This Selected Issues paper on the Republic of Madagascar reports on the several key themes associated with longer-term development issues in Madagascar. As one of the poorest countries in sub-Saharan Africa, Madagascar suffers from low levels of social indicators across all fronts including education, health, water and sanitation, and infrastructure. To make progress toward the Millennium Development Goals, the country will need to scale up substantially both public and private investment while taking actions to increase absorptive and institutional capacity and implementing supportive policies in each of the priority sectors.


This Selected Issues paper on the Republic of Madagascar reports on the several key themes associated with longer-term development issues in Madagascar. As one of the poorest countries in sub-Saharan Africa, Madagascar suffers from low levels of social indicators across all fronts including education, health, water and sanitation, and infrastructure. To make progress toward the Millennium Development Goals, the country will need to scale up substantially both public and private investment while taking actions to increase absorptive and institutional capacity and implementing supportive policies in each of the priority sectors.

II. The Economic and Fiscal Impact of Joining the SADC FTA 1

1. Madagascar intends to start phasing out its customs tariffs on imports from the SADC in 2007. The Malagasy authorities have expressed great hope that joining the SADC FTA will boost the development of the country, by fostering trade and investment. This paper intends to assess the economic and fiscal impact of this regional trade liberalization.

A. Madagascar Trade Liberalization

2. Madagascar has been liberalizing its trade regime on an unilateral and regional basis. Unilaterally, it reduced its simple average most favored nation (MFN) tariff from16.2 percent at the end of 2005 to 13.5 percent in 2006 and then at 12.9 in 2007, slightly below SSA average of 13.0 percent. On a regional basis, Madagascar is a member of the COMESA since 1993 and was one of the nine countries forming the COMESA FTA in 2000. In 2004, Madagascar became the 14th SADC member and, in 2007, intends starting phasing out its tariff on imports from SADC. In a first phase, customs duties on 78 percent of tariff lines will be eliminated and duties on 7.7 percent additional tariff lines will be reduced. The remaining duties will be almost fully eliminated by 2012. The phasing out of Madagascar tariff on SADC import will discriminate between South Africa and the rest of SADC. Nonetheless the differences between tariff on South Africa imports and rest of SADC will be minimal (Table II.1).2

Table II.1

Planned Reduction in Madagascar Customs Tariff on SADC Imports

(Simple tariff average, in percent)

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Countries that are both members of COMESA and SADC already had preferential access to the Malagasy market under the COMESA. Other countries faced MFN tariffs averaging 13.5 percent.

Source: Staff calculation based on the tariff reduction agreed in October 2006.

B. The SADC FTA: A limited Trade Liberalization for Madagascar

3. The liberalization of the SADC FTA is limited. At first glance the SADC FTA will lead to a significant liberalization of imports. SADC countries account for 12.5 percent of Madagascar imports. However, in practice, the liberalization will be much more limited: only 5.6 percent of Madagascar imports will benefit from the tariff cut. The reason is overlapping membership (Table II.2). Four SADC countries (including Madagascar’s main trading partner in SADC, Mauritius) are also members of the COMESA FTA. As a result, their exports to Madagascar already benefit from a duty-free access. Since Madagascar imports from SADC are extremely concentrated (Mauritius and South Africa account for 93 percent of Madagascar imports from the bloc), South Africa accounts for 88 percent of the trade that will actually be liberalized. Appendix II.1 provides more details on Madagascar trade with Africa.

Table II.2.

SADC and COMESA: Overlapping Memberships

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IMF’s Direction of Trade database.

4. Moreover, empirical literature suggests that the potential from African regional trade agreements to increase trade may be low.

  • First, Foroutan and Pritchett (1993) on intra-SSA trade and, more recently, Chauvin and Gaulier (2002) on intra-SADC trade use gravity models to estimate bilateral and regional trade potential. Both conclude that, although small, the actual level of intra-African trade is not below its potential.

  • Second, past experience shows that the actual intra-regional trade liberalization was limited in Africa because of (i) import-substitution policies; 3 (ii) tariff-revenue constraints; (iii) inequal distribution of costs and benefits of integration; (iv) severe distorsions in the trade regimes of many African countries; (v) high transaction costs due to inadequate infrastructures; (vi) limited product complementarities; 4 and (vii) institutional constraints as well as conflicting goals due to African countries’ membership in several regional groups. Moreover, the complementary policies (macroeconomic stability, appropriate exchange rate, investment policies, …) that are crucial to ensure that trade liberalization promotes growth were often not implemented (Chauvin and Gaulier, 2002; Foroutan, 1993; Hallaert, 2004; Khandelwal, 2004; SADC 2006, Yeats, 1998).

