Selected Issues and Statistical Appendix

This Selected Issues paper analyzes recent economic developments and policies in Madagascar. Real GDP growth in 2001 was 6 percent, continuing the trend of sustained increase in per capita real GDP that began during the period 1997–2000. The secondary and tertiary sectors were the main sources of growth. The value added of the secondary sector, which accounts for only 13.3 percent of output, increased by 7.6 percent in 2001, following an annual average increase of 5 percent in 1997–2000.


This Selected Issues paper analyzes recent economic developments and policies in Madagascar. Real GDP growth in 2001 was 6 percent, continuing the trend of sustained increase in per capita real GDP that began during the period 1997–2000. The secondary and tertiary sectors were the main sources of growth. The value added of the secondary sector, which accounts for only 13.3 percent of output, increased by 7.6 percent in 2001, following an annual average increase of 5 percent in 1997–2000.

Madagascar: Basic Data

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Including official tranfers.

End of period.

Including project grants.

Including official transfers.

In weeks of imports of goods and services.

After debt relief.

Madagascar: Social and Demographic Indicators 1

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Sources: CD-ROM of World Bank, World Development Indicators, 2001; and Malagasy authorities.

Data are for 1999, unless otherwise indicated.

I. Recent Economic Developments and Policies1

1. After several decades of decline in per capita GDP, Madagascar experienced, over the 1997–2001 period, high growth rates as a result of significant progress in macroeconomic stabilization and structural reforms, accompanied by substantial inflows of foreign direct investment and external assistance. Over this period, the growth rate of real GDP averaged 4.6 percent, while inflation generally remained below 10 percent (Figure 1). The incidence of poverty declined from 73 percent to 69 percent of the population, with most gains occurring through a reduction of urban income poverty, while the rural poverty head count remained stable. External sector developments were favorable, with export earnings doubling over the five years, spurred by the expansion of activity in the export processing zone (EPZ) exports and high international vanilla prices. International reserves also increased sharply, reflecting, in part, accelerated inflows of foreign direct investment since 1999.

Figure 1.
Figure 1.

Madagascar: Selected Economic and Financial Indicators, 1997-2001

Citation: IMF Staff Country Reports 2003, 007; 10.5089/9781451825282.002.A001

Source: IMF, African Department.

A. Real Sector

2. Real GDP growth in 2001 was 6 percent, continuing the trend of sustained increase in per capita real GDP began during the period 1997–2000. The secondary and tertiary sectors were the main sources of growth. The value added of the secondary sector, which accounts for only 13.3 percent of output, increased by 7.6 percent in 2001, following an annual average increase of 5 percent over the 1997–2000 period. The value added of the tertiary sector, which accounts for 52.3 percent of output, grew by 6.1 percent in 2001, after an average growth rate of 5.5 percent over the last four years. The primary sector, with slower growth and, therefore, a gradually declining share of real value added, grew by 4 percent in 2001.

3. Agriculture accounts for about 55 percent of real value added in the primary sector and employs more than 80 percent of Madagascar’s economically active population. Main agricultural products are rice and cassava (for domestic consumption), coffee, cloves, and vanilla (export products), and sugar cane and cotton (industrial products). Output fell in 2000 because of cyclone damages, but recovered by 5.5 percent in 2001.

4. While the secondary sector accounts for a relatively small share of the total value added, its share increased to 13.3 percent in 2001 from 12.4 percent in 1997. The sector is composed of five main branches of manufacturing activities: food processing, wood and by-products, textiles and clothing, the metal industry, and public utility services (including electricity and water). The sector has grown steadily in recent years due to the expansion of activity in the EPZ, established in 1989.2 By end-2001, there were 149 firms in the EPZ, employing more than 120,000 people (one-third of the secondary sector) and covering diverse activities, including the textile industry and information processing.3

5. The growth of the tertiary sector over the last several years stemmed from the accelerated growth of the secondary sector. For example, the transport sector, which represents 33 percent of the value added in the tertiary sector, experienced an annual average real growth rate of 5.8 percent over 1997–2001, spurred by increased activity in the secondary sector. Construction, which accounts for about 3 percent of the tertiary sector’s real output, grew at an annual average growth rate of 11.6 percent over 1997–2001. The tourism sector, with growth rates of over 14 percent a year in recent years, has also been one of the more dynamic sectors of the economy.

6. Domestic savings increased to 12.3 percent of GDP in 2001 from 7.8 percent of GDP in 2000, as private savings increased to 12.5 percent from 5.3 percent—a gain that was partly offset by the decline of public savings. Over the same period, overall investment rose by 0.5 percentage point of GDP to 15.5 percent of GDP in 2001, on account of rising public investment (Figure 2).

Figure 2.
Figure 2.

Madagascar: Real Sector Developments, 1997-2001

Citation: IMF Staff Country Reports 2003, 007; 10.5089/9781451825282.002.A001

Source: IMF, African Department.

