Growth in Madagascar’s GDP was weak in 2012 (1.9% versus 1.6% in 2011), but projections point to growth of 3% in 2013 and 4% in 2014, provided the elections scheduled in 2013 put an end to instability.
The four-year-old political crisis has led to a deterioration in the business climate and greater loss of control in governance, and worsened the living conditions of the population despite some progress in education and in the fight against HIV/AIDS.
Madagascar is rich in natural resources both significant and diverse, and although their contribution to the national budget is still low, it could grow quickly, especially with the development of major projects for the mining of ilmenite, nickel and cobalt.
Madagascar’s economic growth, which was negative (‑4.1%) in 2009 and weak (0.5%) in 2010, progressed to 1.6% in 2011, still low compared to the average growth of sub-Saharan African countries, estimated at 5.3% by the International Monetary Fund (IMF) in its October 2012 Regional Economic Outlook. The economy grew by 1.9% in 2012, driven mainly by the mining industries, transport (helped by a revival of tourism) and exports from customs-free zones.1 The authorities applied a restrictive fiscal policy to cope with the reduction of external aid, a consequence of the political crisis that has shaken the country since 2009. They followed a prudent monetary policy and managed to contain the budget deficit at 3.1% of GDP (as against 1.7% in 2011). Similarly, they managed to limit the increase of prices to an annual average of 6.4%, down from 9.8% in 2011. The current-account deficit widened to 8.3% of GDP from 6.9% of GDP in 2011. This was the result of greater deterioration in the trade balance and in the services balance, which could not be offset by improvements in the balance of current transfers and of the balance of financial transactions and in capital. Finally, if the elections intended to put an end to the crisis are organised in 2013 as planned, growth could accelerate in 2013 and 2014 to 3% and 4%, respectively. It would benefit from the expansion of the mining industries, the gradual resumption of external financing favourable to construction, and the buoyancy of trade and tourism.
The duration of the crisis has helped impoverish the population and to worsen the country’s social indicators. In 2010, approximately 77% of Madagascans lived below the poverty line. This share is estimated to have increased in 2011 and 2012 even though recent data to confirm this are lacking. The protracted political tension has undermined the achievement of the Millennium Development Goals (MDGs) despite some progress in the areas of education and the fight against HIV/AIDS. GDP per capita amounted in 2012 to MGA 927 545 (Madagascar ariarys) or USD 449, down 4.2% from 2011, while the population is growing at an annual rate of 2.8%. The quality of governance and the business climate also deteriorated, and reform initiatives were limited.
Madagascar, which has very significant and diverse natural-resource deposits, has failed to take advantage of this wealth of assets to make major structural changes to the economy. The main reasons for this failure were recurrent political crises since the 1970s, the weak competitiveness of local processing industries and suppliers, insufficient transport infrastructure and the low quality of public services. The contribution of natural resources to the national budget is still low but should grow rapidly with the implementation of large mining projects.
Figure 1: Real GDP growth 2013 (South)
Table 1: Macroeconomic indicators 2013
|Real GDP growth||1.6||1.9||3||4|
|Real GDP per capita growth||0.5||0.8||1.9||2.9|
|Budget balance % GDP||-1.7||-3.1||-3||-2.2|
|Current account % GDP||-6.9||-8.3||-7.6||-5.7|
Recent Developments & Prospects
Table 2: GDP by Sector 2013 (percentage of GDP)
|Agriculture, forestry & fishing||-|
|Agriculture, hunting, forestry, fishing||26.4|
|Electricity, gas and water||1.1|
|Electricity, water and sanitation||-|
|Finance, insurance and social solidarity||-|
|Finance, real estate and business services||16.7|
|General government services||-|
|Gross domestic product at basic prices / factor cost||100|
|Public Administration & Personal Services||-|
|Public Administration, Education, Health & Social Work, Community, Social & Personal Services||6.3|
|Public administration, education, health & social work, community, social & personal services||-|
|Transport, storage and communication||18.4|
|Transportation, communication & information||-|
|Wholesale and retail trade, hotels and restaurants||11.4|
|Wholesale, retail trade and real estate ownership||-|
Economic activity in 2012 was adversely affected by several factors. The first was the drawn-out political crisis, which had a negative impact on private-sector activities as well as on the volume of external financing. The recurrence of natural disasters (hurricanes and floods) also affected the primary sector, while fluctuations in the international market, especially in energy prices, worsened the economy’s performance. The government increased its subsidies to oil companies to contain fuel prices at the pump. According to National Treasury data, these amounted to MGA 211.83 billion, or 1% of GDP.
