Madagascar

A grave new political crisis hit Madagascar in 2009 and the impact combined with the global financial crisis to send the 2009 gross domestic product (GDP) growth rate plummeting to -4.5%. The international community condemned the change of government as undemocratic, and some external aid, on which Madagascar is dependent, was frozen. Its growth is led by public investment, which in turn is financed by external resources. The outlook for 2010 and 2011 therefore depends on whether the country emerges from the crisis. Even if political events return to normal, GDP should contract again in 2010, because growth drivers, such as tourism and construction, are particularly sensitive to the political crisis. In addition, funding for a “green revolution” has dried up, which could detract from agricultural output.

Capacity for domestic resource mobilisation is low, making it impossible to take up the slack left by the loss of external aid, and the government was obliged to adopt a restrictive fiscal policy to contain the deficit and inflationary pressures. As a result, financing for development projects, particularly in the social sectors, was sharply curbed. The country nonetheless continued to meet its external debt service obligations, thus avoiding international sanctions. The central bank’s monetary policy focused on fighting inflation, notably by intervention in the foreign exchange market to avoid excessive depreciation of the national currency, while at the same time supporting the troubled economy. The trade deficit narrowed, as imports fell more than exports, but the overall balance fell into deficit owing to the drop in foreign direct investment (FDI) and aid flows.

The political crisis has had a strong impact on the private sector. Firms suffered heavy losses in looting at the start of the crisis, and business activity has been greatly hampered by the ensuing insecurity. The fall in external financing and condemnation of the forced government change by trade partners reduced market outlets. For example, the suspension of the agreement with the United States under the US Africa Growth and Opportunity Act (AGOA) should cut textile sector output by 20%. Among the social consequences of the troubles, unemployment is rising fast, particularly in urban centres. 

Madagascar’s dependence on external resources to finance its development is partly due to the country’s low capacity for resource mobilisation. Its tax rate is one of the lowest in Africa. To address this problem, the country embarked in 2007 on extensive fiscal reforms aimed at making the tax system simpler and more transparent, the tax administration more efficient, and stepping up the fight against fraud and corruption. It is essential for Madagascar to increase its resource mobilisation capacity since more than half of tax revenue is currently levied on foreign trade, and this revenue will decline because the country is in the process of liberalising trade with its partners through the Southern African Development Community (SADC) and through economic partnership agreements with the European Union.

Efforts to achieve the UN Millennium Development Goals (MDGs) have also been undermined by the crisis. Although data was not yet available, some of the progress made in recent years has probably been wiped out, particularly in poverty reduction, school enrolment and health. Moreover, the country’s poverty reduction strategy, known as the Madagascar Action Plan (MAP), has been abandoned since the government change and has not been replaced by a new strategy.

GDP contracted by 4.5% in 2009 because of the decline in public and private investment. The partial freeze on external aid, due to the political situation, considerably slowed public investment, since three-quarters of public investment spending is financed by external resources. A restrictive spending policy adopted to adjust to the lower tax revenue did not compensate for the drop in external resources. At the same time, private investment fell owing to the difficulties faced by business. Although the investment data were not yet available at the time of writing, this decline is reflected by some interim indicators, such as electric power consumption and the volume of loans to the private sector. The mining sector seems to have been spared by the crisis, however. The external balance improved, though it remains in deficit. The trade deficit narrowed because, while exports fell due to lower world demand in the context of the economic crisis, imports fell even more due to a drop in domestic demand for consumer items and intermediate goods.

This new instability ended a series of good years since 2003 – the GDP growth rate hit 7.1% in 2008 – and highlights the fragility of Madagascar’s economic situation. The meagre progress made is regularly undermined by repeated political crises. As an indication of this, according to the Ministry of the Economy and the Budget, the secondary sector accounted for only 17.7% of GDP in 2008, against 55.3% for the tertiary sector and 26.9% for primary sector.

The primary sector should again make a positive contribution to growth in 2009, after a 3.1% increase in 2008. The political crisis has had little impact on agriculture, the main harvest benefited from favourable rainfall in the main rice-growing areas, and the country suffered much less from cyclones during the 2008-09 season than in the previous year. Some difficulties may arise for the off-season harvest, however, as funding for farm input subsidies has dried up. Prospects for fisheries are poor, as this sector is sapped by structural difficulties unrelated to the domestic crisis and exposed to the contraction of world demand due to the international crisis. The output of the forestry sub-sector has been tainted by illegal felling of valuable trees, especially rosewood.