7. The decline in the average rate of inflation from 11.9 percent in 2000 to 7.4 percent in 2001 is attributable to a number of factors, including favorable agricultural production, the appreciation of the exchange rate, the large imports of rice (the main staple food), and a decline in money velocity, reflecting increased confidence by the business community.

B. Public Finance

8. Fiscal performance in 2001 was satisfactory in the first half of the year, but revenue in the second half of the year fell substantially short of target, owing largely to weaknesses in customs administration. For the year, budgetary revenue reached 10 percent of GDP, compared with a revised program target of 11.9 percent (Figure 3). Contrary to the normal seasonal trend, customs revenue in the second half of the year was considerably lower than in the first half. There are indications that the deteriorating performance was attributable to the continuing disorganization of customs services at secondary ports, as well as some exceptional exemptions granted in the run-up to the December 2001 presidential elections. Despite the revenue shortfall, the overall deficit, on a commitment basis and excluding grants, was contained at 8.1 percent of GDP, as against the program target of 9.9 percent, as government expenditures were 2.8 percent of GDP lower than programmed. This reflected a substantial shortfall in capital expenditure relative to program by 2.8 percent of GDP and lower-than-anticipated costs of structural reforms, such as the severance pay in connection with the privatization of public enterprises. Current expenditures were only marginally higher than programmed, as a shortfall in expenditures on goods and services, including those financed by debt relief under the Initiative for Heavily Indebted Countries (HIPC Initiative), was offset by significant election-related overruns of expenditures through the special fund of the presidency (estimated at 0.6 percent of GDP). In mid-July 2002, the new government commissioned the State Inspectorate General to conduct an audit of both the HIPC Initiative financed expenditures and the use of the presidential special fund in 2001.

Figure 3.
Figure 3.

Madagascar: Fiscal Sector Developments, 1997-2001

Citation: IMF Staff Country Reports 2003, 007; 10.5089/9781451825282.002.A001

Source: IMF, African Department.

9. External budgetary financing was about 1 percent of GDP lower than programmed, as (i) the disbursement of the second tranche of the World Bank’s second structural adjustment credit (SAC II) (US$30 million) was delayed until January 2002 due to the late selection of a winner of the tender for the telecommunication company, TELMA, and (ii) the disbursement of a tranche of the European Union’s structural adjustment assistance was postponed because of delays in the negotiations of conditionalities. With privatization receipts also lower than programmed by FMG 90 billion (0.3 percent of GDP), as proceeds of the sale of certain assets of the petroleum company were delayed until 2002, bank financing of the government exceeded the revised program by 0.7 percent of GDP.

C. Financial Sector

10. Madagascar’s banking system consists of the Central Bank of Madagascar (BCM), six privately owned commercial banks, a microfinance network, and two insurance companies. The BCM is responsible for the implementation of monetary policy. The Banking and Financial Supervision Commission (CSBF) supervises and regulates all financial services, with the exception of the insurance companies, which are regulated by the Ministry of Finance and Economy. The BCM’s main monetary policy instruments are the required reserve ratio and the treasury-bill auction system, both of which influence the liquidity of the banking system. In addition, the BCM uses the discount rate to signal changes in its monetary policy stance. As average inflation declined to 7.4 percent in 2001 from 11.9 percent in 2000, interest rates on treasury bills began to fall (Figure 4). The central bank’s base rate (TD) was cut in June 2001 from 12 percent to 10.5 percent and further in October 2001 to 9 percent, while the reserve requirement was maintained unchanged at 24 percent for demand deposits and 3 percent for time deposits. With a view to promoting credit expansion in favor of the private sector, which had suffered serious losses during the crisis, the central bank decided to lower the required reserve ratio on demand deposits to 18 percent and on time deposits to 2 percent on October 21, 2002.

Figure 4.
Figure 4.

Madagascar: Money, Consumer Prices, and Treasury Bill Yields, 1997-2001 1

(In percent)

Citation: IMF Staff Country Reports 2003, 007; 10.5089/9781451825282.002.A001

Source: Madagascar authorities.1 Data for broad money and the consumer price index are year-over-year growth rates.

11. Broad money grew on average by 16.6 percent during the period 1997–2000. It increased by 24.4 percent in 2001, reflecting a surge in both net foreign assets of the banking system and net domestic assets. While net foreign assets grew by 15.4 percent of initial money stock (up from 12.2 percent in 2000), owing to higher foreign direct investment and export earnings, net domestic assets rose by 16.6 percent of initial money stock, on account of a sharp increase in the domestic financing requirement of the government; this was partly offset by the decline in credit to the economy, as strong profits reduced the borrowing needs of exporting firms, which are traditional users of bank credit.

12. The monetary authorities continued to pursue a flexible exchange rate policy; the central bank intervened on the exchange market to achieve external reserve objectives and to minimize temporary exchange rate fluctuations.