C. CGE Simulations 5

5. Quantifying the economic impact of a regional trade agreement requires a general equilibrium analysis. Using the Global Trade Analysis Project (GTAP) model described in Appendix II.2, four scenarios on the impact of the SADC FTA are simulated. They differ regarding assumed rigidities in the labor and capital markets.

  • In the first scenario, all prices and wages are assumed to be flexible so as to maintain the current level of employment;

  • In the second scenario, real wages are assumed to be rigid so as to allow the SADC FTA to affect the level of employment;

  • In the third scenario, the real price of capital is fixed so as to allow the SADC FTA to affect the level of capital;

  • In the fourth scenario, both real wages and real price of capital are fixed.

6. Under all scenarios, Madagascar static gains from a full FTA (i.e., eliminating all tariffs on intra-SADC trade) are limited. At most, real GDP would increase by 0.4 percent (Table II.3) and welfare by at most 17.5 million US dollars. The first scenario can be interpreted as the outcome of the SADC FTA if there is, initially, full utilization of both capital and employment or if rigidities prevent to move to the full employment. Other scenarios relax this assumption for employment (scenario 2), capital (scenario 3) or both (scenario 4). These scenarios are alternative closures, but they have policy implications. If there are rigidities in the economy that affect the utilization of capital and/or labor, complementary policies that would remove these rigidities will increase the gains from the SADC FTA. The latest investment climate assessment published by the World Bank documents the various rigidities affecting the use of both labor and capital and thus suggests possible complementary policies. For example, 67 percent of firms surveyed quote the cost of finance as a major or severe constraint, 59 percent the access to finance, 31 percent the skills and education of workers and 15 percent labor regulations (Shah and al., 2005).

Table II.3.

Impact of the SADC FTA on Real GDP

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7. Although the SADC FTA would have only a limited impact Madagascar’s total trade, it would affect significantly its trade pattern and thus the structure of production.

  • First, the direction of trade would be substantially altered. Trade between SADC members would increase substantially at the expense of trade with third countries. While Madagascar total trade would barely increase (0.4 percent at most), its trade with SADC would increase by about 5 percent while its trade with the rest of the world would decline. This points to the possibility of a trade diversion. Results also confirm that the increase in Madagascar trade with SADC would be driven by trade with South Africa (+12.5 percent). In particular, exports to South Africa are expected to double. In contrast, Madagascar trade with the rest of SADC would increase by less than a percent with Madagascar’s exports to that region dropping by 8 percent.

  • Second, the product pattern of Madagascar trade would change. While, despite the hope that Madagascar would become the region’s bread basket (IMF, 2006), agricultural and food exports and production (including rice) would not be affected by the SADC FTA. The textiles and clothing industries would be the major beneficiaries of the SADC FTA. Total exports would increase leading to an expansion of production of apparel (0.5 percent) and of textiles (1 percent). The expansion of trade in textiles and clothing is, as expected, explained by trade with South Africa. Exports of textiles to South Africa would jump by more than 500 percent and exports of clothing by 200 percent. Suggesting an increase in intra-industry trade, imports from South Africa would also increase by respectively 58 and 116 percent. In contrast, trade in textiles and clothing with the rest of SADC and the rest of the world would not be affected much. Reflecting the current small share of South Africa in the Madagascar exports, the total impact on Madagascar exports of textiles will be limited to about 1 percent and of 0.5 percent for apparel.

D. Multilateral Liberalization

8. The gains from the SADC FTA are limited for Madagascar. But, this does not mean that trade liberalization cannot foster significantly its growth. The gains from the SADC FTA are small because

  • It is actually a small trade liberalization covering less than 6 percent of Madagascar imports; and

  • A regional liberalization is a discriminatory liberalization and, as such, involves costs.

9. A multilateral trade liberalization would both increase the coverage of the trade liberalization and eliminate the costs associated with trade diversion. For illustrative purpose, (Table II.4 presents a scenario under which the full liberalization of intra-SADC trade is combined with a partial and small (10 percent) multilateral reduction in applied tariff. The result then appear much larger and consistent with Vamvakidis’ 1998) conclusion. Vamvakidis found that economies have grown faster on average and have a higher investment share after a nondiscriminatory liberalization but not after joining a preferential agreement.

Table II.4.