Consequently, real GDP growth in 2012 has been estimated at 1.9%, barely higher than that in 2011 (1.6%). According to the 2013 budget data, the secondary sector has continued to drive growth and has grown by 3.8%, or 0.4 of a percentage point more than in 2011. This performance was mainly due to the mining industries and the recovery in exports from the free-trade zones. These exports, which were hard hit by Madagascar’s suspension from the African Growth and Opportunity Act (AGOA), should grow by 4.8% (after a 0.7% decline in 2011) thanks to market diversification to Europe and Asia. Thanks to the revival of tourism and transport-related branches, the tertiary sector grew by 2.7% after having declined by 0.7% in 2011. Primary-sector growth has remained low at 0.2%, suffering above all from the under-performance of the forestry sub-sector subsequent to the suspension of issuance of licences to log precious woods, and also from recurrent cyclonic disturbances having affected agricultural production. On the demand side, the overall investment rate is estimated to have fallen to 13.9% of GDP in 2012 from 14.4% in 2011, reflecting the completion of construction of major projects in the private sector and the weakness of external funding to the government where public investment is concerned. Total consumption is estimated to have amounted to 100.6% of GDP in 2012, up 1 percentage point from 2011, a performance mostly due to the private component, notably the purchases of mining companies.
The growth outlook should be better in 2013 and 2014, projected at 3% and 4%, respectively, taking into account the organisation of presidential and legislative elections set for July and September 2013, and of the gradual return of foreign aid starting in 2014, once the institutional situation is stabilised. The secondary sector will remain the main engine of growth, fuelled mainly by the mining industries with an increase in ilmenite production at QIT Madagascar Minerals (QMM) and in that of nickel and cobalt at Ambatovy. The tertiary sector will benefit from the revival of tourism and construction thanks to greater recovery in foreign aid. A revival in the financing of agricultural projects by major donors should contribute to the recovery of agricultural production.
In 2012, the country applied a restrictive fiscal policy to cope with the shock caused by reduced foreign aid. The slowdown in economic activity was in particular reflected by a decline in the turnover of enterprises, resulting in lower revenues from income taxes and value added tax (VAT). Despite this, thanks to better mobilisation of domestic fiscal resources, total revenue (excluding grants) have been estimated for 2012 at MGA 2.357 trillion, a 4.5% increase from 2011. This effort helped to offset the lower revenues from international trade, which forced the government to sacrifice MGA 64.5 billion in customs revenues after it froze the prices of fuel at the pump, which led to lower revenues from taxes and VAT on petroleum products.
Total revenues, however, accounted for only 11% of GDP, compared to 11.3% in 2011. The tax/GDP ratio thus ended up at 10.9%, down 0.2 percentage points from 2011. External donations (consisting mainly of project-based donations) have remained low due to the political situation and have been estimated at MGA 246.6 billion in 2012 (1.2% of GDP), a 37% fall from 2011. Total expenditure has been estimated at MGA 3.317 trillion (about 15.3% of GDP, against 14.9% in 2011), divided into current expenditure (11.2% of GDP) and investment (4% of GDP). In terms of performance, the budget-implementation rate (interests not included) was only 52.41% at the end of 2012. The implementation rate was higher than 90% for current expenditures (debt, balance and operations), but that for the investment programme was only 44.98%. Despite priority having been given to current expenditure, the budget implementation did not allow the public service in general to be effective because the resources were limited. The sectors identified as priorities in 2012 – such as health, education, support to agricultural production, increasing food security and the security of goods and persons, and consolidating the energy sector – received approximately 40% of the resources from the general budget. Budget implementation for 2012 resulted in a budget deficit estimated at 3% of GDP, almost double the 1.6% target set by the budget. To finance the deficit, the authorities resorted to the banking system, notably by issuing Treasury-bill tenders and by drawing down on the on-going project-based loans. According to statistics sourced from the national debt department, they amounted to SDR 56.3 million (special drawing rights) from January to October 2012.