13. The authorities have adopted measures to enhance the soundness of the banking and financial sector,4 based on the recommendations of the 1999 MAE technical assistance mission. Accordingly, the CSBF issued several instructions in 2000 and 2001; these limit insider lending to 10 percent of capital, require all banks to implement a permanent internal audit system subject to systematic review by the CSBF, set prudential limits for bank participation in nonbanking activities, and reduce the regulatory ceiling on lending concentration from 40 percent to 30 percent of capital. The CSBF also adopted regulations and supervisory standards for credit unions and microfinance institutions not previously covered, including a new licensing requirement, effective July 2001.

D. External Sector

14. The external sector benefited from favorable conditions in key commodity export markets and a robust expansion of activity in the EPZ in 2001. The current account deficit, including grants, narrowed to a record low of 1.3 percent of GDP, while the trade balance moved to a small surplus for the first time since 1987 (Figure 5). Exports were the key factor in this development as they expanded by more than 20 percent. Led by favorable international market prices, vanilla exports tripled, while clove exports doubled. Manufactured exports from the EPZ enterprises also contributed to export growth, as they rose by 8 percent in value in the year. EPZ firms profited from the favorable impact of the U.S. African Growth and Opportunity Act (AGOA), as textile exports to the United States doubled in 2001. Imports, on the other hand, increased only by 6 percent in value, as equipment goods and food imports grew modestly and petroleum imports fell, while oil prices declined.

Figure 5.
Figure 5.

Madagascar: External Sector Developments, 1997-2001

Citation: IMF Staff Country Reports 2003, 007; 10.5089/9781451825282.002.A001

Source: IMF, African Department.

15. The favorable external conditions led to an increase of net foreign assets of the central bank by SDR 77 million to SDR 214 million in 2001. At the end of the year, the gross foreign reserves were equivalent to 14.4 weeks of imports of goods and nonfactor services, up from 10 weeks at end-2000. The increase in gross international reserves reflects the improvement in the current account and strong foreign direct investment and inflows of external assistance, both for budgetary and balance of payments support and project financing. Foreign direct investment, while still modest, reached 2 percent of GDP in 2001, increasing by more than one-third. The foreign-financed component of the public investment program amounted to 4 percent of GDP, with grants accounting for about 60 percent of the total. External budgetary and balance of payments support amounted to 1.3 percent of GDP, including an SDR 22 million purchased from the Fund.

16. Reflecting the positive overall balance of payments, the Malagasy franc appreciated by about 8 percent in nominal effective terms and by 10 percent in real effective terms during 2001. Despite the appreciation of the currency, unit labor costs remained highly competitive.5

17. After having reached the decision point of the enhanced HIPC Initiative in December 2000, multilateral creditors, including the African Development Bank, IDA and the IMF, delivered interim debt relief in 2001 amounting to SDR 18.8 million. Paris Club creditors provided Cologne terms flow-of-debt relief beginning March 2001, in an amount equivalent to SDR 55.8 million for the year. They are expected to deliver Cologne stock-of-debt relief once Madagascar attains the completion point. The authorities are in bilateral negotiations with some Paris Club creditors in order to obtain debt relief beyond Cologne terms. Madagascar is also negotiating with non-Paris Club creditors to reschedule current arrangements on terms at least comparable to those of the Paris Club. In 2001, rescheduling agreements were concluded with the Saudi Fund for Development and a commercial bank from Hong Kong SAR. The authorities also reached an agreement with Russia on the restructuring of post-cutoff-date debt in December 2001 and signed a protocol of partial cancellation of the debt owed to China in November 2001. Provided the enhanced HIPC assistance agreed at the decision point is delivered, the net present value of debt-to-exports ratio would fall from 259 percent at end-2000 to 183 percent at end-2001.

18. In recent years, Madagascar has liberalized and simplified its external trade regime. Since October 2000, the country has been a member of the Common Market for Eastern and Southern Africa (COMESA). Also, since early 2000, it has had a preferential tariff agreement with Comoros and Mauritius; 6 both agreements provide for a 100 percent tariff reduction. In 2000, Madagascar adopted a five-rate, non zero external tariff structure with a maximum tariff of 30 percent, consistent with the commitment under the Regional Integration Facilitation Forum (RIFF). The number of products subject to the 30 percent rate was reduced further in 2001, in line with commitments under the RIFF. As of 2001, Madagascar has an open trade regime. According to the Fund’s overall trade restrictiveness index, Madagascar is rated 3 on the 10-point scale of restrictiveness (10 indicating the most restrictive). In 2001, Madagascar’s average tariff rate (including the statistical tax on imports and stamp duties) was 20 percent, with very few nontariff barriers.

E. Structural Reforms

19. In 2001, the authorities implemented a number of structural reforms in the area of budgetary management, tax administration, and privatization. Fund technical assistance was instrumental in improving public expenditure management, with a view to preparing monthly “flash” reports on a timely basis. New computerized systems were installed in all 22 main treasury offices, and became operational in November 2001. The computerized customs information system (ASYCUDA 2.7) was installed in the secondary ports, but the upgrade to version 3++ was delayed. A UN Conference on Trade and Development (UNCTAD) technical assistance mission to secure its installation is expected shortly.

