. The likelihoodof attaining the MDG, Le., providing 52 percent of the rural populationand 77 percent of the urban population with access to potable water and sanitation by 2015, remains constrained by a couple of issues. First, sector investments are insufficient to overcome demographic growth. In2003, for example, sector investments, which accounted for USD 12 million, provided 150,000 additional people with safe water, whereas the population has increased by more than 400,000 over the same period. Supply side interventions to meet the MDGs by 2015 would require an total amount of USD 60 million a year. Second, the sustainability o f the service remains an area of concern, inparticular for water systems installed in small towns, where the service deteriorates after some years, due to inadequate management and no efficient cost recovery system. Third, sector execution capacity, includingtechnical 50  and operational capacity in the Ministry at central and provincial levels, as well as in NGO's and the private sector, is still limited. 145. However, since 2002, a series of actions were undertaken to improve the legal and institutional framework in the water and sanitation sector. Thirteenenforcement decrees of the water law were adopted in 2003 as part of the sector reform. The roles and responsibilities of sector stakeholders are clear and well defined. Government, through the Ministry in charge of water and sanitation plans and monitors all sector activities; ensure donors' coordination and leads regular and broad stakeholders consultation processes, through the WASH (Water Sanitation and Hygiene) committee. A rural water supply and sanitation strategy was validated in 2003. The strategy i s based on the Demand Responsive Approach (DRA) concept, where communities make informed choices on the technology option, contribute to the capital cost with cash or in kind contributions and take responsibility for the operation and maintenance costs and receive adequatetraining to manage the water facilities. Inaddition to the water supply program, education hygiene and sanitation promotion are included as a package to achieve effective and sustained used of improved water and sanitation services and hygiene practices. Finally, NGOs and the private sector are in charge o f the technical study, construction, community mobilization, maintenance and morerecently inthe management o f larger pipedwater systems. ReformProgram 146. First, the sector has developed a full set of tools necessary to movetoward a programmatic approach and to scale up investments. The MEM/DEA presented its "Water and Sanitation for All" program inFebruary 2005 to the donor community. This strategy proposes a long term vision and clear objectives to reach the MDGs and solutions to increase sustainability o f the services and sector delivery capacity. The Directorate of Water and Sanitation has elaborated its first program budget for the 2005- 2007 period. In addition, the RWSS sector has prepared a manual o f procedures, including technical norms and standards for water and sanitation sub-projects implementation and management, to be usedby all stakeholders. Finally the sector undertook in 2004 an exhaustive field inventory of all water point facilities existing inthe country, which will be used as the sector baseline for measuring sector progress and has set up a water points computerized database. The results o f the field inventory were validated in April 2005. 147. Second, the sector has implemented a new policy framework for ensuring more efficient management of water services, in particular in localities with a population above 1,000 inhabitants. Villages authorities or communes can contract, under a lease or management contract, the operations o f the water systems to private operators, promoting efficient pricing, and technical and commercial operations through transparent and competitive contractingprocesses. That new approach has been tested in2005 inabout 25 localities andwill contribute to provide about 100,000 people with improvedpotable water services. 148. Third, in response to high priority for potable water supply in the PRSP, the Government has substantially increased domestic funding to the sector. The allocation for water supply tripled, from USD 1.5 million in2004 to USD4.5 million in2005, representing 38 percent of the total allocations of the Directorate o f Water and Sanitation Program budget. The allocation to the Directorate o f Water and Sanitation increased by 40 percent between 2004 and 2005 that i s from USD 10.6 million in2004 to USD 14.6 million in 2005. Expenditures towards rural areas account for 82 percent o f the 2005 Directorate of Water and Sanitation Program budget. The 2005 program will provide 250,000 additional people with safe water. 149. PRSCZ will be instrumental in increasing sector delivery capacity and scaling up rural water supply infrastructure to increase access, affordability and sustainabilityof water supply and 51  sanitation services in rural and semi-urban, in particular by: (i) improving sector programming and monitoring activities, through the Directorate of Water and Sanitation Program budget and, annual govemmentNVASH members sector reviews and coordinated donors support in order to increase sector accountability, measuring progress in program implementation and getting information about value for money and (ii) by strengthening the operational and technical capacity of the ministry incharge of water and sanitation at the central and provincial levels to better plan, manage and monitor the implementation o f the "Water and Sanitation for All Program". PRSC2 Trigger 150. The indicative trigger was that the Directorate of Water and Sanitation in Antananarivo and its decentralized departments in the six provinces are adequately staffed and equipped to implement successfully the proposed RWSS program "Water and Sanitationfor AN". The trigger has been mostly implemented. The Water and Sanitation for All strategy was produced in February 2005, and based on the results of a study to reinforce capacity inthe provincial offices, the equipment i s largely inplace, and the recruitment is ongoing for the personnel. Hence for the prior action for PRSC 2, the trigger hasbeen slightlymodified to reflect the current status. ExpectedResults 151. The mainresults expected by 2007 inthe rural water and sanitation sector with the support of the PRSC are the following: - The sector wide approach is in place. The program budget of the Directorate of Water and Sanitation i s the reference framework for strategic and operational programming and the monitoring and evaluation o f all sector activities. Investments to the sector have increased significantly. - The ministry in charge of Water and Sanitation at the central and provincial levels has the capacity to plan, manage and monitor the implementation o f the "Water and Sanitation for All Program". - Access to safe water will increase from 14 percent in 2004 to 20 percent in 2007 in rural and semi-urban area and about 1,000,000 additional people will be served over the three years program. E. SOCIAL PROTECTION 152. Seventy percent of the population lives in poverty, 23 percent are acutely poor, and shocks are widespread. Interms o f natural disasters alone, more than 30 cyclones, 6 droughts and 2 famines have hit the island nation since about 1970. Madagascar's on-going risk and vulnerability analysis finds that other shocks, including human disease, locust infestation and livestock disease, are widespread, if less visible than natural disasters. 