The 2013 budget has planned for a moderately restrictive fiscal policy to reduce the budget deficit to 1.6% of GDP while also promoting economic recovery. The fiscal policy is focused on stabilising the tax rate, not setting new taxes and strengthening measures against tax fraud. With the expected stabilisation of the political situation, total revenues should amount to 12.9% of GDP. Grants are expected to increase by 45.3% from 2012 to 2.1% of GDP as most of the projects based on external financing are put on track again. Total expenditure is projected to grow moderately at 8.5% (10% for current expenditure and 3.6% under the public-investment programme), to 15.9% of GDP.
Table 3: Public Finances 2013 (percentage of GDP)
|Total revenue and grants||12.8||14.3||13.2||12.2||12.9||14.1|
|Total expenditure and net lending (a)||15.3||15.1||14.9||15.3||15.9||16.3|
|Wages and salaries||4.8||5.2||5.3||5.6||5.8||6|
Madagascar is not part of any monetary union. The Central Bank of Madagascar (CBM) conducts a prudent monetary policy so as to maintain the internal and external stability of the currency. There was a nominal depreciation of the national currency, the ariary, of 4.8% against the euro and 5.6% against the US dollar in 2012. Interventions by the CBM in the money market (refinancing or liquidity-absorbing operations) did help, however, to protect the ariary against the fluctuations of the main currencies, which are ultimately expected to have had little impact on foreign trade and are mostly determined by domestic production capacities and the nature and quality of external demand.
Price increases were contained at 6.4% on average for 2012, down from 9.8% in 2011. Increases in food prices were moderate (+3.5%) thanks to good supply from the domestic market. The highest price rise was for energy (+8.9%) and was connected to price fluctuations in the international market. Expansion of the monetary aggregates was accelerated in 2012. According to data from the 2013 budget, the money supply increased by MGA 48 billion in the first nine months of 2012 following a 43.1% increase in net claims on the government and a 9% increase in credits to the economy despite the deteriorated economic environment, which led banks to greater caution in their operations. On the other hand, net external assets decreased to MGA 295.5 billion over the same period due to a greater rise in imports, which reduced foreign-exchange reserves to the equivalent of 3.5 months of imports, compared with 3.9 months in 2011. The CBM maintained its lending rate at 9.5%, unchanged since August 2009, which has allowed money-market rates to remain stable since 2011.
For 2013 and 2014, the Madagascan authorities intend to conduct a prudent monetary policy in order to maintain price stability. The CBM plans to increase withdrawal of excess liquidity through the indirect instruments of monetary policy.
Economic Cooperation, Regional Integration & Trade
Madagascar belongs to several sub-regional organisations: the Common Market for Eastern and Southern Africa (COMESA), the Southern African Development Community (SADC) and the Indian Ocean Commission (IOC). The country has been suspended from regional and continental organisations as a consequence of the country’s unconstitutional change of government in March 2009. Intra-regional trade remains poorly developed. In 2010 and 2011, exports from Madagascar to the SADC and COMESA averaged 5% and 4%, respectively, while imports from the same two regional blocs were 12% and 8% on average, respectively. Madagascar signed an interim Economic Partnership Agreement with the European Union (EU) in August 2009, which came into effect in January 2013. The agreement covers market access, fisheries and official development aid. It is too early to judge its impact on trade and customs revenues.
The country’s foreign trade in 2012 saw a higher deficit in the current-account balance, which came out at 8.3% of GDP, compared to 6.9% in 2011. This was a result of greater deterioration in the trade balance and in the services balance, which could not be offset by the improved balances in current transfers and in financial and capital transactions. The volume of exports of goods in 2012 increased by 3% and amounted to 12.4% of GDP. In addition to exports from the free-trade zone, which were resumed and amounted in terms of value to about 40% of total exports, the main exported products were cloves (12.42%), petroleum products (6.84%) and sugar (2.26%). The increase in exports of cloves was connected to the rise in both its price and in global demand. The volume of imports of goods increased by 2.8% and amounted to 23.8% of GDP. The main imported products were petroleum products (23%), raw materials (18%), imports from free-trade zones (15.7%), consumer goods (12.6%) and food products (9.8%). These percentages refer to the total value of imports (on a cost, insurance and freight [cif] basis). The net flow of direct investment was SDR 507.7 million despite the ending of the construction phase in the mining sector. Foreign direct investment (FDI) came mainly from Canada, Japan, South Korea, the United Kingdom, Mauritius and France. The mining sector remained the major FDI recipient in 2012, followed by financial activities, oil distribution, construction and manufacturing activities.
