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MADAGASCAR – ECONOMIC UPDATE: WHY HAS THE MALAGASY
ECONOMY NOT YET COLLAPSED?
World Bank – July 26, 2010
The Madagascar’s economy has suffered but not collapsed since the beginning of the political
crisis in early 2009. This resistance is viewed mainly as the combination of: (i) the modest
rebound in private activities due to the quasi-absence of violence over the past few months;
(ii) the surge in informal activities pushed by the strong performance of the rural sector (which
in turn led to a reduction in the local price of rice); and (iii) official aid flows, still equivalent to
5% of GDP, that have been directed to vulnerable population and communities. The global
situation remains nonetheless fragile, especially on the fiscal front, where limited revenues
and direct financing have restricted public spending and investment, with both short and longterm negative implications on the delivery of social and infrastructure services.
Private Sector: A surprising resistance
The domestic private sector has suffered since the beginning of the crisis, but some activities
have weakly rebounded over the past few months even though they remain far from their precrisis levels. Concurrently, the informal sector has been vibrant –fueled by the relatively good
performance of the primary sector and by the emergence of new trading activities in both
urban and rural areas.
While official data do not converge on the health of the economy in 20091, a closer look at the
performance of the largest enterprises registered in the country confirmed that they went
through a severe adjustment during the first twelve months of the current political crisis. The
sales of the 100 largest enterprises (accounting for about 1/3 of GDP) declined by 25% in real
terms. This decline was not homogenous since some banks and service industries increased
their turnover by about 5-10% during this period.
With the near absence of violence in recent months, industrial activities and domestic demand
have picked up. Energy and electricity consumption (especially to the industrial sector, Figure
1), new vehicles orders (up by 7.1%), and cement sales increased during the first semester of
2010 compared to their levels in 2009. Even the tourism sector weakly rebounded during the
January-May period of 2010 with an 11.5% increase in tourism arrivals (still 43% down
compared to 2008, Figure 2). This rebound did not include the textile sector2 and construction
activities that are still suffering from the negative external environment and the collapse in
public investment. Actually, credit to the private sector collapsed during the first five months of
1
The 2010 Law of Finance reported a GDP growth rate of 0.6% while the National Statistical Agency (INSTAT) and
the Central Bank estimated respectively a decline of 3.7% and 4.6%.
2
A recent survey conducted by the Groupement des Entreprises Franches et Partenaires (GEFP) indicates that
25,000 jobs were lost in this industry during the first semester of 2010.
1
2010, with accumulated increase of only 34 billion of Ariary, compared to 78.7 and 303.8 billion
respectively in 2009 and 2008 (see Figure 3).
Source: OMH; JIRAMA; Ministry of Finance; Ministry of Tourism; Central Bank; and Bank’s staff calculations
Any evaluation on the economic performance of Madagascar should include the informal
sector. For many observers—such as the UN, the resistance of the economy has been linked to
the surge in informal activities. Using the methodology suggested by Schneider, 3 it can be
estimated that informal activities increased by about 13% in real terms during 2009, partly
offsetting the decline in official GDP. Those statistics on the informal sector should be viewed
as indicative rather than conclusive about the combination of: (i) the relatively good
performance of the primary sector (agriculture and forestry) and small mining that remains to a
large extent outside the scope of official statistics, (ii) growing informal trade in urban areas as
the result of unemployed workers from the textile and tourism sectors,4 and (iii) rising illegal
trading of natural and protected species (e.g., rosewood).
The positive impact of the informal sector on the performance of the economy in 2009 can be
further emphasized by the record breaking rice harvests over the past two years (up by 40%
between 2007 and 2009)5 that have led to a decline in prices in all areas; especially in urban
centers. Those high production levels have been the result of good policies and, above all,
exceptional climatic conditions. When rice is available at affordable prices, poverty rates
decrease (at least in the short run) because it accounts for about 40% of the consumption
basket of poor households.
3
See, Andreas Buehn and Friedrich Schneider, Shadow Economies and Corruption All Over the World: Revised
Estimates for 120 Countries, Economics: The Open-Access, Open-Assessment E-Journal, Vol. 1, 2007-9. The share of
the informal sector was estimated equal to 39.7 % of official GDP in 2000, which is used as a benchmark.
Subsequent values of the informal economy are then simulated by assuming a constant relationship between
currency in circulation and official GDP over time. It was found that Informal activities (calculated in nominal
values) increased from 3119 million Ariary to 3813 million Ariary between 2008 and 2009.
4
This has been evidenced by the recent household surveys conducted by the UN System/UNICEF in Antananarivo.
5
Source: FAO that estimates an increase in the production volume of paddy rice from 3000 to 4200 tons over the
past two years.