The secondary sector is the chief victim of the political crisis. Before, the industrial sector was structurally weak and uncompetitive, had a low capacity utilisation rate (between 50% and 60%) and sold over 95% of its output on the local market. As a result, the impact of the global financial crisis was confined mainly to free-zone firms. The consequences of the institutional instability, however, have been dire for the industrial sector. Vandalism committed in the first days of the crisis caused the partial or total destruction of some production plants. Firms also face declining demand, due to the uncertainty, swelling unemployment and wholesale losses on sums due from financially distressed customers (these amount to 3%-5% of annual turnover), as well as increasingly difficult negotiations with banks over credit terms.

The sub-sectors that bore the brunt of the crisis are i) the textiles industry, which was hard hit by the global crisis and by uncertainty over the extension of the AGOA agreement with the United States, and whose 2010 prospects are poor since the agreement was suspended in late 2009 (the US market represents 20% of the sales of free-zone textile firms); ii) the construction materials industry, which is feeling the impact of the slowdown in investment and construction; and iii) crafts, which are directly affected by the decline in tourism. The mining sector was spared, however, except for ornamental stone-cutting activities. The Ambatovy nickel and cobalt mining project (operated by Sherrit) continued with its investment programme, although the pace of investment slowed as from 2008 due to the global financial crisis; the mine should enter production in 2011. The ilmenite mining project at Fort Dauphin -- run by QIT Minerals Madagascar (QMM) -- moved into production and exported 109 000 tonnes, despite a drop in world demand. It should reach its rated output of 750 000 tonnes per year in 2012. Oil exploration continued on several onshore and offshore sites in the Morondava Basin. The reserves of the Tsimiroro site (Madagascar Oil) are estimated at 8 billion barrels, those of the Bemolanga site at 21 billion and the daily output from the Sakaraha site (Sunpec) as high as 50 000 tonnes. Drilling of test wells has begun on the last two sites; if the results are conclusive, production could begin in 2015 at Sakaraha and in 2019 at Bemolanga. The agro-food industry seems in a way to have benefited from the crisis, particularly the dairy industry, with the abolition of the monopoly held by companies controlled by the former president. Once Tiko Group had been dismantled, new production units were able to emerge, thus increasing competition in the sector.

The tertiary sector is also experiencing a sector-wide falloff in activity. The decline in the transport sub-sector, particularly road transport, is reflected in a 10% drop in diesel consumption, despite lower fuel prices. Air transport fell by 45.6%, owing to the cancellation or low fill rate of flights, the security situation and the lack of tourists. Construction, one of the main growth drivers in 2008, also contracted as a result of the slowdown in major construction projects. The latter was due, first, to the completion of a number of such projects (QMM, hotels to host the summits of the African Union and the International Organisation of French-speaking Communities, which initially were to be held in Madagascar), and second, to the partial freeze on external aid, which held back public investment. In the insurance industry, value added fell by 73%, owing to collection difficulties and unrenewed policies. The trade sector has been hit hard by the partial or total destruction of points of sale and storage facilities, supply difficulties and slowing demand. Tourism is another of the sectors most affected by the crisis: tourist arrivals are down 56% with respect to 2008, and the resulting decrease in revenue is estimated at over 60%. All tourism-related businesses have been affected. In contrast, the telecommunications sector has benefited from the crisis because the security situation has led to increased use of telephones and the internet. The year 2009 was also marked by the arrival of a fibre-optic submarine cable.

The difficulties experienced by the vast majority of sectors caused an increase in underemployment and unemployment as business activity slowed and some firms closed. A United Nations survey found that the number of unemployed in the capital increased by 228 000 over the first six months of 2009.

The outlook for 2010 and 2011 depends mainly on whether the country emerges quickly from the crisis. This is the indispensable precondition for the resumption of external aid and FDI flows, which are the main source of financing for public investment. Even if the political situation soon returns to normal, however, the economy will shrink again in 2010, as a number of factors act against a quick economic recovery: the time required for donor re-engagement, the suspension of the AGOA agreement and the discouragement of investors over the government’s increasing intervention in the economy (e.g. the setting of a floor price for vanilla, the imposition of quotas on litchi exports, price subsidies for rice, barriers to the entry of new firms in sectors such as beverages and telecommunications, where large investments were already under way), which makes the outlook less predictable. Household consumption should also be depressed.

Fiscal policy was highly constrained in 2009 by the economic fallout from the political crisis and the partial freeze on external financing that followed the international community’s refusal to recognise the regime change. Tax revenue, which was low to begin with, fell sharply, forcing the new regime to cut the expenditures provided for in the 2009 Budget Act by 37% across the board, except for payment of wages and salaries.

