Republic of Madagascar: Selected Issues and Statistical Appendix
Author:
International Monetary Fund
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Publication Date:
27 Sep 2005
eISBN:
9781451938616
Language:
English
Keywords:
ISCR; CR; exchange rate; inflation expectation; factor cost; monetary policy credibility; world development indicator; GDP deflator; money in Madagascar; Public expenditure review
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This Selected Issues paper and Statistical Appendix analyzes the relationship among prices, income, and money in Madagascar over the period 1982–2004. It finds that a stable long-run relationship for the price level exists, but that the adjustment toward this long-term equilibrium is quite slow. The paper presents an assessment of the real effective exchange rate. It also presents some qualitative competitiveness indicators and examines the performance of exports in Madagascar at an aggregate and product level.

Abstract

This Selected Issues paper and Statistical Appendix analyzes the relationship among prices, income, and money in Madagascar over the period 1982–2004. It finds that a stable long-run relationship for the price level exists, but that the adjustment toward this long-term equilibrium is quite slow. The paper presents an assessment of the real effective exchange rate. It also presents some qualitative competitiveness indicators and examines the performance of exports in Madagascar at an aggregate and product level.

Madagascar: Basic Data

Area, population, and GDP per capita

Area: 582,000 square kilometers

Population

Total: 16.0 million (2004)

Growth rate: 5.3 percent (2004)

GDP per capita (World Bank Atlas method): US$251 (2004)

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Sources: Malagasy authorities.

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, 2004 1

(Unless otherwise indicated)

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Sources: CD-ROM of World Bank, World Development Indicators, 2004.

I. Introduction

1. Madagascar has, since the late 1990s, made major strides in macroeconomic stabilization and structural reforms, however, the economy remains vulnerable to shocks and policy slippages. During the period 1999–2003, economic growth picked up sharply and inflation remained in single digits, excluding 2002 when there was a political crisis. However, inflation increased to 27 percent in 2004 (on a year-on-year basis), following a sharp depreciation of the exchange rate during the first half of the year, fueled by exogenous shocks and inconsistent macroeconomic policies. This paper presents three studies, which are motivated by the need to maintain macroeconomic stability and improve resilience to shocks.

2. Chapter I analyzes the relationship among prices, income, and money in Madagascar over the period 1982–2004. It finds that a stable long-run relationship for the price level exists, but that the adjustment toward this long-run equilibrium is quite slow. It also found nominal money growth and the exchange rate to be significant determinants of inflation, along with inflation inertia, which implies that inflation expectations were determined by past events during the period under study. These results suggest that, to change inflationary expectations, a strong and comprehensive package of tight financial policies is needed, complemented by a boost in monetary policy credibility.

3. Chapter II presents an assessment of the real effective exchange rate. It finds that the current level of the real effective exchange rate is below its long-term equilibrium. Several factors explain this discrepancy, including monetary policy, tax exemption, and terms of trade shock, while other factors tend to mitigate the extent of the discrepancy. The chapter concludes that the current level of the real effective exchange rate is broadly appropriate.

4. Chapter III presents some qualitative competitiveness indicators and examines the performance of exports in Madagascar at an aggregate and product level. It finds that exports have performed fairly well and that performance in the manufacturing sector has been particularly strong. Textiles and garments were found to be the important contributing factors, in part driven by external trade policies such as preferential trade agreements, including the African Growth and Opportunity Act (AGOA) with the United States. As a result, the expected termination of the third provision of AGOA in 2007 poses some challenges. However, given that Madagascar’s export base is diversified, the chapter concludes that the effect of such shocks can be mitigated with appropriate policies, in particular policies aimed at safeguarding recent gains in exchange rate competitiveness.

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Cover IMF Staff Country Reports
Republic of Madagascar: Selected Issues and Statistical Appendix
Author:
International Monetary Fund
Volume/Issue:
Volume 2005: Issue 321
Publisher:
International Monetary Fund
ISBN:
9781451938616
ISSN:
1934-7685
Pages:
124
DOI:
https://doi.org/10.5089/9781451938616.002