According to provisional data from the CBM, the evolution of the competitiveness index, measured by the year-on-year real effective exchange rate (REER), indicated that the country lost in competitiveness in 2011 and in the first eight months of 2012. The REER at end-August 2012 showed a 4.6% appreciation from the end of December 2011 and a year-on-year 1.7% appreciation from August 2011. This loss of competitiveness was the result of domestic inflation, which was higher than that of Madagascar's partner countries but had relatively little impact on international and financial trade.
The outlook for 2013 shows an improvement in the trade deficit resulting from a greater increase in exports (driven by mining products) than in imports. The same is projected for the balance of transfers, which will benefit both from the increase in official transfers following the gradual resumption of aid and private transfers. The current account is projected to improve, with a deficit that could be reduced to 7.6% of GDP, compared to 8.3% in 2012.
Table 4: Current Account 2013 (percentage of GDP)
|Exports of goods (f.o.b.)||22.8||12.3||12.3||14.8||12.4||12.8||12.9|
|Imports of goods (f.o.b.)||32.9||31.8||24.6||24.3||23.8||23.3||21.6|
|Current account balance||-9.1||-21.1||-9.4||-6.9||-8.3||-7.6||-5.7|
The latest joint World Bank/IMF sustainability analysis of the Madagascan debt dates back to June 2008 because the political crisis has prevented the possibility of conducting more recent ones. Nonetheless, total outstanding public debt has remained relatively low because of limited opportunities for loans from traditional donors. According to data from Madagascar’s national debt department, total outstanding public debt was estimated at the end of 2012 at MGA 6.41 trillion (SDR 1.90 trillion), or 29.5% of GDP. Public debt was 77.5% of the total debt stock. It was made up of 77% of debt to international organisations, 18% of bilateral debt and 5% of debt to private creditors. The stock of domestic debt (23% of the total outstanding) was constituted of 77% of Treasury-bill tenders and 23% of negotiable debt securities. The government has accumulated some external arrears, notably to Libya (MGA 49 billion) and Russia (MGA 60 billion), due to political instability for Libya and to waiting for the finalisation of agreements for Russia. With progressive recovery of funding from a number of partners (including the African Development Bank [AfDB] and the World Bank), in particular in the form of loans, outstanding debt is projected to increase but remain under control.
Figure 2: Stock of total external debt and debt service 2013
Economic & Political Governance
The business climate has continued to deteriorate due to political uncertainties: the country lost four positions in the annual ranking of the World Bank report Doing Business 2013, dropping from 138th out of 183 countries in 2012 to 142nd out of 185 in 2013. All the indicators have worsened except for the starting a business category, in which the country was ranked two places higher. Otherwise, there was no change in the categories of getting credit and resolving insolvency.
The sharpest decline was in the area of dealing with construction permits. The major obstacles to improving the business climate include irregular access to electricity due to frequent load shedding, and difficulties in protecting investors, enforcing contracts and registering property. Land-tenure bureaux have been set up across the country to facilitate delivery of land deeds in particular, but some were closed in 2012 by the supervising ministry to resolve governance issues they were facing. To overcome most of these obstacles, an economic recovery plan is being developed on the initiative of the Madagascan private sector.