Actual tax revenue was far below the projections of the 2009 Budget Act, chiefly as a result of the impact of political instability on business turnover, household incomes and external trade. The tax-GDP ratio, initially projected at 12.5%, in fact fell from 12.9% in 2008 to an estimated 9.6% in 2009. The revenue category most affected was customs revenue, which amounted to only 65% of the targets set in the 2009 Budget Act, whereas overall fiscal revenue reached 75% of the targets. Grants, initially projected at 4.2% of GDP, were also down sharply, falling from 3.4% of GDP in 2008 to 0.7% in 2009.

Given this drastic reduction in revenue, the government was forced to adopt an extremely restrictive fiscal policy to contain the deficit. Total expenditure as a percentage of GDP fell by a third with respect to 2008. As wage expenditures were not cut, investment spending bore the brunt of the adjustment. Thus, while the overall budget execution rate fell from 80% in 2008 to 58.8% in 2009, the rate for wage and salary expenditures was 94%, whereas that for investment and maintenance spending was only 33%. In particular, investment spending financed from external sources amounted to only 25% of the projections.

Budget appropriations by ministry were severely squeezed by this restrictive policy. Budget execution data for each ministry are not available, but the 2009 budget law allocated approximately 15% of the central budget to basic education and literacy, of which 30% was earmarked for investment. In the 2010 budget law, the central budget was cut by 15% in nominal terms because of the crisis, but education is one of the sectors least affected by this decrease (-3% for basic education). The health sector was allocated 9% of the central government budget in 2009, 60% of which was supposed to be used for investment, with 70% of this investment spending financed by external resources. In the 2010 budget law, the health budget is down by 34% in nominal terms and its share of the overall budget has fallen to 7%. The cuts were made mainly in investment spending, which fell by 60% in nominal terms; three-quarters of the remaining investment expenditure is still to be financed from external resources. For public works, the 2009 appropriation amounted to 10% of the central budget, with 95% of this earmarked for investment; once again, most of the investment spending (75%) was financed from external resources. The 2010 appropriation is 15% lower in nominal terms, with the share of investment spending and the proportion financed from external resources remaining unchanged.

The fiscal deficit, as measured by the overall balance calculated on an accrual basis, is lower than projected in the 2009 Budget Act. Nearly 75% of the deficit was financed from domestic resources through the banking system: since the international community had withdrawn its support, the government financed the deficit by issuing treasury bills at auction. Until September, the issues were oversubscribed, but for the rest of the year, despite an increase in yield from 4% to 6%, the authorities had more difficulty in finding takers, as subscribers’ confidence eroded in view of the growing tension during this period. In the end, the authorities were also obliged to resort to central bank financing. Whereas in 2008 the government had paid down 436 billion Malagasy ariary (MGA) of debt (2.7% of GDP), in 2009 the banking system’s net claims on the government increased by MGA 257.5 billion, or about 1.4% of GDP, of which MGA 154.7 billion was borrowed from the central bank and MGA 102.8 billion from commercial banks. As banks had excess liquidity, this borrowing did not really have a crowding-out effect on the private sector.

The country honoured its external debt service obligations to all of its financial partners. The structure of public debt remained unchanged, with external debt (converted into local currency) accounting for 80% and domestic debt for 20%. Whereas the state had reduced its indebtedness to domestic creditors in 2008, the domestic debt stock increased by 3.5% in 2009. The stock of external debt decreased in foreign-currency terms, but this decline is not reflected in its local-currency value due to the depreciation of the ariary.

Prospects for 2010 will depend largely on whether a solution to the crisis is found, but the government will probably not be able to maintain such a restrictive fiscal policy. Expenditure over the closing months of 2009 already showed a certain relaxation of this policy. The 2010 budget law is optimistic about the amount of the overall budget and the proportion of external financing. The problem is that such financing, which comes mostly from multilateral donors, is allocated on a performance basis. As a result, it could take some time to return to the pre-crisis situation, even if the crisis is resolved quickly.

The monetary policy of the Central Bank of Madagascar (BCM) pursued the same objective in 2009 as in previous years, namely controlling inflation. In the context of the crisis that shook the country, the monetary authorities sought to hold the inflation rate under 10% and avoid a sudden slide in the ariary, while at the same time supporting the economy. To achieve this objective, the BCM employed three instruments: interest rates, minimum bank reserves and open-market operations.

