Estudios económicos
Madagascar

Madagascar

Population 26.3 million
GDP 459 US$
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Synthesis

major macro economic indicators

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 4.3 5.1 5.2 4.5
Inflation (yearly average, %) 8.3 7.3 6.6 6.3
Budget balance (% GDP) -2.4 -2.5 -2.5 -3.0
Current account balance (% GDP) -0.5 0.8 -1.6 -2.7
Public debt (% GDP) 36.1 36.1 36.5 37.1

(e): Estimate. (f): Forecast

STRENGTHS

  • Significant mineral reserves (precious stones, nickel, cobalt) and petroleum reserves
  • Agricultural potential; world’s leading producer of vanilla
  • Tourism development
  • Public debt mainly on concessional terms (65% of total)

WEAKNESSES

  • Reliant on agricultural and mining products; vulnerable to terms of trade fluctuations
  • Vulnerable to climatic hazards and natural disasters; ranked seventh most affected by climate risk in 2017 according to the Global Climate Change Index
  • Poverty, with 75% of the population living below the extreme poverty line of USD 1.90 per day
  • Dependent on foreign aid
  • Inadequate road, water and electricity networks (just 13% of people have access to electricity)
  • Chronic political instability (crises in 1972, 1991, 2002 and 2009)

RISK ASSESSMENT 

Investment to drive growth

Growth is expected to remain brisk in 2020 thanks to ambitious public and private investment plans. Public investment will be stimulated by the Madagascar Emergence Plan 2019/2023, which is mainly funded by international donors. The increase in business confidence since the peaceful inauguration of the new President should help attract private investors, particularly through public-private partnerships (PPPs). Madagascar’s island location, combined with its lack of infrastructure, nevertheless means that commercial transactions are expensive, which hinders the competitiveness of the private sector. Investments are therefore expected to be concentrated on road and energy infrastructure, but also on health and education infrastructure, which should boost construction and transport. A contract for the construction of a hydroelectric power plant on the Ivondro River under a partnership between French companies Colas, Jovena and SN Power plus the African Development Bank was signed in October 2019. The deal also covers upgrades for road and distribution infrastructure.

The positive outlook for the agricultural sector, which employs 80% of the population, thanks to numerous investments aimed at boosting productivity, should support household consumption (over 75% of GDP). A programme funded by China through the FAO should, for instance, enable the use of higher yielding crop varieties, but also the development of agro-industry, ultimately supporting household incomes. China is Madagascar’s largest trading partner and invested USD 1.1 billion in the country in 2018. Consumption is also set to benefit from more contained inflation, particularly thanks to the decline in oil prices.

The trade balance, which is suffering from the economic slowdown worldwide, but particularly in the United States and Europe, which are Madagascar’s main trading partners, will weigh on growth. However, the export processing zones, which specialise in textiles and essential oils, should be relatively strong. Nearly half of export earnings come from three commodities, nickel, vanilla and cloves, making them vulnerable to price and demand fluctuations.

 

The twin deficits are widening under the weight of investment

The country has been committed to an IMF programme since 2016 as a prerequisite for a three-year Extended Credit Facility worth USD 347 million (3% of GDP), which expires in January 2020. Negotiations for a new ECF arrangement will start shortly after (with a new one expected to be concluded later in the year). Accordingly, the government is expected to continue its efforts to curb current expenditure and increase revenue, in particular through tighter control of the value of imports and wider collection of VAT on public investment projects. The reduction in fuel subsidies and transfers to the state-owned company JIRAMA (which regularly records losses) should also reduce expenditure. However, spending on public investment, which is expected to be mainly financed by international donors, will outstrip budget improvements. The budget deficit is therefore expected to widen and will be financed mainly through foreign borrowing. Public debt, which is 70% external, is almost exclusively on concessional terms and is thus expected to increase while remaining sustainable.

The widening trade deficit, combined with the decline in net current transfers, will probably lead to an increase in the current account deficit in 2020. Favourable nickel prices should support mining exports (15% of total exports), but vanilla exports may suffer from a slight price dip after the peaks reached in 2018. With an increase in imports of capital goods intended for public investment, the trade deficit may widen. However, strong export earnings in the previous three years have enabled the central bank to replenish its foreign exchange reserves, which stand at more than four months of imports. Direct and portfolio investment, as well as grants and project loans, will help to finance the deficit.

 

Andry Rajoelina facing development challenges

Having previously served as President between 2009 and 2014 following the political crisis of 2009, Andry Rajoelina won the presidential election of December 2018 with 55.6% of the votes cast. After a relatively calm campaign, his inauguration marked the first peaceful transition in decades. The May 2019 parliamentary elections saw the coalition that supports him win an absolute majority. However, the opposition complained about irregularities and 680 appeals were lodged (and rejected) against the result of the election, which featured a 60% abstention rate. The new government will have to tackle the persistent socio-economic challenges facing Madagascar if it is to succeed in fulfilling its campaign promises. In particular, it will have to address poverty, endemic corruption and the infrastructure deficit. These last two factors contribute to a difficult business environment, as evidenced by the country’s 161st place in the Doing Business 2020 ranking (out of 190 countries ranked).

 

 

Last update: February 2020

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