The Madagascan financial sector is poorly developed and is limited in its nationwide coverage. In 2012, it comprised 11 banks, six financial institutions and 31 microfinance institutions (MFIs). The rate of access to banking services remains low at about 5% of the population. In September 2012, 21% of households were using MFIs, a 1.5 percentage point increase from the end of 2011. The financial markets include the money market (interbank and open-market trading) and Treasury-bill tendering. Financial regulations have not been reformed in any way in recent years. In addition, the political and economic crisis has affected the quality of bank portfolios. According to CBM statistics, 14.4% of total debts were doubtful receivables at the end of July 2012. All this reflects the difficulties banks are facing in honouring their commitments. There is some liquidity in the financial system, with 50.2% of banking assets held in cash in July 2012, up from 48.2% in July 2011. Long-term financing is difficult to obtain, in particular by small- and medium-sized enterprises (SMEs), and long-term borrowing costs remain quite high (a situation not particular to Madagascar, related to the fact that banking resources are largely made up of short-term deposits, difficult to use for the long term), averaging between 10% and 11% in 2011 and 2012. In the coming years, the CBM intends to increase its evaluation of MFIs. The country has a comprehensive national finance strategy for 2013-17.
Public Sector Management, Institutions & Reform
The process of privatising enterprises remained suspended in 2012 because the political crisis was not conducive to implementing major structural reforms. If the 2013 elections are internationally recognised, the country might be able to finalise a new programme with the IMF, which would put the reform agenda at the centre of economic policy. The state still owns shares in several enterprises operating in sectors such as energy, telecommunications, agro-industry and air transport. Preliminary talks between the public and private sector were also launched in June 2012 at the prime minister’s initiative. They focused on corruption, taxation and untimely tax audits, insecurity and lack of visibility.
Despite their limited resources, the authorities continued to implement reforms in public finances that had been started before the crisis. They deal with the programme budget, public procurement and top-down expenditure management, and include measures to strengthen the tax authorities. With the gradual resumption of funding to the governance sector, the ministry of finance developed an internal action plan for 2013-15 to improve the management of finances. According to the ministry, the plan does not include deep reforms; its goal is to consolidate the reforms achieved before the crisis, and the process is on-going.
Natural Resource Management & Environment
Geologists have categorised Madagascar amongst the so-called “megadiversity countries” as it harbours about 2% of global biodiversity. Its subsoil is rich and its favourable tax legislation is attracting more and more large mining companies. Their massive investments are, however, raising significant environmental challenges, especially given the public authorities’ weak capacities to ensure that they actually comply with environmental standards. In addition, the country’s natural resources are being threatened by the effects of climate change, deforestation and the degradation of natural areas. Madagascar is located in the southwest Indian Ocean basin, one of the major world areas where cyclones are formed, and is also prone to floods and drought. The country has had an environmental charter since 1990, a national adaptation programme of action on climate change adopted in 2006 and a national policy for climate change. It was also equipped in 2010 with a national clean development mechanism strategy, one of the three Kyoto Protocol flexibility mechanisms.
The country is well-endowed with legislation to prevent the exploitation and illicit export of rosewood. The legislation includes the 2011-001 Order on punishment of offences related to precious woods and the 2010-141 Order prohibiting their logging, exploitation and export, but the government’s political will and actual capacity to enforce these texts are still problematic. There are countless cases of illegal exports of rosewood, particularly to China, as regularly reported in the local press.
Given its potential in natural resources, including mining, Madagascar applied to join the Extractive Industries Transparency Initiative (EITI) and was admitted as candidate country in February 2008, but it was then suspended in October 2011 pending the normalisation of its political situation. Budget receipts generated by the exploitation of natural resources are still low. According to the 2010 EITI reconciliation report made public in 2012, earnings from the mining sector paid to the national budget were estimated at around MGA 291 billion, or about 13% of total receipts that year and 1.5% of GDP. The contribution of the mining sector to the national budget is, however, expected to grow in the coming years when Ambatovy project gets fully under way.
In 2012, the country continued to suffer from the effects of the political crisis caused by Andry Rajoelina’s overthrow of Marc Ravalomanana, and the population’s living conditions deteriorated. There were several strikes in the country affecting virtually every sector of the public administration and even the financial sector. The strikers were demanding a wage increase or better safety and working conditions. Despite the difficult economic situation, the government tried to meet some of these demands partially, especially those of teachers. Political efforts were concentrated in 2012 on implementing the post-crisis roadmap signed on 17 September 2011 with SADC mediation. This included setting up all the prescribed transition institutions in government and parliament and the independent electoral commission, CENI-T (Commission électorale nationale indépendante pour la transition).
