Madagascar initially continued to fix its currency to the French franc, although it had withdrawn from the franc area in 1973, but from 1982 managed its exchange rate more flexibly. Its monetary policy gradually focused more on inflation and adopted indirect instead of direct monetary instruments, but with financial markets that were limited and shallow. Recurring political conflicts hindered the evolution of the economy and of policy.
|Years||Targets and attainment||Classification|
|1974-81||Madagascar had remained part of French franc area after independence in 1960, from 1963 with its own currency issued by monetary authority controlled jointly with France, but in 1973 it withdrew from franc area and set up new Malagasy-government-owned central bank; currency continues to be pegged to French franc; financial system includes four commercial banks nationalised 1974-5, plus development bank, postal checking system and some nonbank financial institutions, while government issues some treasury bills and bonds; central bank mainly uses credit controls and rediscount facilities, sets but rarely changes interest rates; interbank money market from 1975, largely inactive; new socialist government from 1975 pursues faster investment and growth with reorganisation of production under national control; foreign borrowing but also high central bank financing of fiscal deficits; banking sector restructured 1977; sharp deterioration of balance of payments, fall in reserves and rise in inflation 1977-79, leading to weakly implemented stabilisation efforts; 1981 interest rates restructured and raised, money market reorganised as interbank loan market||augmented exchange rate fix AERF|
|1982-2017||1982 currency devalued and pegged to basket, with frequent small and occasional large devaluations, then relatively stable from mid-1987; from 1984 stabilisation measures more effective, but structural reforms limited; main monetary instrument remains credit controls (with prior authorisation required for some large loans), also portfolio (liquidity) ratios; interest rates decontrolled from 1983; 1987 reserve requirements introduced, treasury bill issues; 1988-9 restructuring and liberalisation of banking system; liquidity auctions (in both directions) from 1990; larger depreciation 1991 then less adjustment; political turmoil 1991-2 has drastic effects on economy and on economic reforms, but leads to new constitution and then change of government 1992; difficulties for state-owned but not private banks; monetary control issues including monetary financing of fiscal deficits; treasury bill auctions resumed 1993; 1994 interbank forex market liberalised, exchange rate floated with sharp fall, then continuing depreciations; increased autonomy for central bank 1994; privatisations and other structural reform; 1995 strong monetary tightening, by direct instruments but also rises in interest rates; credit ceilings abolished end-1995; by 2000 monetary policy focussed on inflation and forex reserves, conducted mainly via treasury bill auctions and reserve requirements, plus discount rate as signal; 2002 further political crisis with dire short-term economic effects; 2004 electronic trading system replaces forex auctions; 2005 ariary (issued since 1961, worth 5 Malagasy francs) made official currency; 2007 securitisation of central bank loans to government enables higher level of open market operations; political crisis (military coup) leading to international isolation 2009-13, economic deterioration, stagnation in monetary policy and financial development, multiple exchange rates, no consultations with IMF; 2015-16 exchange rate unification, central bank recapitalised and made more independent of government, actual and planned improvements in managing liquidity, in operating monetary policy and in forex market||loosely structured discretion LSD|
Selected IMF references: RED 1973 pp44-5, 74; RED 1975 pp34-5, 55; RED 1976 pp34-6; SR 1976 pp8, 10; RED 1978 pp38-9; RED 1980 pp41-4, 48-50; RED 1982 pp36-7, 40-1, 58-9; SR 1982 pp3-6; RED 1983 pp45-7, 52; RED 1985 pp35-7; RED 1987 pp32-5; SR December 1987 pp12-14; RED 1989 pp9-14; RED 1992 pp26-8; SR 1993 pp2-3, 6-7, 9; RED 1995 pp19-23, 38-46; SR 1995 pp1-3; SISA 1996 pp19-20, 25-31; REDSI 1997 pp12-15, 23-4, 27, 30; REDSI 2000 pp11-12; SISA 2001 pp6-9; SR 2002 pp10-12; Fifth Review under Three-Year Arrangement, September 2004, pp7-8; SR 2006 pp19-20, 83; SR 2007 pp19, 25; SR 2014 pp4-5, 7, 13-15; SR 2015 pp8, 11-12; SR 2016 pp14-15; SR 2017 p20; SR 2018 pp9-10.
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