153. Existingsafety net programs are ill-adapted to effectively managingthese risks. The current system of safety nets has evolved in response to various crises. As a consequence, much of today's spending appears to be crisis-driven, to the detriment o f longer term strategic aims. Moreover, beneficiary groups have not been rigorously defined nor prioritized. Although social protection spending comes to approximately 7 percent o f Government expenditure (above-average for comparable countries), the lack of a clear definition and prioritization o f vulnerable groups creates the risk that these resources 52  will be spread across broad beneficiary populations, to little effect, rather than concentrated on the neediest groups. In order for Madagascar's social protection resources to achieve maximum impact, a greater portion o f resources need to be invested further upstream, in risk prevention and mitigation instruments; in a more coordinated fashion, with less overlap between different partners' activities; and for the benefit o f well-defined, agreed-uponvulnerable groups. 154. In 2002, the Government created a Technical Committee on Social Protection (TCSP) to address the issues raised above, through development of a comprehensive Risk Management and Social Protection (RMSP) Strategy. Though the TCSP has been effective in this role (the RMSP Strategy is expected be completed in early FY06), it is not a permanent Government body, and its mandate does not extend to implementing the strategy nor undertaking social protection reforms. Madagascar now needs a permanent institutional framework for social protection, with a mandate to implement the RMSP Strategy, to lead social protectionreforms, and to guide/coordinate future investments inthe sector. Reform Program 155. The TCSP i s in the process of finalizing a Social Protection Policy Note, and the R M S P Strategy, The Policy and Strategy will help Madagascar to set clear objectives, reform goals, and cost-effective interventions. They will be based on an assessment o f the priority areas of vulnerability, and will take into account the needto balance short-term, risk-coping instruments with long-term, growth- enhancing social protection interventions. The Policy and Strategy pieces will provide the analysis necessaryfor social protection reforms envisioned under PRSC3. 156. The TCSP has also done initial research on the creation of a permanent institutional framework for social protection. Because resources are over-invested in emergency management and response, it i s critical that the mandate o f this social protection agency/committee/secretariat encompass management o f all welfare-harming risks, and not only highly visible natural disasters and other emergencies. The Government has recently created the "Cellule de Prevention et de Gestion des Urgences (CPGU)" that includes a Steering Committee and an Executive Secretariat. Clarification about the mandateo fthis new organizationwill decide whether a more specialized agency i s needed. Results 0 Finalizationandvalidation o f the RiskManagement and Social Protection Strategy (early FY06) Creationofpermanent institutional framework for social protection (FY06) 0 Implementation o f social protectionreformprogram, and accompanying interventions (FY07) STRENGTHENINGMONITORINGAND EVALUATIONOF THE PRSP 157. The PRSP lays out the principles of the monitoring and evaluation system, the institutional framework, the objectives of the system as well as the modality o f operations with civil society and the donor community. The objectives of the system are to monitor inputs, outputs and outcomes, and evaluate impacts. To date, the monitoring and evaluation system i s at an embryonic stage. Institutional responsibilities need greater clarity. The Secretariat Technique h 1'Ajustement (STA) does not have adequate capacity to meet its function o f coordinating the technical aspects of PRSP preparation and monitoring. Capacity to monitor the implementation o f the PRSP needs to be strengthened at the sector ministry level also. The Institute o f Statistics (INSTAT), which is the central agency of the national statistical system, suffers from mismatch of technical expertise, uncertain financial position, and limited analytical capacity. The Center for Economic Research Studies (CREAM), a research center of MEFB, i s 53  also weak. Buildingin-country analytical capacity to generate quality policy analysis and informpolicy- makers' decisions also remains amajor challenge. ReformProgram 158. The PRSCsare supportingthe followingreforms: e the developmentof a concreteplanfor strengtheningthe monitoringand evaluationsystem. An Institutional Development Grant has just been approved to support this important activity. Madagascar will be a pilot country for a donor coordinated statistical capacity buildingtechnical assistance withthe EU, DFID, PARIS 21and the World Bank. The elements of such a plan could include (a) strengthening the logical framework for the PRSP to linkthe combination of projects, programs and policies to outputs and development outcomes. The data collection plan would be made consistent with this framework; (b) clarifying the institutional structure for monitoring and evaluation; (c) capacity buildingplan, for STA, INSTAT, and key sector ministries, to enable these institutions to undertake their functions; (d) further elaboration of the Statistical Master Plan from INSTAT to the national statistical system to include a well developed capacity building plan, data collection system and medium-term financing plan to improve predictability of resources and updating of the legal and institutional framework for the National Statistical System to clarify mandates and responsibilities, and improve coordination and harmonization; and (e) a clear policy for open access to public information to strengthen government transparency and accountability, and to elicit the participationo f civil society inmonitoring PRSP implementation and especially service quality and delivery. This would include, among others a protocol for open access to primary data. 0 Support to the 2004 household survey: Technical assistance to support the new household survey (Enqugte Prioritaire aupr2s des Mdnages, EPM) in 2004 (comparable to the 2001 EPM survey), with a module on vulnerability was provided. Data collection has just been completed and analysis i s ongoing. Povertyand SocialImpactAnalysis 159. The Government i s committed to undertaking poverty and social impact analysis (PSIA) o f key policy reforms. To inform the content o f this PRSC and to inform other critical policy issues, ex-ante poverty and social impact analysis has been undertaken inthe past year. The areas include: (i) Poverty and social impact analysis of the impact of changing rice tar&%. The changed economic environment o f 2004, with a sharply depreciating exchange rate and higher world prices o f rice, altered the balance between the interests o f rice producers and consumers. In 2003, rice tariffs were at 20 percent. Analysis showed that at the new exchange rate and world prices o f rice, the tariff could be reduced. This was done in the 2005 Loi des Finances with rice tariffs being reduced to 10 percent. Further analysis i s being undertaken to provide the Government policy options to manage future rice crises better. (ii) Analyzing thepoverty and social impact of cost-recovery in the health sector: The participatory work on this issue is commencing, and results are expected inthe next six months. The work will focus on understanding the effectiveness o f current and proposed safety net mechanisms in targetingthe poor for protection from health fees inbothurban and rural areas, at the hospital and health post level through qualitative field work and analysis of existing quantitative data. In addition, it will seek to understand the evidence on the distributional impact of reinstatement of cost recovery, to develop a consensus among stakeholders (NGOs, ministrypersonnel etc.) on the appropriate role for a safety net mechanism. 