Originally scheduled to take place before December 2012, the presidential and parliamentary elections were first postponed to May and then July 2013 due to technical and financial constraints. The CENI-T and the United Nations (UN) finally set the first round of the presidential election on 24 July 2013 and the second round of the presidential election coupled with the parliamentary elections on 25 September 2013. Local elections will be held on 23 October 2013. According the CENI-T, 82.38% of potential voters had been identified by February 2012. The electoral budget, first estimated at USD 71 million, was reduced to USD 60 million as a result of the depreciation of the local currency and of savings in the purchase of equipment. Funding continues but even if all donor promises and the government’s commitment materialise, there will still be USD 3 million left to find.
The roadmap also emphasises that confidence and national-reconciliation measures need to be carried out, including an amnesty law and a law on the Madagascan reconciliation council. Several factors suggest that 2013 could be the year when the political crisis ends. First of all, the two protagonists, former president Marc Ravalomanana and the current transition president Andry Rajoelina, have announced that they will not run for president. This decision, which was one of the recommendations of the SADC summit of heads of state and government of 7 and 8 December 2012 in Dar es Salaam (Tanzania), should generate a political climate conducive to the holding of the elections. In the second place, the population is exasperated by how long the crisis has lasted. All the political and social actors want it to end as soon as possible. The international community, especially the SADC, is putting much “pressure” on the country’s political actors to make that happen. Moreover, the UN is involved alongside the CENI-T to ensure that elections are credible and transparent.
Thematic analysis: Structural transformation and natural resources
The past 20 years in Madagascar have witnessed recurrent political crises that made it impossible to implement major economic structural changes. A few sectors (or branches) can, however, be seen as having driven the economy: construction, mining, textiles, information and communication technology (ICT), and tourism. The engines of future growth will be food products, mining, renewable energies, textiles, construction and tourism.
A report published by the IMF in October 2012, Regional Economic Outlook: Sub-Saharan Africa, indicates that the GDP shares of agriculture, mining and manufacturing have remained practically unchanged for 20 years. They were 28.6%, 0.5% and 10.6%, respectively, in 1990: and in 2010 28.4%, 0.6% and 11.1%. The construction sector grew the most, from a 1.3% to a 4.7% share of GDP between 1990 and 2010, but it only generated 1.2% of the jobs created in 2010. The GDP share of the tertiary sector, which remains the main driver of growth, fell from 57.8% in 1990 to 53.9% in 2010, or a 3.9% fall.
Agriculture is distinguished by low productivity. It remains the largest provider of jobs having generated 80% of both male and female jobs, a share that has remained constant for several years according to the 2010 EPM. The mining sector has recently emerged as a growth engine. In the 1990s, its exploitation was mostly informal and small scale and was dominated by small mines with little added value. The mining landscape altered in the late 2000s as a result of mining reforms and the arrival of big mining investors in two large projects, QMM and Ambatovy. Growth of the mining industries, which was 9% in 2008, rose to 25.6% in 2012 and is projected at 42.4% in 2013 in the 2013 budget. The sector does not, however, generate many jobs. The largest mining project, Ambatovy, provided only 18 000 jobs during its construction phase and will have 6 000 for operations.
The development of free-trade zones since 1989 was intended to strengthen the Madagascan industrial fabric, but the manufacturing sector has not evolved significantly since then. It only provided 3.4% of jobs in 2010, the year Madagascar was suspended from AGOA, which it had entered in 2000, because of the political crisis. Several enterprises and companies had to shut down, causing a loss of nearly 20 000 jobs. The textile industry has suffered from this situation. After a 24.6% fall in 2010, its growth is nonetheless gradually picking up: it rose from -0.8% in 2011 to 1.9% in 2012 and could reach 2.6% in 2013 thanks to a diversification of its market outlets. It is, therefore, still of major importance, even though it accounted for only 1.1% of jobs in 2010.