20. The authorities continued to implement their comprehensive public enterprise privatization program, concluding the sale of assets (storage facilities) of the state petroleum company, SOLIMA, and launching the tender for the telecommunications company, TELMA; the winner of the tender was selected in December 2001. In mid-2002, the authorities decided to place Air Madagascar under a management contract with an internationally recognized foreign firm, in order to improve its efficiency and pave the way for a future privatization. They also decided to open up the capital of the state cotton company, HASYMA.

II. Economic and Social Impact of the Political Crisis7

A. The Political Crisis, January–July 2002

21. The political crisis started following the first round of presidential elections on December 16, 2001. Mr. Ravalomanana, then Mayor of Antananarivo and the leading challenger against the incumbent President, Mr. Ratsiraka, contested the results announced by the High Constitutional Court (HCC), according to which Mr. Ravalomanana received 46.21 percent of the vote and Mr. Ratsiraka received 40.85 percent. The support committee for Mr. Ravalomanana, observing the polling and having separately counted the votes, argued that Mr. Ravalomanana in fact won the election by an absolute majority, rendering a second round of elections unnecessary. Mr. Ratsiraka’s insistence on a second round of elections triggered daily mass demonstrations and a general strike, starting in late January in Antananarivo, by the supporters of Mr. Ravalomanana. Mr. Ravalomanana proclaimed himself President on February 22, appointed a new government, and took over all ministries in the capital, while Mr. Ratsiraka set up his seat of government in Toamasina (Tamatave). At the same time, Mr. Ratsiraka’s supporters blockaded all roads from the coastal areas to the central plateau and began blowing up bridges. In early March, Mr. Ratsiraka’s government appointed a new governor of the central bank based in the Toamasina branch. With the central bank management split, foreign depositories froze the external reserves of the central bank, preventing the payment of external obligations, as well as the functioning of the interbank foreign exchange market.

22. Mediation attempts under the auspices of the Organization of African Unity (OAU) and the United Nations led to an agreement on April 18, 2002 in Dakar, Senegal. After a recount of the first-round votes, as stipulated by the agreement, the HCC on April 29 declared Mr. Ravalomanana winner of the elections with 51.46 percent of the vote, compared with the 35.90 percent obtained by Mr. Ratsiraka; Mr. Ravalomanana was officially inaugurated as President on May 6. Following the recount of the first-round votes, Mr. Ravalomanana’s government received growing domestic support. With the bulk of the military shifting support to Mr. Ravalomanana, his government was able to take control of the coastal cities of Tuléar and Majunga in mid-June and of the port of Diego Suarez at the beginning of July. By early July, most countries had officially recognized Mr. Ravalomanana’s government. The political crisis ended when Mr. Ratsiraka left Toamasina for France in July, with Mr. Ravalomanana in control of the whole country; road blockades were dismantled and the free flow of people and goods through the country was reestablished. The foreign exchange market reopened in late July. This chronology of events is summarized in Box 1.

Chronology of Events

Presidential elections

December 16, 2001. First round of presidential elections.

December 23, 2001. The High Constitutional Court (HCC) rejects the petition by Ravalomanana supporters to compare the vote count by the Ministry of the Interior and that of the KMMR (support committee of Mr. Ravalomanana); the petitioners claim that Mr. Ravalomanana attained more than 50 percent of the popular vote in the first round of elections.

January 25, 2002. The HCC announces that Mr. Ravalomanana received 46.21 percent of the vote and Mr. Ratsiraka received 40.85 percent.

Protests and dual governments

Late-January-February 2002. Massive protests in the capital organized by Mr. Ravalomanana’s supporters

January 30, 2002. Mr. Ravalomanana calls for a general strike in Antananarivo; daily central bank operations cease; interbank foreign exchange and treasury bill markets close.

February 2002. Diplomatic initiatives by the Association of Francophone Parliamentarians, the Organization of African Unity (OAU), the Indian Ocean Commission and Mauritius fail to end the crisis.

February 22, 2002. Mr. Ravalomanana declares himself the President of the Republic and takes over all ministries in the capital.

February 26, 2002. Mr. Ravalomanana appoints Mr. Sylla as the Prime Minister and nominates a government, while Mr. Ratsiraka continues to act as the President from his stronghold of the coastal city of Toamasina. Strikes in the capital end.

February 28, 2002. Mr. Ratsiraka declares martial law in the capital, which is not respected.

February-March 2002. Ratsiraka supporters begin setting up roadblocks throughout the country and destroy bridges to isolate Antananarivo.

March 4, 2002. Central bank headquarters reopen.