2
Public Sector: Austerity but …
The public sector was the driver of economic growth during the period 2003-2008, with a boom
in public investment. Since the beginning of the political crisis, fiscal austerity has led to a sharp
decline in public spending (down by 47% between 2008 and 2010, see Figure 4). This
adjustment concentrated in capital outlays, while wages and debt payments were fully paid
over the period. Over the first semester of 2010, the wage bill accounted for 51% of total
committed expenditures, while capital expenditures were equivalent to only 10%.
The level of fiscal revenues attained
approximately 783.5 billion Ariary
between January and May 2010, up
by 13% compared to the same
period of 2009 but still down by 11%
with respect to 2008 (Table 1). All
taxes generated fewer revenues in
2009 and 2010, reflecting the
slowdown in (official) economic
activities and imports, except for the
excise and Value Added Taxes on
domestic transactions. The increase
in the collection of the excise tax is
explained by higher rates (from 150
to 250%), while higher VAT revenues (up by 42% between 2008 and 2010) are hard to elucidate
without detailed information on tax evasion and rebates.
The Government can rely in Table 1: Tax revenue performance, year-to-date variation
principle on non-fiscal revenues
May
May
10/May 09
10/May 08
that include royalties from
Domestic revenue
11.8%
8.0%
mining and forestry activities as
of which:
Direct taxes (income and profits)
13.5%
-10.2%
well
revenues
from
its
Property taxes
23.3%
-30.3%
Indirect taxes (VAT, excise)
11.4%
39.3%
participation in enterprises.
-VAT
1.9%
42.2%
Those revenues have been
-Excise
39.9%
40.9%
historically low in Madagascar,
-Others
6.8%
-33.3%
Customs revenue
16.0%
-30.2%
reaching only 0.3% of GDP in
of which:
Import Duties
10.8%
-29.9%
2008 against 2% of GDP in
VAT on import
9.4%
-28.4%
Senegal or even 5% of GDP in
Duty on Petroleum
3.9%
-32.1%
Kenya. Similarly, official figures
VAT on Petroleum
58.4%
-33.6%
Total
13.4%
-11.1%
were only equal to 6 billion
Source: Ministry of Finance and Bank’s staff calculations
Ariary during the first quarter
of 2010 even though mining royalties and duties were increased dramatically in early 2010.
Those low figures may reflect serious underreporting by the Treasury, raising suspicion on the
widespread use of out-of budget procedures and so possible corruption. Transparent
budgetary rules are crucial at the time when several operators have expressed growing
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interests in the mining (e.g., Chinese) 6and natural resources sectors (e.g., rosewood) in
Madagascar.
Following the trend observed in 2009, the use of domestic financing by the Government has
been restricted during the first semester of 2010, in line with its modest needs. The amount of
T-bills has only increased by 5%, with both bank and non-bank holdings rising, compared to its
level at the end of December 2009 with little variations in their rates of return –around 10% for
one-year maturity bonds- over the past few months (see Figure 5). During January-May, the
Government borrowed a meager Ariary 3 billion from the Central Bank but reconstituted
deposits with commercial banks, for an overall quasi-neutral net position with the banking
system
Contrary to public perception, Madagascar continued to receive official aid inflows during 2009
and early 2010. Recent estimates (from the UN system and the Prime Minister office) reveal
that the country benefited from about US$350 million in 2009 (and about US$ 60 million during
the first quarter of 2010) or about the equivalent of 5% of GDP. Although this amount was
about half as the one reported in 2008, it remains higher than the average ratio observed in
Sub-Saharan African countries (net aid inflows were equal to 4% of GDP in 2008), at par with
Kenya and Chad and not far from Ghana, Zambia or Senegal. External assistance has been
increasingly delivered outside the public sector –directly to NGOs or communities, but it
contributed to reduce the pressure on public spending. Money is fungible meaning that direct
public support from the budget is less necessary for areas/groups targeted by external funds.
The cut in official aid has mostly occurred in direct budget support and large infrastructure
projects, while “humanitarian” or social sector assistance has been globally at par or even on
the rise (partially compensating for lower public spending these areas).
Financial sector: Stability and Caution
Base money rose by 1.6% in January-May, with a decline in net foreign assets and a higher
level of open market operations being more than offset by a rise in other items net. The
Central bank pursued its policy of regularly mopping up excess liquidity. Broad money rose by
a modest 1.5 % in the first five months of the year, with an ebbing of net foreign assets more
than offsetting a modest rebound in private sector credit (up 1.7 % compared to end-2009).
Cautious fiscal and monetary policies have helped to maintain inflation at 9.1 % on year-to-year
basis at end of May 2010, in line with seasonal trends (Figure 5). The price of first necessity
products declined by 0.8% between April and May but renewed pressure on imported goods is
expected in view of the recent decline in the local currency value (i.e., gasoline).