SADC and Multilateral Liberalization 1

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The multilateral cut simulated is a uniform and non-discriminatory 10 percent cut in the applied customs tariff rate of all regions on all goods. For SADC, the cut is limited to trade with non-SADC countries while intra-SADC trade is fully liberalized.

E. Fiscal Impact

10. The CGE simulations ignore the fiscal implications of the SADC FTA. The fiscal impact is crucial for Madagascar because the country has one of the lowest tax revenue-to-GDP ratios in the world (about 10.7 percent of GDP in 2006) and about half of the tax revenue is tax on international trade.6 Thus, Madagascar will have to find domestic measures to offset the losses in government revenue from regional tariff reductions.

11. In order to assess the fiscal impact, data on imports from the pre-shipment inspection company Société Générale de Surveillance (SGS) have been used.7 SGS data, which were available at the HS-6 digit level for January-November 2006, allow to distinguish tax exempt export processing zones (EPZs) imports and dutiable imports.

12. This paper focuses on imports from South Africa since they account for almost 90 percent of Madagascar imports that will be affected by the tariff cut. It appears that revenue on taxes on South Africa imports are larger than South Africa’s share in Madagascar imports would suggest because:

13. As a result, assuming constant import weights, the phasing out of tariffs on South African imports would lead to a reduction in Madagascar revenues from customs tariff of 7.7 percent. Since the customs duty enters in the basis of other taxes levied on imports, the cut in tariff will affect the collection of excise taxes as well as VAT. However, the revenue on imported petroleum will not be affected because the specific tariff levied on these products will not be cut. Overall revenue of taxes on international trade would decrease by 2.6 percent in 2007 up to 3.1 percent in 2012 (Table II.5).9

Table II.5.

Revenue Losses on Imports from South Africa 10

(In percent of the respective tax receipts)

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14. This revenue loss should be considered as a lower bound because

15. In contrast, customs reforms and the move from preshipment inspection to the TradeNet system are likely to improve the customxs efficiency and thus the collection of taxes on international trade. TradeNet, is an electronic platform linking the various trade parties (importers, trade forwarders, customs, central bank, …) which will facilitate and reduce the cost of customs procedures. Singapore and Ghana have implemented it have experienced improved revenue (Engman, 2002).

F. Conclusion

16. The SADC FTA will only have a limited impact on Madagascar’s real GDP and welfare because less than 6 percent of the country’s imports will be liberalized. Most of the impact will come from trade liberalization with South Africa. Nonetheless, the SADC FTA will alter Madagascar’s trade structure. Madagascar’s trade with South Africa would increase substantially under the SADC FTA but the impact on trade with the rest of SADC is limited and trade with third countries would decline. Most of the change in trade is due to changes in trade in textiles and clothing that would be the main beneficiaries of the SADC FTA.

17. Although the economic impact is expected to be limited, the fiscal cost appears somewhat larger. Assuming fixed imports weight, the revenue of taxes on international trade, which account for about half of Madagascar tax revenue, would decline by about 3 percent in 2007 11 and possibly slightly more. Thus, Madagascar will have to find domestic measures to offset the losses in government revenue from regional tariff reductions because, unlike many African regional agreements such as SACU or COMESA, SADC has no provision for compensating fiscal losses (Walkenhorst, 2006) except that countries affected by the tariff cut would have a privileged access to the SADC regional development fund (SADC, 2006).

APPENDIX II.1—Madagascar imports from Africa

Imports from Africa represent only 15 percent of Madagascar total imports. However, this share has been increasing since 2001, recouping the loss experienced in the second half of the 1990s.

Virtually all Madagascar imports from Africa are from the COMESA and SADC areas. The exceptions are Cote d’Ivoire (0.1 percent of total imports) and the Maghreb countries (0.2 percent).

Trade with SADC appears more important than trade with COMESA. Moreover, in 2005, 89 percent of COMESA imports are from countries that are members of both SADC and COMESA (90 percent of which is imports from Mauritius). This is less true for imports from SADC: in 2005, only 35 percent of SADC imports were from countries belonging both to SADC and COMESA.

This reflects the weight of South Africa in Madagascar imports from both Africa and SADC. South Africa accounts 40 percent of Madagascar imports from SADC but imports from South Africa do not explain the recent increase in Africa and SADC market share since its share in Madagascar imports has been flat since 2000. Imports from Mauritius are the main reason fro the increase in trade with Africa and various African groups. Their value was 12 times higher in 2005 than in 2000.