March 7-8, 2002. Mr. Ratsiraka’s government fires the governor of central hank and appoints a new interim governor, who controls the Toamasina branch. Foreign depositories freeze external reserves of the central bank.

April 18, 2002. Mr. Ravalomanana and Mr. Ratsiraka sign an agreement in Dakar, Senegal, under the auspices of the OAU and the United Nations, stipulating also a recount of the first-round vote.

April 29, 2002. After a recount of the vote, the HCC declares Mr. Ravalomanana the winner of the elections with 51.46 percent of the vote against the 35.90 percent obtained by Mr. Ratsiraka.

May 6, 2002. Mr. Ravalomanana is officially inaugurated as the President of the Republic and confirms Mr. Sylla as Prime Minister.

May 7, 2002. Four governors (of Tulear, Diego Suarez, Toamasina, and Majunga) loyal to Mr. Ratsiraka declare their provinces sovereign and independent.

May 31, 2002. The government of Prime Minister Sylla launches a military offensive to take control of the provinces loyal to Mr. Ratsiraka.

Recognition of Mr. Ravalomanana

May 2002. Switzerland and Norway recognize Mr. Ravalomanana as the President of Madagascar.

June 19, 2002. Mr. Ravalomanana gains control of Tuléar and Majunga.

June 26, 2002. The United States recognizes Mr. Ravalomanana as President.

July 2, 2002. Military units loyal to Mr. Ravalomanana enter Diego Suarez.

July 3, 2002. The French Minister of Foreign Affairs visits Antananarivo and meets with Mr. Ravalomanana, implicitly signaling recognition by France.

July 5, 2002. Mr. Ratsiraka leaves Toamasina for France.

July 8, 2002. Toamasina falls without resistance; Mr. Ravalomanana controls the whole country.

July 11, 2002. European Union countries recognize Mr. Ravalomanana’s government.

B. Economic Impact of the Political Crisis

23. The political crisis engendered a sharp downturn in economic activity. The economic embargo on a large part of the central plateau, beginning in early February, and the resulting disruption of transportation led to a significant reduction in domestic and external trade. Output losses due to the crisis were concentrated in the transport, export processing zone (EPZ), and tourism sectors. Real GDP is projected by the government statistical agency, INSTAT, to decline by 12 percent in 2002. The consumer price index increased by 21 percent in the first five months of 2002, mainly as a result of shortages of fuel and other necessities, such as food products and soap. Income poverty is estimated to have risen by as much as 6 percent, up from 69 percent of the population in 2001 to 75 percent.

Economic Impact of the Political Crisis

(annual percentage change)
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Source: Malagasy authorities.

24. The political crisis had a relatively mild adverse impact on primary sector production, compared with the impact on the secondary and tertiary sectors of the economy (see Box 2). The expected decline in primary sector output in 2002 results from a decline in forestry output, partially offset by agriculture output growth of 0.8 percent. The decline in primary sector activities is partly explained by disruptions to harvesting due to the unavailability of transportation and lack of credit to pay field laborers. In addition, several agro-business enterprises, such as the cotton company, HASYMA, ceased operations owing to cash constraints. While the volume of agricultural production remained relatively stable in real terms during the crisis, producer prices for some food crops, such as rice, declined by up to 50 percent in isolated communities as a result of the sharp increase in transport costs and difficulties in delivering products to markets. At the same time, the prices of imported staple goods, such as salt, sugar, vegetable oil and lamp oil, increased sharply until May. Consumer prices declined from June to September, after the free movement of people and goods had been reestablished.

25. The political crisis had its largest impact on the secondary sector, where output is expected to plummet by 25.1 percent in 2002. Road blockades prevented the supply of essential inputs, including fuel and raw materials, for most manufacturing industries located in the central plateau. In addition, companies producing for the domestic market faced weaker demand, prompting them to curtail production and lay off workers. It is estimated that, for EPZ companies, which are mainly involved in apparel production for export markets, output will fall by about 70 percent in 2002, following a 40 percent increase in 2001. EPZ firms, unable to meet foreign orders, shut down operations, with the exception of a few in high-value-added production, which were able to ship products by air, and of a few located in coastal areas. Most companies shut down their plants, temporarily laying off an estimated 100,000 EPZ employees. Since a number of foreign orders have been lost, by mid-October 2002, only 49 about 150 EPZ companies had partially resumed operations, accounting for some 20,000 workers. The EPZ companies are, as a group, expected to operate at significantly reduced (35 percent or less) capacity until spring 2003, when foreign orders and production are expected to pick up.8

26. The tertiary sector was also hard hit by the political crisis, with an expected decline in output of 12.5 percent for the year as a whole, compared with an increase of 6.1 percent in 2001. Transportation was one of the most affected sectors, as 90 percent of the trucking fleet was virtually immobilized by the roadblocks, damaged bridges, and fuel shortages.9 The severe shortage of fuel led to a sharp increase in petroleum prices on the black market of as much as 500 percent across the country.10 Air Madagascar stopped most internal and external flights, as did most foreign carriers for security reasons. Commercial activity also declined substantially following the decline in secondary and tertiary sector output. Since about 55 percent of Madagascar’s electricity output is utilized by industries and businesses, electricity output fell during the crisis as economic activity slowed. In the electricity sector, two acts of sabotage cut power to Antananarivo on two occasions. The public electricity company, JIRAMA, also had collection difficulties as local governments and universities could not pay their electricity and water bills. Tourism was brought to a halt during the crisis; international travel to Madagascar for tourism is estimated to have declined by 95 percent.