54  (iii) Land tenure - Recognizingthe importance of a transparent and well-functioning property rights regime to meet the growing demand for formalization, reduce disputes and court cases, improve the investment climate, increaseagriculturalproductivity among the rural poor, and promote good governance more broadly, the Government has made land tenure reform one of its key priorities. New land legislation will be presented to parliament in July 2005, to be followed by a piloting phase (supported by the EU, FAO, France, FAD, the U S M C A program), to test community- driven and decentralized approaches to formal registration and conflict-resolution. A PSIA will complement these efforts by providing an ex-ante evaluation of the impact o f land tenure securitization. The study will be based on a detailed farm-level survey specifically designed for thispurpose, collected duringApril-May 2005 inthe Lac Alaotra region, the mostimportantrice- growing area of Madagascar (and also the main focus o f the Watershed Management Project). Information was gathered from 1700 households on land productivity, investment, land documentation, conflicts and tenure insecurity. The study will compare outcomes - land values, investment, land conflicts, land leasing, and productivity - across titled and untitled plots to assessthe economic and social costs of tenure insecurity. V. CREDITIMPLEMENTATIONAND RISKS A. CREDIT ADMINISTRATION 160. The key prior actions that have been completed prior to Boardpresentation of PRSC 2 are shown in Table 13. While PRSC 3 is designed to support the overall implementation of a broad range of reforms, there are a number of core monitorable actions proposed as indicative triggers for PRSC 3. They will serve as the basis for the Bank to proceedwith PRSC 3. Disbursement,Reportingand Auditing Arrangements 161. The safeguard assessment carried out by the IMF identified some weaknesses in the B C M (Madagascar Central Bank) control environment, especially in the areas of internal control and financial reporting. However, an agreed action plan with the B C M authorities have been developed to address them. The follow-up report issued in March 2005 by the IMF revealed real progress in the implementation of this action plan. In addition, steady progress has also been noticed in the implementation of the priority action plan for public finance reforms. As a result no additional fiduciary arrangementswill be required. 162. The proposed credit will follow the Bank's disbursement procedures for development policy support. Credit proceeds will be disbursed against satisfactory implementation o f the development policy program and not tied to any specific purchases or be subject to procurement requirements. Once the credit is approved by the Board and becomes effective, the proceeds of the credit will be disbursed in compliance with the stipulated single tranche release conditions. Once the Bank's Board approves the credit and at the request of the Borrower, IDA will disburse the proceeds o f the credit into an account designated by the Borrower that i s part o f the country foreign exchange reserves account at the Central Bank o f Madagascar. The Borrower shall ensure that upon the deposit of the Credit into said account, an equivalent amount i s credited in the Borrower's budget management system, in a manner acceptable to the Bank. The Borrower will report to the Bank on the amounts deposited inthe foreign currency account and credited inlocal currency to the budget management system. Ifthe proceeds o f the credit are usedfor ineligible purposes (i.e. to finance goods or services on the standard negative list), as defined in the Development Credit Agreement, IDA will require the Borrower to promptly upon notice from IDA, refund an amount equal to the amount o f said payment to IDA.Amounts refunded to the Bank upon such request shall be cancelled. The administration o f this credit will be the responsibility of the Ministry of 55  Finance. IDA will have access to: i)the Auditor General (Chambre des comptes) audit report on public accounts and; ii) the annual financial statements of the Central Bank audited in accordance with International Auditing Standards. PRIORACTIONSFORPRSC2 TRIGGERSFORPRSC3 Governance Public Financial Satisfactory implementation o fthe 2004 Satisfactory implementation o f Priority Management Priority Action Plan for public financial Action Planfor 2005. management reforms. Budget Formulation Budget for 2005 allocates greater share o f Budget for 2006 allocates adequate resources to PRSP priority sectors relative to resources to PRSP priority sectors. 2004, with adequate funding allocated to key priorities (such as education, health, nutrition). BudgetExecution Monthly accounts producedby the 15" o f the Monthly accounts producedby the 15'ho f following month inTamatave, where the the following month inthe five regional transitional financial management system is treasuries and central treasury where the fully operational. transitional financial management system i s fully operational. Final accounts for 2003 prepared by the Treasury. Procurement Establishthe new procurement oversight New Procurement Code applied, institution ("Autoritk de Rkgulation des Procurement Oversight Institution, Marches Publics") procurement entities inthe sector ministries, and the Appeal systemoperational. Accountability Projet de loi de Rkglement for 2002 and 2003 sent to the Auditor General. Decentralization Increase resource allocation for the communes Adopt a time-bound actionplan for 2005 for Satisfactory implementation o f customs ~~customs ~ customs reform and start implementation. actionplan. Human and Material S writv Education Implementation o f the National Education Implementation o f National EFA Plan on for All (EFA) on track. track. Health Update national policy for health. Introductiono f MediumTerm Expenditure Framework for the health sector commencing inCY 2005. Nutrition Creation o fNational Councilfor Nutrition and establishment o fthe secretariat (Office National de Nutrition) and appointment o f its coordinator. Water Supply The Directorate o fWater andSanitationin The Ministryand its mainpartners begin