The BCM cut its leading interest rate twice, from 12% to 10% in early 2009, and again to 9.5% in August, in order to stimulate the economy. These cuts brought the nominal interest rate down to the level of inflation, so that real interest rates were close to zero. The required reserve ratio for banks was maintained at 15%. Concerning open-market operations, which are used to drain off excess bank liquidity, the BCM was forced to negative tenders, as the crisis made it impossible for the Treasury to issue new securities. As a result, the banks are still overliquid.

The growth of the money supply continued to slow in 2009, following a trend observed since 2006. The monetary growth rate over the first ten months was only 5.2%. The main source of growth in M3 was net claims on the government, an item that had rather been a check on monetary expansion in 2008. Credit to the economy still contributed to the growth of M3, but its contribution was only a third of what it was in 2008, considering the relative decline in lending to the private sector. Net external assets, which were an expansionary monetary factor in 2008 due to the policy of sterilising FDI-related inflows of foreign exchange, were a restrictive factor in 2009, because the BCM had to intervene several times on the interbank currency market to support the ariary. Over the first ten months of the year, the BCM was obliged to sell SDR 31.9 million (Special Drawing Rights). At the end of October 2009, the national currency had depreciated by 23.6% against the euro, 9% against the US dollar and 15.3% against a composite index, with respect to its value at end-October 2008.

The inflation rate fell from 9.2% in 2008 to 8.9% in 2009. With the easing of oil prices, it could have fallen a bit further, as the projected rates were about 7.5% before the onset of the political crisis. However, rising prices for some basic necessities, particularly flour and sugar, and the depreciation of the ariary, limited the decline in inflation.

The BCM’s objectives for 2010 are, first, to control inflation in anticipation of regional monetary integration within SADC and, second, to allow more growth in monetary aggregates than in 2009 to support the economic recovery, but without endangering price stability. The specific target is a 10% increase in the monetary base, as against 7% in 2009. However, the pressure from the probable increase in oil prices in 2010 and the depreciation of the ariary could keep the inflation rate above 9% or even higher. Moreover, returning to a much less restrictive fiscal policy also exposes the economy to the risk of inflation, as happened after the crisis of 2001-02. Lastly, if this policy were to be financed by printing money, in the event that the crisis is not resolved, inflation could accelerate very quickly.

Madagascar is a member of the Common Market for Eastern and Southern Africa (COMESA) and of SADC, but since the other member countries have not recognised the regime change, it has been suspended from these regional institutions until the constitutional order is re-established. Despite the political situation, on 29 August 2009 the country signed the interim economic partnership agreement with the European Union (EU) along with the other countries in the sub-region. Like the other signatories, Madagascar gained totally duty-free and quota-free access to the European market as of 1 January 2008, in anticipation of the signature of the agreement. The country will now open its market to EU products by gradually lowering customs duties on 80.7% of its imports from the EU. After a grace period of five years, 37% of trade is to be liberalised. The remaining 43.7% will be liberalised by 2022. Products excluded from the scope of liberalisation include meat, fish, animal products, vegetables, beverages and leather goods. However, the operations of the Economic Development Board of Madagascar, which was assigned the role of export promotion agency, were disrupted by the crisis and the suspension of external aid (on which it depends). It was therefore not in a position to play its proper role in 2009.

As imports decreased more than exports, the current account deficit fell by 30% in value terms over the first ten months of 2009. In contrast to earlier years, however, this deficit was not offset by foreign exchange inflows from foreign direct investment and aid. As a result, the financial transactions account fell by 59% in 2009. FDI alone fell by 31%, while foreign loans to the public sector fell by 86%. The overall balance, which had been positive in recent years (SDR 261 million in 2008), therefore turned negative (SDR -1.9 million). The reduction in FDI and aid flows also eased the upward pressure on the exchange rate that had characterised the year 2008.

Madagascar’s main imports are capital goods (27% of total goods imports), commodities and energy. Total imports fell off sharply over the course of 2009. Food imports increased substantially, however, mainly because of the difficulties (directly related to the crisis) faced by Tiko Group. The volume of food imports over the first six months of the year was 3.8 times greater than that for the same period in 2008.

Exports – which consist mainly of mining products, textiles and oil products, as well as traditional products such as coffee, vanilla, cocoa, cloves and sugar – also fell sharply during the year. Exports of vanilla and coffee were hit particularly hard, as the volume exported in the first six months of 2009 amounted to only 5% of that exported in the first six months of 2008. Exports by the textiles sector fell by a third over the same period, owing to the months of uncertainty over whether the AGOA agreement would be extended. On the bright side, exports of ilmenite began in 2009 and amounted to 109 000 tonnes.

