Madagascar PER

1. Madagascar PER Helping to link the Budget to the PRSP Christos Kostopoulos, ECSPE Dieudonne Randriamanampisoa, AFTP1

2. Madagascar PER: PRSP  Budget • COUNTRY PROFILE • PRSP – Objectives, Implementation challenges, Recommendations • Macro • Allocative • Budget management • ACCOMPLISHMENTS (modest), LESSONS, AND NEXT STEPS

3. Madagascar PER: PRSP Budget A. Country Profile • Population of 17 million, 80 percent live in rural areas (2004); size of France and Belgium, Kenya, Thailand • Great underexploited potential for economic growth and development - including a rich natural resources, fisheries, tourism, textiles • Declining growth, due to poor policies • Early 1990 reforms gradually pay off between 1997-2001; GDP gr. 4.6 avg. per.

4. Madagascar PER: PRSP Budget A. Country Profile

5. Madagascar PER: PRSP Budget A. Country Profile ..as if that’s not enough.. • 2002: A political crisis in the first half of the year severely disrupted the economy • GDP contracted by 13 percent, inflation was 16 percent, drop in investment and collapse of revenues • Destruction of economic infrastructure (bridges, roads) and sharp rise in urban poverty • EPZs closed • Poverty rose to 81% (simulation) • ..respects ~10-political/reform cycle • 2003: Economic recovery (9.8 percent of GDP growth –brought real incomes to 90% of pre crisis levels ); • 2004: Two cyclones, a sharp depreciation in the MGF and a collapse of vanilla prices

6. Madagascar PER: PRSP BudgetA. Country Profile • Extended dialogue on PEM issues and excellent GOM-WB relationship PEM-PFM Related activities • PER 2003/04 was an opportunity for follow-up on previous PEM/PFM and stock-taking exercise; ask of service delivery

7. Madagascar PER: PRSP BudgetB. PRSP Objectives and Implementation Challenges • PRSP Objectives: To promote rapid and sustainable development to reduce poverty by half in 10 years from 70% to 35% • PRSP Priorities • Improving Governance • Broad-based Growth (Transportation initially) • Bringing Social and Material Security (Education; Health; Security)

8. Madagascar PER: PRSP BudgetB. PRSP Objectives and Implementation Challenges • PRSP Challenges • Implementation Challenge 1: Macro framework restrained • Implementation Challenge 2: Expenditure composition not fully aligned with PRSP priorities • Implementation Challenge 3: Budget process (preparation and execution) still poor and capacity is limited, despite efforts

9. Madagascar PER: PRSP BudgetB. PRSP Objectives and Implementation Challenges • Implementation Challenge 1: Macro framework restrained • PRSP was ambitious: 2004-2006 GDP gr 7.5%; Cap exp 10.2% GDP; high deficit despite high debt: end 2001 101% Nominal GDP; • But PRGF was more cautious: 2004-2006 GDP gr 6%; Cap Exp 8.7% GDP • Year 2003 turned out better than expected, and set GOM on a higher expenditure path; although poor consensus on macro undermined MT planning • Need post 2006 framework.

10. Madagascar PER: PRSP BudgetB. PRSP Objectives and Implementation Challenges Implementation Challenge 1: Macro framework restrained (cont) Recommendations • Raise revenues • Improve revenue forecasting • Prepare annual budget framework papers to link resource availability to PRSP objectives • Prepare a post-2006 macro framework Implementation Challenge 2: Expenditure composition not fully aligned with PRSP priorities

11. Implementation Challenge 2: Expenditure composition not fully aligned with PRSP priorities Despite efforts to prioritize within the envelope… ..changes relative to GDP are modest Budget Allocations

12. Madagascar PER: PRSP BudgetB. PRSP Objectives and Implementation Challenges • Implementation Challenge 2: Sectoral expenditure composition not aligned with PRSP priorities (cont) • Allocations not aligned with Business Plans/PRSP • Marginal changes made in composition in favor of priorities (government, transport, education) BUT.. • ..impact on GDP ratios is minimal • Excessive allocations to administration; • Health sector allocation is still far behind the need; • Agricultural sector is neglected; • Not enough to Justice and environment sectors; • High Degree of Centralization • Recommendations: • (i) further prioritize (!!??), but this not easy except for some MOF expenditures • (ii) increase envelope by raising revenues and receiving more external assistance • (iii) look at sectoral policy issues that can affect intra-sectoral expenditures (education, transport, environment)

13. Madagascar PER: PRSP BudgetB. PRSP Objectives and Implementation Challenges Implementation Challenge 3: Budget process still poor and capacity is limited, despite efforts Recent achievements • Prepared Public Finance Priority action plan (2004/05) and established coordination committee in the Ministry of Finance to coordinate, monitor and evaluate reform agenda • Introduction of program budgets for 2005 • Implementation of the recommendation of an audit on the treasury • Putting in place of an integrated financial management system is ongoing • Preparation of the new procurement code • Establishment of the General Inspectorate for Finances (IGF) • Introduction of a results matrix for all ministries and departments