Antananarivo and the six decentralized implementation o f the recommendations o f departments inthe provinces have started to the sector review inthe programbudget adequately staff and equip themselves to 2007-2009 implement successfully the "Water for All" 56  Implementation 163. The responsibility for implementing the PRSC program in Government rests with the Ministry of Economy, Financeand Budget. This represents a change since the Vice Prime Minister's office was dissolved in March 2005. The Government has continued to take the lead in updating the program policy matrix, and the Ministryo f Economy, Finance and Budget coordinated inputs from all the relevant ministries to update the policy matrix. B. ENVIRONMENTAL ASPECTS 164. The proposed PRSC 2 i s a development policy credit insupport of a broadprogram o f policy and institutional reforms, for which the environmental requirements of OPBP 8.60 apply. The PRSC 2 program does not pose any significant environmental impacts. The Bank`s overall strategy has focused on further strengthening of the Government's legislative andinstitutionalcapacity to address environment andnaturalresource management. 165. The Government of Madagascar adopted the National Environment Action Plan (NEAP)in 1989 to give greater coherence to efforts to manage the natural environment. To this end, a Policy has been developed inorder to mainstreamenvironment within economic development. The Policy i s well defined in the Charter of Environment published in December 1990 and modified in July 1997 and in the Environment Policy Letter adopted in August 2003. This Policy is to be implemented throughout the NEAP designed for fifteen years in three phases. The institutional and regulatory framework have been putinplace andimplementedduringthe IDA supported EnvironmentProject 1through the publicationof the first MECIE Decree (National Environment Impact Legislation) in 1992. This legislation was revised in 1995, 1999 and finally in 2003 to integrate national natural resources management and economic growth strategies. The IDA supported Environment Project 2, included a focus on integrating the environment program into national development. Several sectoral policies have been developed and implemented. 166. The third environment project approved inApril 2004 aims to consolidate the gains from the first two phases. It aims to conserve and value the importance and quality of the natural resources to allow sustainable economic growth and better quality o f life. Special emphasis is placed on improving governance, particularly inthe forestry sector through: (i) institutional reforms aimed at separating policy- making and regulatory functions from operational responsibilities; (ii) improvement o f the forest exploitation and adjudication system; and (iii) intensificationo f tavy and bush-fire control measures. This would ensure an adequate coherence o f sector legislation with the environmental legal framework as reflected in both national legislation, as well as Madagascar's participation in international conventions and treaties. In addition, the role o f national institutions in charge of managing natural resources and environmental impact, mainly between the Ministry of Environment and Water and Forest and the National Office of Environment (ONE), has been clarified. This would ensure better management of standards such as cost effectiveness, quality o f services, speed o f EA process. Among other decisions, it has been agreed to establish a one stop shop in ONE for the evaluation of EIAs and the issuance of environmental permits. Moreover, decentralization of legislation process is underway with an important information campaign and a capacity buildingprogram. Finally, for the sake o f good governance and to provide a strong signal to the private sector, these institutions will aim to ensure that all public investments effectively comply with the existing legislation. The policy is flexible and its implementation progressive. Sector investments, such as investments in water and sanitation will be carried out in line . with an implementation framework and a manual o f procedures which takes into account the experience of IDA-financed projects (PAEPAR and FID) and the national environmental impact legislation. The manual of procedures incorporates the environmental impact framework tested in the latter projects, which was found satisfactory. 57  c. R I S K S 167. The mainrisksto the implementationof the povertyreductionstrategy include: First, Madagascar remains vulnerable to extemal shocks including cyclones and increase in intemational prices of key commodities, such as oil and rice, which regularly undermine growth and poverty reduction. The Bank i s finalizing a Risk and Social Protection Review to assess needed risk prevention and mitigation strategies for the extemal shocks Madagascar faces. The Bank has also modified procedures for its Community Development Project (FID IV) to allow the project to respond to emergenciesrapidly. Inaddition, to contain the damage from cyclones, the construction o f schools, and re-construction o f damaged infrastructure i s anti-cyclonic. The Government has set up a Cellule de Prevention et de Gestion des Urgences (CPGU) to manage, co-ordinate and monitor programs to prevent crisis, and manage them better when they do occur. Finally, the Government has made rice an important policy focus, focusing on the entire rice value chain (production, distribution, marketing), and i s also looking at policy options to better stabilize prices. Second, political stability remains key for implementing the PRSP. The President's popularity remains high, but with the next elections in 18 months from now (December 2006), short-term election objectives could dominate the policy agenda, potentially affecting the implementation of the PRSP. The Bank i s focusing on transparency and trylng to change the culture of granting ad hoc privileges through the govemance project and WBI capacity buildingsupport. The Bank is assisting the Government achieve its development objectives, andhas accelerated disbursements o f its portfolio starting FY03. Third, maintaining a stable macroeconomic environment remains critical, and managing the high inflation in the face of continued high intemational prices could prove challenging and affect macro-economic and social stability. The IMF monitors the macro-economic program regularly. Fourth, slow progress in implementing public finance reforms could hamper service delivery. Budget execution has been unpredictable, with stop-and-go cycles. The unreliability of revenue forecasting and delays in donor aid flows has meant that expenditures adjust to revenue shortfalls, thereby hampering effective budget execution. The Government has prioritized its policy actions in public finance, through the production of annual Priority Action Plans, starting in 2004. The Government has also started implementing a customs reformplan. But, ifprogress on implementation of these plans is slow, the impact on poverty reductionwould likely not materialize. To mitigate this risk the Bank is continuing to support the reforms proposed in the areas o f public finance, budget programming, procurement, institutional development and capacity building. The Govemance