27. The banking sector continued operations throughout the crisis and ensured the continuity of the payments system. The quality of the commercial bank’s loan portfolio deteriorated, as the share of nonperforming loans rose from 10.3 percent at end-2001 to 14.0 percent at end-August 2002, Until October 23, 2002, when the treasury bill market reopened, all treasury bond holdings, including those of the commercial banks, were automatically rolled over. As the interbank foreign exchange market was closed from February to July, foreign exchange operations were severely curtailed; they did however perform some transactions on a “netting” basis. Microfinance institutions have reported lower savings and credit repayment rates following the crisis. The telecommunications sector experienced a small decline in output during the crisis but is expected to fully recover in the last months of 2002, compensating for most of that decline.

C. Social Impact of the Political Crisis

28. The crisis had a particularly strong impact on poor families and vulnerable groups. Three groups in particular experienced a sharp decline in their standard of living: farmers in the rural areas, the newly unemployed in the formal sector, and the extremely poor in the informal sector in the urban areas. In the rural areas, farmers, especially those isolated from the markets, experienced a decline of up to 50 percent in household income, as a result of a significant drop in producer prices and a dramatic increase in fuel and transport costs.11 In urban areas, reduced production and the temporary shutdown of companies resulted in loss of jobs for about 150,000 mostly low-skilled workers in the formal sector. The loss of income in urban formal sector income also led a drop in demand for informal sector operators. Consequently, the extremely poor, who are primarily involved in informal sector activities, such as petty trade and day work in the construction industry, were particularly affected by the crisis.

29. In addition to the loss of income, the sharp increase in the prices of a number of essential goods further reduced the purchasing power of these groups. On the basis of simulations made using the household survey data collected during the crisis, the United Nations Development Program (UNDP) has estimated that income poverty increased by as much as 6 percent since 2001 and now affects 75 percent of the population. In addition, the World Bank reports that, in the February–August period, school dropout rates increased significantly, reaching 14 percent, while visits to health care centers declined by 36 percent in rural areas and 14 percent in urban areas. Both rural and urban families have reported decreased food consumption, which is likely to further increase malnutrition rates for children under 5 years of age.

III. External Competitiveness12

A. Introduction

30. Since the establishment of an export processing zone (EPZ) regime in 1989, exports have assumed an increasingly important role in Madagascar’s economic development. And, as Madagascar’s exports have become more diversified, the maintenance and enhancement of international competitiveness have assumed an increased importance. Over the period mid-1999 to 2001, concern over a possible deterioration in competitiveness developed as the nominal and real effective exchange rates of the Malagasy franc were appreciating (by about 18 and 33 percent respectively between June 1999 and December 2001, Figure 6). Motivated by the question of whether the appreciation reflected an equilibrium movement or an incipient misalignment, and recognizing that the measurement of external competitiveness cannot rely on a single approach, the staff has been monitoring Madagascar’s export performance and various measures of competitiveness.

Figure 6.
Figure 6.

Madagascar: Real and Nominal Exchange Rates, January 1990 - August 2002

(Average 1990=100)

Citation: IMF Staff Country Reports 2003, 007; 10.5089/9781451825282.002.A001

Source: IMF, Information Notice System.

31. This section provides a short survey of the findings derived from three different approaches to the measurement and assessment of competitiveness.13 These include econometric modeling of the fundamental determinants of the equilibrium real effective exchange rate, comparative labor cost analysis, and an analysis based on a constant-market-share (CMS) decomposition analysis. In short, the results from all three approaches suggest that Madagascar remains broadly competitive, despite the recent current appreciation, and that there is no evidence of a detrimental exchange rate misalignment.

32. These general conclusions tend to be supported by Madagascar’s recent export performance. Receipts for exports of goods and nonfactor services have increased steadily since 1996, rising from about 20 percent of GDP in 1996 to over 30 percent in 2001, and the volume of exports increased in every year from 1996 to 2001. The current account deficit (excluding official transfer) in relation to GDP narrowed from about 8 percent of GDP in 1997–98 to 5.7 percent in 2000, and further to 1.7 percent in 2001. Prior to 2002, Madagascar was reasonably successful in attracting numerous foreign investors, partially through an ambitious program of privatization of state enterprises, but in particular through its EPZ regime, especially in the textile and apparel manufacturing sector. Private capital inflows increased from 0.2 percent of GDP (SDR 4 million) in 1994 to over 2 percent of GDP (SDR 50 million) in 2000 (Figure 7).

