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Madagascar - Economy

A third consecutive year of drought in 2016 deepened the suffering of hundreds of thousands of people in the south of Madagascar. Four out of nine southern districts were likely to fall into the “emergency” classification by the end of 2016. Unless swift action is taken, three more districts could follow. The south of Madagascar has been hard hit by this year’s El Niño, which resulted in reduced rains for southern Africa. To escape this misery, one household in three, in the south of the island, has already been forced into desperate measures such as begging, selling its land or house, or migrating. Four in 10 households have already eaten their vital seed stocks, leaving nothing for the November/December planting season.

The combination of high population growth, poor health, food insecurity and high poverty contributes to unsustainable natural resource use, in particular slash and burn agriculture (“tavy”) and clear cutting for firewood. This had lead to increasingly degraded natural environments and, in various locales, serious, irreversible biodiversity loss.

Rapid growth and sustained poverty reduction will require more investment in infrastructure and broader access to education and health care, in addition to structural reforms. It will be essential to increase tax revenue and to contain and then reduce lower-priority spending, including transfers to state-owned enterprises, such as the utility company JIRAMA. Reforms to strengthen governance are also central to the success of the economic program. Key actions include strengthening public financial management and procurement practices, increasing budget transparency, carefully managing the fiscal implications of Public Private Partnerships, and reinforcing the institutions and legal framework for combatting corruption.

Until the political crisis in early 2009 Madagascar had been largely seen as a development success in the making. Following economic liberalization after the abandonment of socialist economic policies, the economy reached an average annual real growth rate of 5.7% between 2003 and 2007. Poverty declined from a high of 80% in 2002 to a still high of 65% in 2008, with a concentration in rural areas exceeding 80%. Some social indicators also improved significantly, e.g. infant mortality was halved between 1997 and 2008 and now stands at 48 per 1,000 live births.

Madagascar’s growth had increased over the last 15 years, following the abandonment of socialist economic policies, reaching an average annual real growth rate of 5.7% between 2003 and 2007. Poverty declined from a high of 80% in 2002 to 65% in 2008, and was largely concentrated in the rural areas. Despite initiatives to push the development agenda and strengthen economic and public sector management, conflict of interest between political and economical circles undermined the success of the development agenda. This ultimately became evident to development partners when the political crisis unfolded in early 2009.

Hampered by fragile institutions, Madagascar is striving to recover from an extended political crisis and international isolation from 2009 to 2013. During this period, key social and developmental indicators deteriorated. The recovery that began in 2014 has so far failed to gain much momentum due to key commodity prices falling, weather-related shocks, and deep-rooted structural weaknesses. GDP growth was estimated at 3.1 percent in 2015, which is slightly lower than in 2014 and barely higher than population growth. Inflation fell back to 6.3 percent at end-May 2016 from 7.6 percent at end-December 2015, led by lower food and fuel prices.

Indicators such as the World Bank Doing Business Report (164 out of 189 countries) and the World Economic Forum Competitiveness Index (130 out of 140 countries) demonstrate the need for improvements in Madagascar’s competitiveness. On July 27, 2016 the Executive Board of the International Monetary Fund (IMF) approved the equivalent of SDR 220 million (about US$304.7 million, or 180 percent of current quota) under a 40-month Extended Credit Facility (ECF) arrangement for Madagascar, to help reinforce macroeconomic stability and boost sustainable and inclusive growth.

The government is committed to placing Madagascar on the path of sustainable and inclusive growth, improved physical and human capital, and strong governance, as laid out in the National Development Plan and the 2016-2021 Government’s Priority Investment Program. The objective is to address the existing complex and significant challenges in several areas: economic, political, geographical, socio-cultural, and environmental. The new social protection policy, approved in 2015, aims to increase income and access to social services for the poorest, provide social protections to the most vulnerable, and develop social contribution systems.

Over the past two decades, economic growth in Madagascar (2.8 percent) barely kept pace with population growth rate, leading to stagnant living standards and missing most Millennium Development Goals (MDGs). This low growth trajectory was exacerbated by the political transition period, lasting from 2009-2013. In March 2009, the elected President Marc Ravalomanana was ousted by the former mayor of Antananarivo Andry Rajoelina following a coup supported by the army. The international community did not acknowledge as legitimate this de facto transition regime. On December 24, 2009, the country’s eligibility under the African Growth and Opportunity Act (AGOA) was also suspended as Madagascar no longer met the criteria regarding political pluralism and rule of law. Following the political crisis, economic activities declined, unemployment increased, and government revenue dropped, inducing a sharp fall in public investment. The annual growth rate shrank from 7.1 percent in 2008 to 2 per cent in 2013.