technical assistance project i s the key operation inthe Bank's strategy that will allow Madagascar to increase its capacity to absorb extemal aid and use it effectively in the pursuito f its PRSP objectives. In addition, ongoing operations will continue to put a heavy emphasis on institutional strengthening, training and capacity building. Fifth, the political leadership has a clear vision ofreformand is strongly committedto moving the PRSP agenda forward. Yet, implementation o f these reforms relies on civil servants at different levels. But implementing and delivering on the Government's ambitious reform program could be limitedby weak capacity. As noted above, to mitigate this risk, the Bank i s supporting institutional strengthening, training and capacity building. Sixth; sustainable poverty reduction will depend on maintaining growth at high levels, attracting private investment into the labor-intensive manufacturing sector and into ago- businesses with spread effects to rural areas, as outlined inMadagascar Naturellement. The 58  erosion o f trade preferences, and the expiration o f the MFA is expected to impact the growth of the textile sector inthe EPZ. Failure to reestablish the confidence of private sector investors in the Malagasy economy, which was affected by the politicaland economic crisis in2002, would undermine the prospects for high growth and poverty reduction. As o f today, the FDIremains low at 1percent of GDP, half the value as in 2001. The perception o f conflict of interest of elected andpublic officials couldnegatively impact on the investment climate. Riskmitigation includes the acceleration of reforms to improve competitiveness as outlined in the Integrated Framework report and active participation in trade negotiations (EU, WTO, regional), and assisting Madagascar inits quest to diversify its sources o f growth, as has been outlined inthe recently completed Development Policy Review. The ongoing Investment Climate Assessment will provide recommendations on improving Madagascar's competitiveness and the Bank will continue to assist the Government prioritize and implement reforms to improve the investment climate. The governance agenda continues to support enhanced accountability and transparency. Finally, as mentioned in the Joint Staff Assessment (JSA), Madagascar's PRSP is ambitious and its objectives can only be reachedif: (i) key reforms take place; (ii)significant institutional strengthening occurs; (iii) if donors align their support to the PRSP; and (iv) ifthe required financial support form the donor community i s forthcoming. Several actions including the Government's efforts to strengthen institutions and stay the course on key reforms will help mitigate this risk. In addition, as noted before, the donor community has already started to intensify its efforts at coordinating assistance programs, harmonizing disbursements and procurement procedures and developing common programmatic approaches centered around the PRSP. The donor community i s increasing its level of financial aid to Madagascar, and i s also providing technical assistance and support for capacity building for sustainability. Co- ordination continues to be enhanced by focusing on implementation and results, using the PRSP monitoring framework. 59  MADAGASCAR SECOND POVERTYREDUCTIONSUPPORT CREDIT ANNEXES Annex 1: Chairman's SummingUp for Sixth Review under the PRGF Program ................................ 61 Annex 2: Policy and Institutional ReformMatrix ................................................................................. 63 Annex 3: Letter o f Government Policy 80 Annex 4: Madagascar at aGlance ......................................................................................................... ................................................................................................. Annex 5: MadagascarKey Economic Indicators.................................................................................. 86 93 Annex 6: MonitoringIndicators Annex ................................................................................................ 95 60  Annex 1:Chairman's SummingUp for SixthReview under the PRGFProgram 05/11/2005 11:OS Fhx 202 623 5321 S AFRICAN I Boo1 DmvqlopdO a k 5111mlW 1201PM - User MNGCHOYHING C u m t CLassbWn: FOROFflCW. USE ONLY W c mOFTNTERNATIONALMONETARYFUNDANDFOROFFICIALUSEONLY February22,2005 TheActingChair's SummingUp RepublicofMadagascarcSixth Review Underthe PovertyReductionandGrowthFacility ExecutiveBoardMeeting05/16 February 18,2005 ExecutiveDirectors commendedthe Malagasy authoritiesfor the broadly successM implementationin2004oftheir PRGF-supportedeconomicprogram,despiteth,=severe extmalshocksandcapacityconstraints.NolabIy,effortstostabilizetheexchangeratehave provedsuccessful, economicgrowthhasbeensustained, andfiscaldisciplinehas been broadly maintained.Nevertheless,the economyremainsfragilq andvulnerableto shocks. Directorsunderscoredthat thekey policy challengesgoingforwardwill beto safeguard macroeconomic stability andto acceleratestructuralreformswith aviewto diversifyingthe economy's productionbaseandstrengtheningits competitiveness. Directorsregettedthefiscal expenditureslippagesthat occurredat the endof the year, andnotedwith concernthatinnationhadcontinuedto increaseIhroughau~. 2004. Directonwelcomedthe authorities' commitmentto tightenfiscal andmonetary policiesto controlinflationarypressuresin2005. They underscoredthatthe plannedfiscalstrengthening will callfor additionalrevenuemobilizntionefforts andstrengthenedbudgetaryexecution add control.Withregardto revenues,Directorshighlightedthe needto sigaXleadtlyincreae Madagascar's relativelylowrevedueratio.They welcomedthe decisionto rescindthe remainingtax andtariff exemptionsandpostponethe reductionintheVAT rate, butstressed that continuedefforts to strengthentax administrationaudbroadenlhebasewill beneededto buildonthe recentimprovementsincustomscollection. Withregardto public expenditures, Directorswelcomedthe prudentpolicies envisagedfor this year, andstressed the needto protectspendinginthe priority sectors for povertyreduction, inparticularthosecentraltothe achievementoftheMillennium DevelopmentGoals. Directorsemphasizedtheimportanceofpressingaheadquickly with reformsofthe public expendituremanagement systemaimedat improvingthe q,uality and efficiencyofpublicspending by addressingweaknessesinbudgetpreparalion, expenditure control, andtreasuryoperations. Directorsconsideredthatthe proposedmonetarystance for 2005 shouldhelpachieve the authorities' objective o f a sharpreductionininflation by the endof tfie year. However, the authoritiesshouldcontinueto monitormonetary conditionsclosely, and take prompt actionas needed.Directorswelcomedongoingeffortsto improveliquidity forecastingand management, butsaw scapefor furtherstrengtheningmonekuypolicyimplemmtihon, in particularthroughthe developmentofthe central bank'smonetary policyinst"@. The -over- 61  62  iu, l- : 0 1 % 0 0N  I  2 rc 0  P %  Y co h  P I E .e  a  c ri  c ri c ri m 3 ri m  ri r; ri r;  I  -0 8 s v1 0 0 N 7 8a B 0 N x I c, a   a   ?   