Africa’s share in Madagascar imports

Citation: IMF Staff Country Reports 2007, 239; 10.5089/9781451825435.002.A002


Regional Agreement’s share in Madagascar imports

Citation: IMF Staff Country Reports 2007, 239; 10.5089/9781451825435.002.A002


South Africaand Mauritus share in Madagascar imports

Citation: IMF Staff Country Reports 2007, 239; 10.5089/9781451825435.002.A002

APPENDIX II.2—Madagascar: The GTAP Model 1

The GTAP model used in this paper is a comparative static, global general equilibrium model based on neoclassical theory. Firms maximize their profits while consumers maximize their utility. All markets are assumed to be perfectly competitive, and constant returns to scale prevail in all production and trading activities.

Firms use both a composite of primary factors and a composite of intermediates to produce their output according to Leontief production technology. The primary factor composite is a constant elasticity of substitution (CES) function of labor, capital, land and natural resources, while the intermediate composite is a Leontief function of material inputs, which are in turn CES blends of domestically produced goods and imports. Imports are sourced from all regions, with their share depending on trading prices (the Armington approach).

On the demand side, each country or region is assumed to have a “super” household disposing of regional income in fixed proportions in the form of private consumption, government expenditure and savings. Household consumption is assumed to be a constant difference in elasticities function of various consumer goods while government expenditure is based on a CES function of various commodities. Both household and government consumption are CES blends of domestically produced goods and imports, which are in turn sourced from all trading regions based on the Armington approach.

In closing the model, regional savings are assumed to be homogenous and contribute to a global pool of savings, which is then allocated among regions for investment in response to changes in regional expected rates of return. These changes are assumed to be equalized across regions, thus giving rise to capital (i.e., savings) mobility across regions. This allows for greater changes in the trade balance as a result of trade liberalization and tends to dampen the terms of trade effects. In contrast to savings, capital stocks are assumed to be immobile across regions, although they are perfectly mobile within a region, as is labor. Land and natural resources are industry-specific, and only limited transformation of their uses among industries is possible.

The simplicity of the GTAP model makes its simulation results relatively easy to interpret, but limits its capacity to deal with more complex economic issues, such as the adjustment path over time and long-term effects of trade policies associated with investment accumulation, technology and productivity change. Also absent in the model are adjustment costs associated with trade liberalization. These limitations must be kept in mind when interpreting the results presented in this paper.


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Prepared by Jean-Jacques Hallaert.


Tariff will remain on sugar products as well as oil, petroleum products, and gases.


For example, provisions for protection of infant industries are included in the SADC agreement.


Significantly, the Communiqué of the 2006 SADC extraordinary summit indicated: “Summit noted that SADC’s trade pattern consist mainly of commodities and that there is a need to diversify the SADC economies and increase intra-regional trade and growth” (SADC, 2006). Yeats (1998) as well as Chauvin and Gaulier (2002) argued that while there is little potential to increase intra-African trade under a FTA because of the limited product complementarities, an exception may be trade with South Africa.


This section draws on Hallaert (2006), which provides more details on the model, specification, and results.


See Chapter III, Tax Policy Reform Priorities to Improve Revenue Performance.


This period covers the relevant pre-FTA period, because data for 2005 were biased by the end of the temporary customs exemption on investment goods and because the phasing out of the tariff on SADC imports was launched in November 2006.


This ratio is calculated on imports excluding EPZ imports, which are granted duty-free treatment, for the period January-October 2006.


SGS data provide dutiable imports but do not single out if these imports benefit from exemptions. This could bias slightly the result presented here. Revenue losses are compared to the potential revenue in January-October 2006 (i.e., assuming no exemption) dutiable rather than actual revenue collection. If exemptions existed prior to the SADC FTA, their elimination would reduce the fiscal losses presented in this paper (Hallaert, 2004 and IMF, 2005).


The calculation presented in this table remain unchanged when elasticity price of import demand (Khee and al., 2004) are introduced because the tariff cut are very large. At the extreme, an elimination of a tariff will trigger an increase in the volume of imports but since the tariffs are eliminated, this increase does not provide additional customs revenue. There is an expected increase in revenue of other taxes on imports but that effect is largely offset by the reduction of the taxable base (value of imports plus customs tariff that are cut).


Since the tariff cut has not be implemented starting January 1, 2007 as initially plenned the actual impact on the 2007 budget will be more limited.


This appendix is from Mlachila and Yang (2004). See Hertel (1997) for more details on the GTAP model. More information on the database can be found at:

Republic of Madagascar: Selected Issues
Author: International Monetary Fund