In the tertiary sector, trade is the largest provider of jobs. In 2010 it accounted for almost 7% of jobs, of which 9% were for women and 5% for men. ICT and tourism have been dynamic sectors, with ICT showing sustained growth at more than 3% per year these past ten years, including in the crisis years, thanks to the liberalisation of the sector and to significant investments in infrastructure including the installation of optical fibre in the different regions. The turnover of mobile telephony grew 13-fold between 2005 and 2009, providing several direct and indirect jobs (call centres, computer programming, etc.) according to the ILO in its December 2011 report, Madagascar : évaluation des impacts de la double crise sur l’emploi. The tourism sector has also grown, especially in the 2000s, but its expansion has been hampered by the political crisis. The number of tourists fell from 375 010 in 2008 to 162 687 in 2009, then rose a little to 196 052 in 2010. Similarly, the occupancy rate of hotels dropped from 64% in 2008 to 39% in 2009 then rose back to 46% in 2010. Tourism, nevertheless, generated more than 31 000 direct jobs in 2011, compared to fewer than 20 000 in 2004, or a 57% increase. Tourism revenues have nearly tripled, rising from SDR 104 million in 2004 to SDR 303 million in 2008.
Madagascar has very significant and diversified natural resources. Their contribution to the national budget is still low but should grow rapidly with the recent implementation of major mining projects.
Traditionally, exports of mineral resources were mainly of chromium and graphite, but their share in total exports dropped from 4% in 1990 to 1.2% in 2011. The main reason for this is the coming on stream of gigantic industrial mines such as QMM and Ambatovy, which has transformed the Madagascan mining landscape. The production and export of titanium and zirconium by QMM since 2010 has increased the share in exports of hard commodities, which in 2011 was 8%. In terms of volume, ilmenite exports are expected rapidly to reach 750 000 tonnes per year, or 10% of world production, and zirsill exports to reach 60 000 tonnes per year. This volume was also expected to increase after Ambatovy began to export nickel and cobalt in November 2012. Ambatovy intends to move quickly to produce 5 600 tonnes per year of cobalt, or 10% of world production, and 60 000 tonnes per year of nickel, or nearly 5% of world production. This project is one of the largest customers for suppliers of goods and services in Madagascar. At the end of 2010, it had signed contracts with local suppliers for more than USD 1.2 billion. After training to improve the quality of their products, more than 500 micro-, small-, and medium-sized enterprises received orders from Ambatovy. More than 2 000 local businesses are entered into a database used by Ambatovy and its sub-contractors.
In 2011 petroleum-product exports were estimated at 61.5 tonnes and accounted for about 6.6% of exports in terms of value. According to the French treasury directorate general, a dozen companies of various nationalities are engaged in oil-exploration operations in Madagascar.
Exports of food products such as vanilla, coffee, cloves and pepper constituted 11% of exports in 2011, in particular thanks to the performance of cloves (+342%). Vanilla exports fell, however. Prawns and other fishery products accounted for 11.2% of exports from the free-trade zones in 2011, and their share in total exports was 4.5% in 2011.
The contribution of natural resources to the national budget is still low in terms of its potential, but should grow, thanks to the major mining projects. According to the 2010 EITI data reconciliation report, earnings from the mining sector paid to the national budget were estimated at around MGA 291 billion. The vast majority were royalties paid by Wisco (USD 100 million). Mining resources accounted for approximately 13% of total revenue and 1.6% of GDP.
According to the transition authorities and a number of civil-society organisations (including Les amis de la Terre-France in their November 2012 report, Madagascar : nouvel eldorado des compagnies minières et pétrolières), the Madagascan mining code, in particular the law on large investments, favours mining companies over the country. The authorities therefore suspended the issuance and the renewal of permits in many areas of the sector. Moreover, they went back on certain provisions of the law on large mining investments, requesting commitments from the Ambatovy project that were not initially provided for in the legislation. Revision of the mining code could be included amongst the priorities of the next post-election government. Modifying the allocation key for distributing mining revenues between the central government and local communities will certainly be one of the elements to be considered in greater depth as part of such a review.
The country does not have a stabilisation fund in which resources can be invested in long-term assets.