Annex 3: Letterof GovernmentPolicy 80  81  82  83  84  85  UNOFFICIALTRANSLATION OF THE FRENCH ORIGINAL MrPaulWolfowitz President The World Bank 1818 HStreet NW Washington D C 20433, U S A Dear Mr Wolfowitz, 1. The Republic of Madagascar developed its Poverty Reduction Strategy in the end of July 2003 following a broad-based participatory process. The document was conveyed to your institution, as well as to the International Monetary FundinAugust 2003, and approved by your Executive Board on November 14, 2003. This document was updated in a broad based participatory workshop which was held on June 2 and 3, 2005. The updating essentially aims, on the one hand, to take into account changes inthe international environment and inthe Malagasy economy and, on the other hand, to integrate a longer term vision which was lacking in the previous document. 2. The strategic axes o f the Poverty Reduction Strategy Paper (PRSP) however remain the same and include: 1) restoringthe Rule o f Law andgood governance, 2) fostering and promoting a very broad-based economic growth, 3) fostering and promoting human and material security, as well as broadened social protection schemes. A three year implementation program of the strategy is expected to reduce poverty to 68% by 2006. 3. PRSP implementation started in July 2003, and continued substantially throughout 2004, taking advantage of the opportunity provided by the budgetary framework. Thus, the 2004 Budget was as much as possible aligned to the PRSP priorities and emphasized the support to actions envisioned to enhance governance and public finance management, education, health, and transport. The ultimate goal from these measures would be establishing an investment enabling climate and ensuring a better opportunity for enhancing service delivery to the population, and inparticular to the poor. 4. In the area of governance, 22 regions stipulated by the constitution were created to coordinate the actions by communes which would ensure broad based development, and to support them through developing better synergy. Such goals are pursued through the development and the implementation o f regional development plans, most ofwhich are currently being finalized. 5. Inthe same area, the fight against corruption has become more effective. The legislative and institutional framework has undergone dramatic change. Several new laws have been adopted by the Parliament. These are namely the "anti-corruption" law and the law relative to money laundering. A bill on political parties relating to new rules on their funding has been 86  submitted to Parliament for adoption. The Government has decreed several texts for implementing such laws. At the institutional level, the Independent Anti-Corruption Bureau (BIANCO) has been operational for six months. It is, among others, in charge o f undertaking surveys and audits among sensitive public services, and conducts investigations starting from corruption related complaints which are addressed to them. BIANCO i s also in charge of receivingasset declarations from electedand senior officials inthe public administration. 6. For more transparency in the actions by the mining, fishery, and forest sectors, the Government i s publishingon a biannual basis the list o f operating permit holders, as well as that o f fees collected from each operator. Within the Justice sector, anti-corruption strategies have been developed and implementedthrough strengthening internal control, inparticular inspections injurisdictions, andenforcing service standards inbothcivil andcommercial courts. Inaddition, as well as the 2004 promulgation of the law instituting the Supreme Court, administrative and financial courts have been set up in the autonomous Provinces. The missiono f such courts i s to deal with litigations anddisputesopposing the Administration andthe nonpublic sector. 7. With regard to public finance, the 2004 priority action plan for reforming public finance has been substantially implemented. Such a planrelates to enhancing revenues and streamlining the expenditure circuit. Details on the achievement of both points are provided inparagraphs 7 and 8. Regarding revenues, the first goal in the Government is to increase efficiency in tax administration; fifty (50) tax centershave been computerized. Under the same view, the software SYDONIA ++ is installed and operational and a one stop shop is working in some customs offices. Service standards which are aligned with the international standard are gradually being put inplace. 8. With regard to expenditures, several important changes occurred during 2004 regarding public finance. Those changesbrought innovation as regards to the budget chain andprocedures. Following texts have been issued: (i)the organic law on public finance, (ii) the new procurement code, (iii) reorganizing the diverse control and verification bodies, (iv) texts texts merging the functions of "sous ordonnateurs" (budget officers) and credit line managers. In addition, an Integrated Scheme for Managing Public Finance (SIGFP) i s put in place and partially operational. Such a scheme shall cover the operations on revenues andexpenditures and integrate the customs administration, the tax administration, the Treasury, the Budget and the CDE. It would enhance budget execution and monitoring. For the time being, only the Toamasina Treasury, where the systemis fully operational, canproduce monthly accounts within less than 15 days following the end o f the month. 9. Considerable progress has been made in the preparation of final accounts and Budget ExecutionLaws ("lois de rbglement"). Therefore, the draft 1999 Budget Execution Laws will be submittedto Parliament very soon. The draft Budget ExecutionLaws for 2000, 2001, 2002, and 2003 have been deposited at the Auditor General's office. The Auditor General is reviewing the drafl Budget Execution Laws for 2000, 2001, and 2002 and is planning to send to the Government the draft reports on 2000 and 2001 by end o f June 2005. At such a pace the draft Budget Execution Laws for 2000, 2001, 2002, and 2003 will be ready for submission to Parliament by the end of the year 2005. The 2003 Final Accounts will be submitted to the Auditor General's office end of June 2005. 87  10. The decree on setting up the Authority for regulating Procurementwas publishedandmost implementing texts andthe standard documents for implementing the new Procurement Code are finalized end o f June 2005. The new Code is expected to be fully operational by the beginning o f the year 2006. 11. A substantial increase inthe budget allocated to the road sector reflects the intention by the Government to materialize its support to investment andto stimulate shared growth. Thus, due to a 20% increase in the budget to the transport sector, the accessible national road network has substantially increased and rural paths have been built or rehabilitated to enhance the movement o f people and o f goods. The works for rehabilitating and enhancing important ports (Toamasina, Mahajanga, and Toliary) are currently ongoing to reduce business transaction costs and enhance competitiveness. Finally, Nosy-Be and Antananarivo-Ivato airports have been enlarged to meet tourism sector needs. 