Madagascar Economy

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MADAGASCAR
GDP (U.S.$): $17.27 billion.
GDP per capita: $900.
Unemployment: NA.

Budget: Income .............. $879.9 million
Expenditure ... $1.147 billion

Main Crops:
coffee, vanilla, sugarcane, cloves, cocoa, rice, cassava (tapioca), beans, bananas, peanuts; livestock products

Natural Resources:
graphite, chromite, coal, bauxite, salt, quartz, tar sands, semiprecious stones, mica, fish

Major Industries:
meat processing, soap, breweries, tanneries, sugar, textiles, glassware, cement, automobile assembly plant, paper, petroleum, tourism

NATIONAL GNP

Successive Malagasy Governments have liberalized economic structures, initially under pressure form international financial institutions but increasingly of their own accord. An initial privatization program (1988-1993) and the development of an export processing zone (EPZ) regime in the early 1990s were key milestones in this effort. A period of significant stagnation from 1991-96 was followed by 5 years of solid economic growth and accelerating foreign investment, driven by a second wave of privatizations and EPZ development. A 6-month political crisis triggered by a dispute over the outcome of the presidential elections held in December 2001 virtually halted economic activity in much of the country in the first half of 2002. Real GDP dropped 12.7% for the year 2002, inflows of foreign investment dropped sharply, and the crisis tarnished Madagascar's budding reputation as an AGOA standout and a promising place to invest. The crisis was resolved, and President Ravalomanana launched ambitious recovery programs, including multiple efforts to restore the confidence of the private sector.

Post-crisis confidence-building measures included a recovery plan developed in collaboration with the private sector and donors and presented at a "Friends of Madagascar" conference organized by the World Bank in Paris in July 2002. Donor countries demonstrated a high level of confidence in the new government by pledging $1 billion in assistance over 5 years. The Malagasy Government identified road infrastructure as its principle priority and underlined its commitment to public-private partnership by establishing a joint public-private sector steering committee. The government also advanced the preparation of its Poverty Reduction Strategy Paper (PRSP) through a broad consultative process, holding a national workshop in March 2003 to discuss the draft. The document has now been approved by the World Bank and the International Monetary Fund (IMF).

Foreign trips by President Ravalomanana to Germany, Switzerland, France, and the United States doubled as trade missions through the participation of Malagasy economic operators. The Malagasy Government worked cooperatively with the U.S. Embassy and private sector organizations to conduct a "Madagascar Day" event in Johannesburg in December 2002 targeted at U.S. firms in South Africa; an "AGOA in Madagascar" conference in January 2003; and to host in November 2003 a "Trade Mission" which produced 12 Memoranda of Understanding between U.S. firms and Malagasy public and private sector entities. At the November 2003 "Friends of Madagascar II" conference, major donor nations and institutions expressed satisfaction with the government's macroeconomic strategy, applauded the country's projected 9% real GDP growth rate, and noted that the government was on track with IMF Poverty Reduction and Growth Facility (PRGF) targets.

In 2000, Madagascar embarked on the preparation of a Poverty Reduction Strategy Paper (PRSP) under the Heavily Indebted Poor Countries (HIPC) Initiative. The boards of the IMF and World Bank concurred in December 2000 that the country is eligible under the HIPC Initiative, and Madagascar has reached the decision point for debt relief. On March 1, 2001, the IMF Board granted the country $103 million for 2001-03 under the PRGF. Resources freed up from HIPC will be directed toward improving access to health, education, rural roads, water, and direct support to communities. In addition, on March 7, 2001, the Paris Club approved a debt cancellation of $161 million. On February 28, 2001, the African Development Bank approved under the HIPC a debt cancellation of $71.46 million and granted in June 2001 an additional credit of $20 million to fight against AIDS and poverty. In October 2003 the U.S. Government sent the Government of Madagascar a draft bilateral agreement to implement interim debt relief. Another agreement will be required to implement debt forgiveness upon Madagascar's completion of its poverty reduction program. The World Bank will review both that program and the Bank's Country Assistance Strategy, to which it is closely related, in November 2003. The IMF Board is scheduled to review Madagascar's performance under the PRGF in December 2003.

The political crisis of 2002 seriously hampered economic growth, and some infrastructure was damaged. Macroeconomic figures document the impact of the 2002 political crisis. The current account deficit as a percentage of GDP reached 5.9% in 2002 as compared with 1.3% in 2001 due primarily to a 50% fall in exports. Real GDP contracted by over 12%. The inflation rate hit 15.8%. Foreign investor confidence was shaken. Recognizing that fact, the Ravalomanana government quickly put in place business-friendly economic and financial policies and began to actively solicit foreign investment. Those policies build upon Madagascar's traditional appeal to investors, which stems from its competitive, trainable work force. More than 200 investors, particularly garment manufacturers, have organized under the country's Export Processing Zone (EPZ) system since it was established in 1989. The absence of quota limits on textile imports to the European market under the Lome Convention has helped stimulate this growth. In addition, Madagascar's eligibility for AGOA has significantly increased Malagasy exports to the U.S. and foreign investment in Madagascar. The Madagascar-U.S. Business Council was formed in Madagascar in 2002. In 2003, The U.S.-Madagascar Business Council was formed in the United States in May 2003, and the two organizations continue to explore ways to work for the benefit of both groups.

Partial figures for 2003 show that Madagascar's economic performance is expected to improve dramatically in 2003. The current account deficit as a percentage of GDP should fall to 4.3% as exports have rebounded to their pre-crisis level. Final figures are expected to show a significant increase in exports. Real GDP growth is projected to reach 9%. The inflation rate has fallen to less than 2% and could average zero for the calendar year. Madagascar's debt ratio, which had reached 46% in 1996, is estimated at 15.4% in 2000. Within an overall framework of poverty reduction, the HIPC Initiative would enable the country to reduce its debt service ratio to 5.5% in 2003, and remain at around 5% throughout the projection period 2000-19.

The government of President Ravalomanana is aggressively seeking foreign investment and is tackling many of the obstacles to such investment, including combating corruption, reforming land-ownership laws, encouraging study of American and European business techniques, and active pursuit of foreign investors. President Ravalomanana rose to prominence through his agro-foods TIKO company, and is known for attempting to apply many of the lessons learned in the world of business to running the government.