Figure 7.
Figure 7.

Madagascar: Foreign Direct Investment, 1970-2000

(In percent of GDP)

Citation: IMF Staff Country Reports 2003, 007; 10.5089/9781451825282.002.A001

Source: World Development Indicators, World Bank.

33. This section is organized as follows. The next subsection highlights the results of an econometric analysis of the fundamental determinants of the real exchange rate and an assessment of misalignment. A comparative analysis of trends in Madagascar’s labor costs vis-à-vis specific competitor countries is reported in Subsection C. Subsection D outlines the application of CMS analysis to Madagascar’s export growth during the period 1991–2001. Subsection E concludes.

B. Equilibrium Real Exchange Rate Assessment

34. Using econometric methods, the fundamental long-run determinants of the real exchange rate of the Malagasy franc (including the net foreign assets position, terms of trade, taxes on international trade, and investment spending) have been modeled.14 Using an estimated long-run equation for the real effective exchange rate, evaluated at trend, or smoothed, values of all independent variables, estimates of the equilibrium real exchange rate have been derived. From these equilibrium estimates and actual values of the real exchange rate, measures of real exchange rate misalignment can be derived. The exercise indicates that the real exchange rate of the Malagasy franc has been significantly overvalued and undervalued for long periods in the past, but that, since 1996, the estimated equilibrium and actual real effective exchange rates have been quite close to each other, exhibiting differences of less than 5 percent. Thus, after taking into account changes in the fundamental determinants, the appreciation of the real effective exchange rate between 1999 and 2001 would appear to be consistent with an equilibrium change and indicative of neither misalignment nor a loss of competitiveness.

C. Relative Labor Cost Analysis

35. This subsection reports the key findings of a comparison of Madagascar’s labor costs in the manufacturing sector since 1967 with a those of a small group of selected competitor countries.15 The rationale for examining relative labor costs is that labor usually represents the main domestic value-added component of total production costs and thus captures a key underlying determinant of competitiveness. To the extent that capital and intermediate goods are traded in international markets, whereas labor remains largely immobile internationally, labor costs are likely to diverge much more across countries than other costs of production, and, therefore, play an important role in determining the country’s overall external competitiveness and in attracting foreign direct investment.

36. The comparison, conducted using U.S. dollars as a common currency, indicates that since 1987, Malagasy labor costs have been significantly below those in the comparator countries. In 2000, average monthly wages in Madagascar were about $58, compared with countries. In 2000, average monthly wages in Madagascar were about $58, compared with about $100 in India and Kenya, and $271 in Mauritius (Figure 8). This comparison ignores the effects of labor productivity differentials, an aspect that the staff intends to address in future work using unit labor costs, however, it nonetheless indicates that the level of wages in Madagascar’s manufacturing sector tends to be much lower than in some key competitor countries.

Figure 8.
Figure 8.

Madagascar and Selected Comparator Countries: Monthly Wage in Manufacturing, 1963-2000

(In U.S. dollars)

Citation: IMF Staff Country Reports 2003, 007; 10.5089/9781451825282.002.A001

Sources: UNIDO; IMF staff, and the author’s calculations.

D. Constant Market Share Analysis

37. This subsection summarizes the results of a constant-market-share analysis of Madagascar’s export growth over the period 1991–2001. The CMS decomposition of export growth suggests that Madagascar has become more somewhat competitive between the base year of 1991 and 2001.

38. CMS analysis is a popular, easily applied method for examining a country’s export growth. It entails the decomposition of the change in a country’s exports between any two time periods into four components: a general growth effect; a commodity composition effect; a market distribution effect; and a residual effect, accounting for all other factors which is usually attributed to change in competitiveness.

39. More formally, the change in exports can be expressed by the following equation:

ΔX = ΣrXi + Σ(ri-r)Xi + ΣΣ(rij-ri)Xij + (ΔX - ΣΣrijXij),


r is the proportional change in the overall exports of competitor countries;

ri is the proportional change in the overall exports of competitors’ exports of good i;

rij is the proportional change in the overall exports of competitors’ exports of good i in market j;

Xi is Madagascar’s exports of good i; and

Xij is Madagascar’s exports of good i in market j.

40. The first term on the right-hand side of the equation is generally interpreted as the “general growth effect,” measuring the export growth associated with the general increase in world exports; the second term is the commodity composition effect, which is meant to capture the extent to which a country’s exports are concentrated in commodity classes with growth rates more favorable than the world average; and the third term is the market distribution effect, which indicates whether the country’s exports have been concentrated in markets experiencing relatively rapid growth. These first three effects measure the change in exports that would occur if the country were able to keep constant its shares in the corresponding markets. The final, or competitiveness effect, then accounts for all growth that arises from changing export shares.16

41. CMS analysis has the advantage of being able to account for the extent to which a country’s exports are concentrated in commodities and markets that can be considered to be expanding slowly or rapidly, and the nature of the actual expansion of exports in the particular context. This type of analysis may point to a preferred composition and distribution of exports because, presumably, a country will prefer to concentrate its exports in commodities and markets that are rapidly expanding. However, the CMS method does have certain limitations: in particular, the results can be sensitive to the choice of base year and competitor groups.