14. Madagascar PER: PRSP BudgetB. PRSP Objectives and Implementation Challenges Implementation Challenge 3: Budget process still poor and capacity is limited, despite efforts (cont.) Outstanding issues • Preparation • A weak macro and fiscal framework • Restricted role of cabinet (in preparation and in accountability) • Marginal involvement of line ministries in budget preparation process • Line ministry capacity in preparation is weak • Need well elaborated strategies (objectives, institutional arrangements, costing - funding availability) • Available programmable envelope limited-inadequate non salary expenditures (e.g. education, transport and environment) • Execution - Disbursement of funds: • Many processing steps to make payments (11 from commitment to execution) • Limited time for budget execution: between April to October • Weak cash management in place • Procurement problems related to investment budget (accounting/accountability) • A flawed system of financial monitoring (execution data of donor funded investment, budget reporting system of line ministries, accounts of treasury; reliability of expenditure data)

15. Madagascar PER: PRSP BudgetB. PRSP Objectives and Implementation Challenges Implementation Challenge 3: Budget process still poor and capacity is limited, despite efforts (cont.) Outstanding issues (cont) Execution-Management • A highly centralized public administration (only 3-4 percent of the national budget is managed by the communes) • Ineffective management and organizational structure (e.g. education, transport and environment) Recommendations • Tremendous training needs in the area of program budgeting, procurement and integrated financial management system • Developing a budget framework paper to strengthen macroeconomic framework preparation and make planning more transparent • Enhancing the role of Cabinet and strengthen participation of line ministries at different stages of budget preparation process • Introducing a coherent results-based management framework (linking business plans and program budgets to PRSP, regular implementation reports)

16. Madagascar PER: PRSP BudgetSummary of linkages b/w Budget and PRSP • Presidential commitment to PRSP (end 02 for 03B) • Including PRSP Business Plans (end 02 for 03B) • Strengthening of revenues / fiscal framework (03B-05B) • Continuous re-prioritization (03B-05B) • Orientation/linking of Budget Reform towards implementing policies and getting results (03B-05B) via single government-owned PEM/PFM Action Plan • New budget calendar (05B) • Early macro framework with IMF/BFP • More time for budget prep at line ministry level, coordinate with annual PRSP review (June) • Strengthen Cabinet in prioritization and reform monitoring • Later submission to Parliament • Introduction of Program Budgeting (05B) to link Budget to PRSP • Introduction of a results matrix (05B)

17. Madagascar PER: PRSP BudgetSummary of linkages b/w Budget and PRSP Generic Budget Cycle with some Madagascar “PRSP-Budget Preparation” Reforms in Red Budget Framework Paper Budget Calendar Macroeconomic Framework Ceilings Ministry ceilings developed based on bottom up requirements Cabinet Debates ceilings based on government priorities National Assembly Approves first year estimates, two forward years indicative Review of progress by central ministries to feed into setting of ceilings for next year PRSP Business Plans Sector Review Ministries define their objectives, results indicators, activities and costs for three year period based on policies and priorities Three Year Estimates Ministries finalise estimates based on approved ceilings for three year period Managing and Reporting on results Ministries use information on results to improve management and report progress Program Budgets Information on results is used in planning the next budget cycle PRSP Annual Review Results Matrix

18. Madagascar PER: PRSP BudgetD. Modest accomplishments, Lessons and Next steps • Accomplishments (PER: GOM and WB) • Raised awareness on resource issues • Raised awareness on progress on reforms • Reinforced links between PRSP and budget • Gave ammunition to reformers • Lessons • Reforms take time • Capacity building is critical • Reform management is key to maintaining reform pace • Next steps • PRSP remains MT policy document and expenditure roadmap • PER fed into 2005 PEM/PRM action plan • GOM to lead PER in 2005 • Implementation of recommendations

19. Madagascar PER Team Guenter Heidenhof and Christos Kostopoulos (Task Team Leaders), Odile Keller, Emile Louis Rene Finateu, D. Randriamanampisoa, Sylke von Thadden, Gervais Rakotoarimanana, Sylvain Rambeloson (Public expenditure management); Jacob H. Bregman, Maria Eugenia Bonilla-Chacin, Patrick Ramanantoanina (Education); Willem van Eeghen, Janet Dooley, Anna van der Wouden (Country Management Unit); Susanne Holste, Noroarisoa Rabefaniraka (Transport); Kirk Hamilton, Martien Van Nieuwkoop, Bienvenu Rajaonson, Jean-Christophe Carret (Environment); Robert Keyfitz, Luc Razafimandimby, Adam Schwartzman, Aurelien Kruse, Benu Bidani (Macroeconomic); Laza Razafiarison (Macro/Public Finance); Madeleine Chungkong, Mavo Ranaivoarivelo, Lanto Ramanankasina (overall support); Sanjay Pradhan, Brendan Horton and Stefano Paternostro are the peer reviewers. Helga Mueller was Sector Manager. Hafez Ghanem was the Country Director through mid 2004, and James Bond supported the PER as Country Director afterwards.