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China’s third largest steel company Wuhan Iron and Steel Corporation (WISCO), in a joint venture with two others
companies, received approval from China’s National Development and Reform Commission to explore for iron ore
deposits in Madagascar’s southwest (Soalala project).
4
Figure 6: Trade balance
500,000
US dollars
400,000
300,000
200,000
100,000
0
Exports
Imports
Linear (Exports )
Linear (Imports)
Source : INSTAT ; Central Bank; Ministry of Finance; and Bank’s staff calculations
External sector: lower exports …but also imports
Trade figures indicate that exports slightly fell by 6% during the first five months of 2010
compared to the same period a year ago but were significantly lower than in 2008 (down by
31%, Figure 6). Concurrently, imports continued to decline by 20% compared to the first five
months of 2009, reflecting the slowdown in the economy. Subtracting the known uptick in
imports of petroleum products, this point to a further decline in non-oil imports on account of
the continued loss in purchasing power of the population. As a result, the trade deficit was
reduced by 1/3 (or US$68 million).
Table 2: Variations in exports of selected items between
first quarter 2009 and 2010
Products
Mineral products
231%
Leather
159%
Gems
111%
Shirts
30%
Wood products
25%
Petroleum products
10%
Other food processing
The slight decline in the level of exports
masks variations across products (Table 2).
While most traditional exports declined
over the past year (including textile due to
the loss of AGOA privileges and most
agricultural products such as vanilla),
mineral and wood exports surged
7003%
Clove (oil)
Other chemical products
Source: Central Bank
% change
0%
-8%
Processed Fruits and Vegetables cans
-15%
Other sea food products
-17%
Vanilla
-18%
Other textile
-18%
Cacao
-23%
Shrimps
-30%
Tee-shirts and garments
-51%
Clove
-62%
Cotton
-63%
Wood
-83%
Source: Customs
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dramatically. The significant increase in mineral product is explained by QMM production that
only started by mid-2009.
Without intervention from the monetary authorities, fluctuations in the exchange rate are
generally viewed as the consequences of: (i) pressures on the balance of payments; (ii)
confidence losses in the local financial sector; and (iii) currency movements on international
markets. The recent variations in the value of the Ariary vis-à-vis the US dollar and Euro (Figure
7) are principally the consequence of the instability of major currencies around the world
(linked to the fiscal crisis in the Euro zones). Domestic factors have remained relatively stable
during this period. The lack of pressure on the balance of payments is reflected by the stability
of international reserves held by the Central Bank (around US$960 millions) since end-2009,
while the confidence in the local currency on the financial market can be illustrated by the
unchanged ratio of local versus foreign currency denominated deposits (around 2.5). This
stability illustrates the confidence of most local financial operators in the local currency –at
least in the short term.
Looking forward
In the aftermath of the brutal change of power in March 2009, most observers predicted the
collapse of the Malagasy economy if a consensual solution to the political crisis was not found
in the short run. Private sector confidence was falling, and most donors were ready to suspend
their financial assistance.
After almost one and half year of political instability, the economy is hurt but not dead. The
formal private sector has revealed timid signs of recovery (far from pre-crisis levels) and the
informal sector has been vibrant as the result of the good performance of the primary sector
and rising trade activities in urban centers. External aid, albeit declining and delivered outside
public channels, still counted for about US$350 million or 5% of GDP in 2009. This amount has
contributed to maintain the delivery of social services and aggregate demand in the country.
The economy remains nonetheless extremely fragile as illustrated below:

First, the fiscal situation is vulnerable because weak tax collection will continue to
reflect the sub-optimal performance of the formal private sector, most notably of
largest tax contributors. The authorities have been able to control spending but this
might become increasingly difficult in a volatile political environment and growing needs
to maintain physical infrastructure.

Second, the surge in informal activities is partly the result of illegal trading in natural
resources that can hurt badly Madagascar’s reputation over time. If, in the short run,
those can provide additional resources, they affect negatively the rules of the games
and might crowd out serious investors. They are also a source of inequalities that may
create further political and social tensions.
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
Third, the financial market has demonstrated remarkable resilience but its thinness
makes it vulnerable to any shifts or shocks even of little magnitude. For example, an
increase in monetary financing by the public sector would almost immediately lead to
money creation and possibly to accelerated inflation.
Those examples are far from exhaustive and political factors (such as violence, riots, military
insurgence) might affect badly the economy. Furthermore, the country remains exposed to a
variety of exogenous shocks such as variations in climatic conditions or international
commodity prices. The relatively good performance of the primary sector over the past two
years has been mostly the consequence of exceptional good weather (i.e., no cyclone since
early 2008). While predictions are virtually impossible, recent history indicates that intensive
cyclones have hit Madagascar at least every two consecutive years --except for 2009 and 2010.
Any reversal would therefore test the resistance of the economy and of the large majority of
households who live below the poverty level and therefore remain extremely vulnerable.
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