12. Other economic reform measures can be summed up as follows : (i)pursuing the liberalization o f economic and trade activities through an adopted mechanism for setting the domestic oil prices, (ii) promoting foreign direct investment and putting in place incentive tax and customs measures, (iii)identifying economic growth poles which integrate free zone enterprises, mining, fishery, tourism, and rural activities, (iv) adjusting the monetary policy and the exchange market to the development o fthe context. 13. Inthe social sector, the main activities relateto implementingthe EducationForAll (EFA) Plan through the provision o f school kits and manuals to all primary education pupils, hiring teachers, training 1,900 teacher trainees and building 1,667 classrooms. In the health area, emphasis was put on streamlining the expenditures in the sector. Therefore the survey on the national health accounts has been launched while the implementation o f District Development Plans andAnnual District Work Plansreceived support in2004. 14. In the area o f water, nutrition and social protection, the main achievements for the year 2004 were on the study / building and rehabilitating o f water supply infrastructure (drilling, wells, ...), the study / building and rehabilitating o f water conveyance infrastructure (tanks, pipelines, distribution pipes, pumps,. ..)and on the operationalization o f the National Authority for Water and Sanitation (ANDEA). 15. Due to the implementation o f these reforms, public finance has been improved through increased tax revenues end enhanced expenditure execution. Tax pressure has moved from 10.0% in 2003 to 10.9% in 2004. Despite considerable shocks (cyclones, oil price rise, depreciated rate o f the Malagasy Franc and a fairly high inflation) growth remained robust in 2004 with a 5.3% growth rate. Such growth originates namely from the highperformance infree zone enterprises, and from the tourism sector, as well as from a strong increase in public investment. 16. For the 2005/2006 period, the second year for effective implementation o f PRSP, the Government intends to consolidate and refine the measures which have been already embarked upon, namely inthe areas o f public finance, justice, and fight against corruption, development o f 88  private sector and o f social sector. Such measures will inthe short term contribute to achieving a 6.3% growth for 2005 and 7% for 2006. As it is essentially derived through a noticeable increase inbuildingandpublic works activities, such growth will doublejob creation inthe sector. Inthe primary sector, the orientation o f the Government actions towards rural development will stimulate agriculturalproduction, namely that o f rice through expanded cultivated areas or scaled up output. Such an economic growth should allow the Government to expect increase in tax revenues which would go from 11.4% in2005 to 12.1% in2006. The budgetary deficit excluding grants is projected at 9.8% o f GDP in2005 whereas the foreign current deficit will be about 8%. 17. Regarding public finance, the 2005 budget allocation was better aligned to the PRSP priority sectors. Therefore allocation toward these sectors continues to be strengthened, namely to Education (+25%), Health (+36%), and Transport (+78%). For nutrition, the Government approved a budget o f 25 million dollars for the 2005 program, which accounts for considerable increase compared to the 2004 budget. The Government has launched the 2005 Priority Action Plan and is being implemented. SIGFP is planned to be operational inprovincial capitals inthe 2"d semester o f 2005, andwould allow real time monitoring o f the budget execution. Merging the credit line manager and "sous-ordonnateur" (budget officer) functions is effective under the execution o f the 2005 budget in order to expedite and enhance the budget execution. The Government would grant particular attention to controlling public finance and strengtheningthe external control by the Parliament, the jurisdiction control by the Auditor General and the internal control through the operationalizationo fthe General Inspectiono f Finance. 18. With support from WCO, the Government is specifying its overall customs reform strategy. A priority action planfor the year 2005 is being developed andwill be validatedby mid June 2005. This plan will strengthen the ongoing actions and focus on three strategic axes: increasing customs revenues, enhancing customs service standards (in particular, reducing clearance period), and anti-comption efforts. In parallel the Government envisions important involvement by the private sector and will undertake a feasibility study for the "Tradenet" system. 19. The measures for encouraging private investment as o f the second semester o f 2005 will mostly be on developing the rural sector. They will focus on putting in place new mechanisms for funding essential agriculture infrastructure such as hydro-agricultural networks. For encouraging investment and enhancing productivity in the agricultural sector, the Government will set up a new land tenure policy and a new extension service policy for farmers. The currently ongoing works on rural roads should facilitate the flow o f goods and access o f producers to more remunerating markets. Finally, the Government would grant particular attention to monitoring the setting up o f the integrated framework program for developing Madagascar integration into international trade. 20. Inadditionto consolidatingactions inthe education andhealthsub sectors, the government would deploy the Social Protection Strategy. In education, the technical works on the Plan for streamlining and managing human resources are completed. The consultant report including a proposal o f several scenarios is currently available and the MENRS has to proceed to the second stage, i.e., establishing an implementation plan. In nutrition, the National Council for Nutrition 89  (CNN) and the National Nutrition Office (0") were established in November 2004. ONN operationalization is well on track with the appointment o f its Coordinator. 21. Regarding health, the National Health Policy is being revised andwill be finalized by end o f June 2005. A Medium Term Expenditure Framework has been introduced inthe 2005 budget. The future framework will better indicate the means to achieve the Millennium Development Goals (MDG). Regarding social protection, the 2005 budget is funding actions planned under a strategic framework. 22. For rural water supply, capacity building in the Directorate for Water and Sanitation (DEA) in Antananarivo and of the six Provincial Directorates is ongoing through provision o f equipment and adequate human resources. Aside from vehicle delivery planned in the end o f June 2005, all other equipment have been delivered and assigned to the directorates involved. The decision on the hiringo fstaff is confirmed and staffwould be deployedby endo fJuly 2005. 