The country emerged from this political crisis with weakened social conditions: the poverty rate reached 71.5 percent of the population in 2012 (as defined as the FAO as minimal caloric intake); access to education barely improved, with the success rate in examinations, in particular at the baccalaureate level, having fallen (36 percent in 2014 compared to 41 percent in 2013); public health access improved slightly (with an increase in the rate of outpatient care provided at basic health centers: 29.2 percent and 32.9 percent in 2013 and 2014, respectively). In the medium-term, economic growth is projected to accelerate, driven by scaled-up investment and expansion of agriculture, tourism, manufacturing and mining.

As a former French colony, Madagascar sells more of its exports to France than any other country (38 per cent in 2012). In addition, 650 out of 2,500 companies in Madagascar have French capital. However, France was only the fifth largest foreign investor in Madagascar in 2012, having been removed from its prior first place position by large Canadian, Japanese, Korean, and British-Australian mining investments. China was the leading supplier of Malagasy imports in 2012, with at least 22 per cent market share, made up mainly of electric appliances, hardware and construction materials.

Industry in Madagascar is limited to textile manufacturing and agricultural products processing. The largest industries, which are located mainly near Antananarivo, Tamatave, and Toamasina, include textiles, food processing, paper, wood manufacturing, and mining. The chemical sector is a minor component of Madagascar's economy.

Current mining activities are limited, but future exploitation of Madagascar's significant mineral deposits without adequate environmental protection measures is a concern. The Ankarana nature reserve in the north is attracting illicit mining activity with the potential to cause soil and water contamination. Chromium ore is mined at Andriamena and Befandriana Nord.

Madagascar is a rural, agriculture-based society. Agricultural activity is dominated by rice production. Vanilla, coffee, sugar, and forestry and fish products are also important commodities. Agriculture generates about 26 percent of GDP and is the main source of income for a majority of households. Agricultural reforms aim to improve productivity, support the move from just subsistence farming toward production for domestic, regional, and international markets, and reduce risks for the most vulnerable households. In this context, the government aimed to: (i) increase investment in roads and irrigation infrastructure; (ii) expand investment in agricultural training centers; (iii) increase funding of agricultural research; (iv) expand social protection programs targeting vulnerable subsistence farmers; and (v) protect farmers’ land rights. These measures should increase the amount of land used for agriculture, expand the number of trained agriculture workers, increase the number of households covered by social protection significantly, and boost the number of local land offices that issue land certificates.

In the forestry sector, a surge in illegal logging of precious timber in the context of the 2009 political crisis has led to a severe loss of Madagascar’s natural capital and potential government revenues as well as significant environmental damage in protected areas. Persistent illegal logging over the past decade reflects state capture by influential timber-trading elites from the Sava region. The decline of the vanilla industry, a critical mainstay of regional elites, opened the door to the establishment of rosewood market activity on the back of the vanilla market, making the forestry sector an important source of rents for some traders also involved in the vanilla trade. Expanding and accelerating rosewood exports offered an immediate rent-seeking opportunity for the transition government.

In the pre-colonial past, when population size and rate of increase were lower, use of natural resources in rural areas to meet daily needs was more sustainable. This changed during the colonial period when land policies supported unsustainably high levels of natural resource extraction in some areas. During the post-colonial socialist era, increases in poverty and population size contributed to unsustainable natural resource use. In particular, slash and burn agriculture (“tavy”) and clear cutting for firewood led to increasingly degraded natural environments and, in various locales, serious, irreversible biodiversity loss. Annually, a substantial part of the island is burned and deforestation continues at approximately 250,000 ha/year. Consequently, a large proportion of the island’s initially-forested areas are presently deforested and much of the remaining natural forest is under threat.

Madagascar’s aromatic and medicinal plant [AMP] value chain consists of plant products used in the perfume, cosmetics, food, wellness and pharmaceutical industries. AMP in Madagascar are either wildcrafted (collected from natural stands) or cultivated (in agroforestry systems or plantations). Common wildcrafted plants in the study area include radriaka (Lantana camara), talapetraka (Centella asiatica), and wild ginger (Hedysarum coronarium). Cultivated plants include ginger (Zingiber officinalis) cinnamon (Cinnamomom verum) and black pepper (Piper nigrum). Additionally, some endangered species, such as niaouli (Melaleuca quinquenervia) and katrafay (Cedrelopsis grevei) are increasingly cultivated on private plots. Plantation crops include cinnamon (Cinnamomom verum), eucalyptus (Eucalyptus globilus and Eucalyptus citrodora), cloves (Eugenia caryophyllata), and ravintsara (Cinnamomom camphora). Madagascar has a robust and expanding domestic market and a modest share of the global AMP market. Madagascar has potential competitive advantage for some specific (e.g., endemic, scarce) plant products.

The currency of Madagascar is called an ariary. It's split into 5 iraimbilanja, and it's also one of two non-decimal currencies in the world. In pre-colonial currencies, ariary means silver dollar.

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Page last modified: 12-10-2016 19:48:42 ZULU