A number of conditions are in place to allow Madagascar to grow enough to be able to promote structural change, namely to reallocate the labour force from the least productive sectors to the most productive ones, but this change has been thwarted by several factors: recurrent political crises that have generated an unstable environment for private-sector activities; the weak competitiveness of local processing industries and suppliers (high costs of production factors other than labour); insufficient transport infrastructure; and the low quality of public services. In addition, good, sound management of natural resources remains a major challenge to Madagascar.
The first factor that might facilitate change was the establishment of free zones in 1989. These were intended to generate jobs, to acquire and master new technologies, and to bring in capital. The zones were to be a stepping stone towards the country’s true industrialisation. Eighteen years later, in 2007, the number of employees was estimated at 120 000, or one-third of the labour force in the secondary sector. In 2008, the zones had 175 enterprises, of which 63% were in the textiles and apparel branch (further details are available in the ILO’s September 2011 study, Les zones franches à Madagascar). The 2002 crisis and that of 2009, which resulted in the suspension of AGOA agreements, led to the shut-down of several companies in the zone and the destruction of many jobs.
The second condition that can promote structural change lies in high-incentive oil and mining legislation. The 2002 law on major mining investments provides for very competitive tax benefits for large investment projects (greater than MGA 50 billion, or about USD 22.5 million), in particular for those that process their products on site. Corporate income taxes were thus reduced to 25% (compared to 35% for the general tax system) and to 10% when products were processed inside the country. In this case, the mining licence was set at 1%. These benefits help explain FDI inflow, in particular to extractive activities, which accounted for between 60% and 80% of the entire FDI inflow over the past years.
The third element favourable to a change in the economy is the existence of a 2007-12 industrial policy document through which the government of the time laid down its aim to “launch large-scale industrialisation with intensive use of surplus labour”. It especially wished to encourage the introduction of new investment projects in sectors considered as high priorities for their ripple effect: tourism, agribusiness, light industry for export, mining, infrastructure and ICT.
Political normalisation will be essential for the country to be able to implement a genuine industrial policy taking these factors into account. It should make it possible to lift identified constraints and, in addition to the sectors already cited, give on-site processing of local products a place of choice, in particular in the agricultural sector.
Good management of natural resources remains one of Madagascar’s major challenges. According to a December 2010 World Bank study, Madagascar : revue de la gouvernance et de l’efficacité du développement, the country is mired in a “natural-resource curse” with regard to its mining potential. In the forestry sector, illegal logging and export of precious woods are almost daily realities despite the legal regulations. In the mining sector, the tax revenues generated by mining will grow with the implementation of the two huge mining projects. They could “sharply change how revenues are distributed amongst the elites by rewarding highly those who control political power”, according to the World Bank study. They could also “exacerbate social inequalities in the mining communities”. In addition, the management of mineral rights remains a potential source of pay-outs if the desired transparency is not there.
Given the risks, implementing the EITI is an opportunity, provided that the current blockages are removed, as the country was suspended from the EITI in 2010 because of its political instability. The actions that are taken once institutional stability is recovered must: support the EITI and, above all, civil-society oversight of the use of public resources; strengthen the management skills of the mining communities for transparent use of the revenues generated by mining; and consolidate the oversight bodies for the illicit exploitation and export of precious woods, and apply penalties to all apprehended offenders.
1. The performance of the mining industry is mainly due to a number of large mining projects. QIT Madagascar Minerals (QMM)’s ilmenite-mining project in Fort-Dauphin is in its third year of operation. In 2013, the company should approach its annual export target, i.e. 750 000 tonnes per year of ilmenite (10% of world production) and 60 000 tonnes per year of zirsill. QMM’s investment amounts to USD 950 million. Rio Tinto owns 80% of the shares and the government of Madagascar 20%. The Ambatovy nickel and cobalt production project exported its first products (99.9% pure nickel and 99.3-99.8% pure cobalt) in November 2012. Ambatovy is a consortium comprising Sherrit International Corporation (Canada), SNC-Lavalin (Canada), Suminoto Corporation (Japan) and Korea Resources Corporation (South Korea). Investment has been evaluated at USD 5.5 billion. An average annual production of 60 000 tonnes of nickel, 5 600 tonnes of cobalt and 190 000 tonnes of ammonium sulphate is expected over a period of 20 years.