23. The Malagasy government is determined to achieve its goal of substantial poverty reduction planned in the PRSP. We rely on the support o f the international community, and in particular from the International Development Association, to complement the resources needed for attainingthis goal. 90  Annex 4: Madagascar at a Glance Sub- POVERTYand SOCIAL Saharan Low- Madagascar Afrlca Income 2004 Developmentdiamond' Population,mid-year (millions) 17.3 703 2,310 GNI per capita (Atlas method, US$) 290 490 450 Life expectancy I GNI (Atlas method, US$billions) 5.0 347 1,038 Average annual growth, I99844 T Population (%) 2.9 2.3 1.9 Laborforce (%J 3.2 2.4 2.3 GNI Gross Most recent estimate (latestyear available, 1998-04) Per primar) Poverty(% of populationbelownationalpovertyline) 70 capita enrollmenl Urban population(% of totalpopulation) 31 36 30 Life expectancy at birth (yearst 55 46 58 Infantmortality(per 1,000live births) 84 103 82 Chiid malnutrition(% of children under5) 40 44 Access to an improvedwater source (% ofpopulation) 25 58 75 Access to improvedwater source Illiteracy(% ofpopulation age 153) 32 35 39 Gross primaryenrollment (% of school-agepopulation) 102 87 92 Male 104 94 99 Madagascar Female 100 80 85 Low-income Q~OUD KEY ECONOMIC RATIOSand LONG-TERM TRENDS 1984 1994 2003 2004 GDP (US$billions) 2.9 3.0 5.5 4.4 Economicratios. Gross domesticinvestmenffGDP 8.6 10.9 17.9 24.4 Exportsof goods and serviceslGDP 13.3 22.0 23.1 29.9 GrossdomesticsavingslGDP 4.0 3.3 8.9 9.4 Trade Gross nationalsavings/GDP 2.1 1.4 13.0 15.9 Currentaccountbalance/GDP -6.0 -9.4 -4.9 -8.5 InterestpaymentdGDP 1.3 0.7 1.1 1.4 Total debtfGDP 73.0 138.3 83.8 108.6 Total debt servicekxports 30.3 9.3 9.3 8.7 Presentvalue of debffGDP 43.8 56.3 i Presentvalue of debffexports 187.6 186.2 1984-94 199444 2003 2004 2004-08 Indebtedness (average annualgrowth) GDP 1.2 2.7 9.8 5.3 6.5 GDP per capita -1.5 -0.3 6.8 2.6 4.0 -Madagascar Exportsof goods and services 4.0 0.7 45.4 -6.0 9.3 Low-incomegroup (% of GDPJ Growthof Investmentand GDP(%) Agriculture 35.3 23.8 29.2 28.8 Industry 13.0 9.7 15.3 16.0 loo Manufacturing 11.2 8.0 13.7 14.2 50 Services 51.7 66.5 55.5 55.2 0 Privateconsumption 86.2 89.8 81.9 81.4 Generalgovernmentconsumption 9.8 6.9 9.2 9.2 Importsof goods and services 17.9 29.6 32.1 44.9 -GDI  Madagascar at a Glance (continued) PRICES and GOVERNMENTFINANCE 1984 1994 2003 2004 IInflation Domestic prices 1 I%change) Consumer prices 39.1 -0.8 26.9 ImplicitGDP deflator 10.3 41.7 2.8 14.3 Government finance (% of GDP, includes currentgrants) Current revenue 15.1 9.1 12.8 15.7 Current budget balance 8.1 -4.3 1.5 3.7 I Overallsurplusldeticit 1.7 -11.2 -6.8 -5.8 -GDPdeflator -CPI 1 TRADE 1984 1994 2003 2004 (US$ millionsf Total exports (fob) 337 447 941 920 1.800 T Coffee 141 86 4 6 1,Bw Vanilla 53 63 195 108 1,400 Manufactures 42 191 640 653 1,200 1,ooO Total imports (cif) 411 642 1,521 1,634 800 Food 48 79 96 83 Bw Fueland energy 98 72 213 204 400 Capitalgoods 68 143 208 300 200 0 Export priceindex (1995=100) 99 91 136 150 98 69 w 01 02 03 Importprice index (1995=100) 70 93 92 98 EExports Imports Terms of trade (19951100) 140 98 148 152 BALANCEof PAYMENTS 1984 1994 2003 2004 (US$ millions) Exportsof goods and services 390 653 1,261 1,304 0 Imports of goods and services 513 874 1,752 1,956 1 Resource balance -122 -221 -491 -651 -2 Net income -132 -146 -80 -81 3 -4 Net current transfers 77 90 303 364 5 Current account balance -177 -277 -268 -369 e 7 Financingitems (net) 184 269 285 386 -8 Changes in net reserves -7 8 -17 -17 8 Memo: Reserves includinggold (US$ millions) 68 62 397 467 Conversion rate (DEC, locallUS$) 576.8 3.082.7 6,191.6 9,354.1 EXTERNAL DEBTand RESOURCEFLOWS 1984 1994 2003 2004 (US$ millions) Total debt outstandingand disbursed 2,147 4,096 4,590 4,734 IBRD 25 14 0 0 IDA 251 1,021 1,823 2,103 F,07 G:231 Total debt service 123 65 119 114 IBRD 3 5 0 0 IDA 3 13 37 42 Composition of net resource flows Officialgrants 68 116 186 251 Officialcreditors 160 56 147 259 Privatecreditors 3 -5 -8 4 Foreign direct investment 9 6 13 44 Portfolioequity 0 0 0 0 0:128 c:202 World Bank program Commitments 45 53 90 A IBRD E Bilateral - Disbursements 30 60 195 306 B IDA D Other multilateral - F Private Principalrepayments 2 9 24 27 C IMF --- G Short-term .- Netflows 29 50 171 279 Interest payments 4 8 13 15 Nettransfers 24 42 158 264 92  Annex 5: MadagascarKey EconomicIndicators Gross domestic producta 100 100 100 100 100 100 100 Agriculture 29 32 29 29 28 27 27 Industry 15 14 15 16 16 16 17 Services 57 54 55 55 56 56 56 Total Consumption 85 92 91 91 88 87 86 Gross domestic fixed investment 18 14 18 24 25 25 24 Government investment 7 5 8 9 11 11 11 Private investment 11 9 10 15 14 14 13 Exports (GNFS)b 29 16 23 30 30 30 30 Imports (GNFS) 32 23 32 45 43 41 40 Gross domestic savings 15 8 9 9 12 13 14 Gross national savingsc 17 8 13 16 17 18 18 Memorandum items Gross domestic product 4530 4397 5474 4359 4941 5381 5819 (US$ million at current prices) GNIper capita (US$, Atlas method) 260 230 290 300 290 290 310 Real annual growth rates (%, calculated from 1984prices) Gross domestic product at market prices 6.0 -12.7 9.8 5.3 6.4 7.0 6.3 Gross Domestic Income 9.3 -13.6 13.4 6.1 5.3 7.3 6.3 Real annual per capita growth rates (%,calculated from 1984prices) Gross domestic product at market prices 3.O -15.2 6.8 2.6 3.9 4.4 3.7 Total consumption 1.9 -10.1 10.4 -3.5 -2.8 1.8 2.2 Private consumption 0.9 -9.5 9.5 -3.7 -3.0 -0.7 1.9 Balance of Payments (US$ millions) Exports (GNFS)b 1317 730 1261 1304 1501 1625 1749 Merchandise FOB 965 499 941 920 1062 1132 1229 Imports (GNFS)b 1462 1029 1752 1956 2134 2211 2317 Merchandise FOB 950 620 1131 1314 1457 1498 1567 Resource balance -146 -299 -491 -651 -633 -585 -568 Net current transfers 146 99 303 364 342 350 358 Current account balance -59 -271 -268 -369 -380 -322 -300 Net private foreign direct investment 93 9 13 44 74 81 87 Long-term loans (net) 136 85 146 283 313 337 339 Official 108 149 147 259 182 148 167 Private 28 -64 -1 24 131 189 172 Other capital (net, incl. errors & ommissioi -72 124 126 58 38 36 20 Change inreservesd -98 53 -17 -17 -46 -132 -147 Memorandum items Resource balance (% ofGDP) -3.2 -6.8 -9.0 -14.9 -12.8 -10.9 -9.8 Real annual growth rates ( YR84 prices) Merchandise exports (FOB) -2.1 -46.7 40.1 -11.0 59.7 2.5 6.2 Primary 0.1 -23.9 13.0 -25.7 75.6 -2.4 5.8 Manufactures -4.6 -59.8 75.9 -11.9 49.4 4.9 6.0 Merchandise imports (CIF) 14.4 -26.7 73.7 0.5 2.9 4.7 6.2 93  Annex 4: Madagascar Key Economic Indicators (continued) Publicfinance(as YOof GDP at marketprices)e Current revenues 11.6 8.8 12.8 15.7 14.4 14.8 15.1 Current expenditures 10.3 10.3 11.4 11.9 10.8 10.4 10.7 Current account surplus (+) or deficit (-) 1.3 -1.5 1.5 3.7 3.7 4.4 4.4 Capital expenditure 8.1 5.3 8.2 9.5 10.9 11.2 10.7 Foreignfinancing 4.6 5.0 5.4 7.0 7.9 7.5 6.7 Monetaryindicators M2/GDP 24.7 26.2 25.1 24.3 23.8 24.2 24.9 Growth o fM2 ("h) 24.4 7.1 8.2 16.4 19.2 14.5 14.5 Private sector credit growth I 19.1 -10.2 96.9 -466.7 143.6 149.4 128.8 total credit growth (%) Priceindices(YRS4 =loo) Merchandise export price index 113.4 110.0 148.0 162.7 117.5 122.3 125.O Merchandise import price index 108.8 113.6 116.3 124.3 128.1 128.4 126.1 Merchandise terms o ftrade index 104.1 96.8 127.3 130.9 91.7 95.2 99.1 Realexchange rate (US$/LCU)f 57.8 62.5 65.6 67.1 66.9 67.3 67.7 Real interest rates Consumer price index (% change) 7.4 15.8 -0.8 26.9 5.0 5.o 5.0 GDP deflator (% change) 7.3 15.3 2.8 14.3 14.6 4.9 4.9 a. GDP at factor cost b. "GNFS" denotes "goods andnonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includesuse ofIMFresources. e. Consolidatedcentral government. f. "LCU"denotes"local currency units." An increase inUS$/LCU denotesappreciation. 94  L 1 i? sP .-C e e  0 s h 2N -S gm P s 2 N I s 00 c1 e Ie   m w m VI b w l -? In bvI 0 0 - w m\c VI dv. m o c I m w c "P VI d U 0 00 VI N