42. The CMS analysis was conducted over the period 1991–2001 using country trade data available in the UN Commtrade database,17 with the key findings summarized below:

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43. Since the introduction of the EPZ regime in 1989, there has been significant economic transformation in Madagascar. The structure of exports has shifted from traditional commodity exports, such as vanilla, cloves, and coffee, to shrimp and other fishery products and textiles and apparel. Reflecting these changes, the CMS decomposition suggests that competitiveness increased significantly during the period 1991–2001, starting in 1992, and accounting for almost all (99 percent) of the net increase in exports over the complete reference period. The growth and commodity effects are estimated to have diminished export growth by 3 and 24 percent, respectively, while the market effect remained positive, contributing some 27 percent to the total export growth (Figure 9).

Figure 9.
Figure 9.

Madagascar: Constant-Market-Share Export Growth Decomposition, 1992-2001

(Base Year = 1991)

Citation: IMF Staff Country Reports 2003, 007; 10.5089/9781451825282.002.A001

Sources: UN Commtrade database, and the author’s calculations.

E. Conclusions

44. The research findings summarized in this section, all tend to support the notion that Madagascar remains competitive, despite the currency appreciation from 1999 to 2001. This view is supported by Madagascar’s recent export performance and also tends to be shared by the managers of textile and apparel manufacturing enterprises operating in Madagascar’s EPZ. In general, they appreciate the quality and productivity of Malagasy labor, indicating that shortfalls in the hourly productivity of Malagasy workers vis-à-vis the best garment workers in the world are more than compensated for by the lower wages prevailing in Madagascar. Most EPZ operators, and especially those in the apparel industry, consider Madagascar an attractive place to invest, despite factors that they cite as hurting competitiveness, including poor public infrastructure, high telecommunications costs, operational inefficiencies at ports and airports, and an overly bureaucratic regulatory and tax system, compounded by corruption.

45. In the year to July 2002, following resolution of the 2002 political crisis (see Section II), the Malagasy franc depreciated by over 11 percent in nominal terms, reversing some of the appreciation experienced over the period 1999–2001, boosting competitiveness. Nevertheless, the crisis has not enhanced Madagascar’s reputation for political stability and could represent a significant negative factor influencing Madagascar’s overall competitiveness. EPZ production and exports have been slow to recover since July 2002, with only one-third of EPZ operators having at least partially resumed their operations by October. Thus, it still remains to be seen whether the 2002 crisis has permanently driven away existing and potential foreign investors.

APPENDIX I Madagascar: Summary of the Malagasy Tax System, June 2002

(All amounts in Malagasy francs)

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Source: Ministry of Budget and Development of Autonomous Provinces.

Levied on behalf of local authorities.


Table 1.

Madagascar: Growth and Structure of GDP, 1997-2001

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Sources: Ministry of Economy, Finance, and Budget; and Fund staff estimates.

Excluding public enterprises.

Table 2.

Madagascar: Gross Domestic Product at Constant 1984 Prices, 1997-2001

(In billions of Malagasy francs at 1984 prices)

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Sources: Ministry of Economy, Finance, and Budget; and Fund staff estimates.
Table 3.

Madagascar: Supply and Use of Resources at Current Prices, 1997-2001

(In billions of Malagasy francs)

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Sources: Ministry of Economy, Finance, and Budget; and Fund staff estimates.
Table 4.

Madagascar: Production of Rice and Other Food Crops, 1997-2001

(In thousands of tons)

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Source: Ministry of Agriculture and Rural Development
Table 5.

Madagascar: Rice Production, Imports, and Availability, 1981-2001

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Sources: Ministry of Agriculture and Rural Development; and National Institute of Statistics (INSTAT).

May differ from data provided by other sources.

Madagascar was a net exporter of rice until 1970 (except for 1965).

Domestic paddy production converted to rice equivalent plus net change in stocks and net imports.

Table 6.

Madagascar: Retail Prices of Ordinary Rice, 1997-2001

(In Malagasy francs per kilogram)

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Source: National Institute of Statistics (INSTAT).

The data refer to the price of rice sold from the food security stock, or Stock Tampon.

Table 7.

Madagascar: Production of Major Cash Crops, 1997-2001 1

(In thousands of tons)

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Source: Ministry of Agriculture and Rural Development.

Data on total production are approximate; those on marketed production are more accurate.

Unroasted coffee.

Green vanilla.

Prepared vanilla (4.6 kilograms green = 1 kilogram prepared).

Most of the production is marketed.

Seed cotton.