The rise in import prices (up 14.4% in the first half of 2009) and the drop in export prices (down 17.7%) entailed a decline in the country’s terms of trade, exacerbated by the depreciation of the ariary.

The outlook for 2010 is not promising. Given the suspension of the AGOA agreement and the prevailing climate of uncertainty, FDI (apart from the mining sector) could well continue to decline, even if the country manages to emerge from the crisis by initiating a concerted transition process.

Since no new external loans were contracted after the international community refused to recognise the new regime, the stock of public external debt denominated in foreign currencies decreased by 3.5% in 2009. However, the depreciation of the currency and negative GDP growth increased the debt/GDP ratio from 30.7% in 2008 to 32% in 2009, and the falloff in tax and export revenue also increased the relative size of debt service.

According to the World Bank’s Doing Business (DB) report, Madagascar has made substantial progress in recent years with respect to the ease of doing business. The number of procedures required for starting a business fell from 15 in DB2004 to 2 in DB2010; the time required and the cost of the procedures have also been considerably reduced. Import/export procedures have been cut by half, although their cost has increased since the 2007 survey. Madagascar therefore rose from 144^th place in the DB2009 overall ranking to 134^th place in DB2010. Nonetheless, the business climate in Madagascar does not encourage competition and innovation, and there are many conflicts of interest with political circles. The judiciary’s lack of independence engenders doubts in the private sector as to the system’s ability to enforce contracts. This lack of dynamism is a serious obstacle to FDI, which, apart from the free-zone textiles industries, is directed mostly to the mining sector, where it has only a minor impact on job creation. Before the crisis, a reform of the investment and mining codes was in progress. A policy on security of land tenure is also being implemented.

In 2010, the private sector will once again face sluggish demand, with external aid below the pre-crisis level and reduced public spending, particularly on investment. The confirmation that the AGOA agreement is suspended will also affect the outlook for the year.

The caution of commercial banks and the BCM enabled the country to get through the financial crisis without any bank failures. Banks remain overliquid, although their liquidity level is declining as a result of economic difficulties and the falling number of deposits. Although the volume of doubtful loans rose by 13.5% with respect to year-end 2008, net banking income increased over the first half of 2009. Capital markets are relatively undeveloped and charge relatively high interest rates, despite the fact that the BCM cut its leading rate from 12% to 10% and again to 9.5% in the first three quarters of 2009. Credit remains tight, and small and medium-sized enterprises have great difficulty in financing their investments – including by borrowing from microfinance institutions, whose interest rates remain very high. Financial depth (domestic credit/GDP) remains low (20% of GDP in 2008) compared to the sub-Saharan African average (31%), and the ratio of loans to the private sector is also low (11% of GDP in 2008, as compared to 18% for sub-Saharan Africa). Loans to the private sector increased by only 5% in nominal value (and thus fell in real terms) over the first 11 months of 2009, as against a 30% increase over the same period in 2008. This slight increase was led by short- and long-term loans. It proved impossible to complete the financial system reforms in progress, notably the creation of a stock market, for which a bill was supposed to have been tabled in parliament during the year.

Owing to the political crisis, a number of reforms initiated by the previous government were discontinued in 2009, because of either differences of opinion or lack of financing, particularly in relation to reforms in public finance management. In addition, the Madagascar Action Plan (MAP), the country’s poverty reduction strategy, which had guided government actions since 2006, was abandoned and has not been replaced by a new strategy.

Although political decentralisation has progressed – the country is now divided into 22 administrative regions, whereas before the 2006 reform there were 6 provinces – budgetary decentralisation is in its infancy, with less than 5% of public spending devolved to the regional and local levels. Moreover, the regional chiefs are still appointed by the central government. The creation of the Local Development Fund (Fonds de développement local – FDL), which is supposed to finance municipal investments, increased public spending at the decentralised level by only 0.6%. Furthermore, most of the FDL’s expenditures have been financed from external resources. No significant progress was made on the decentralisation front in 2009.

The inadequacy of Madagascar’s infrastructure networks (transport, power distribution, water supply, etc.) is a major constraint on the development of the private sector and of the economy in general. Although infrastructure was one of the priorities of the MAP, little progress has been made. The reduction of investment and maintenance expenditure in 2009 inevitably detracted from the quality of the country’s infrastructure, particularly in transport. As most infrastructure projects are financed by the public sector from external resources (75% of the central government investment budget is financed by foreign aid), such projects slowed markedly in 2009. Information and communication infrastructure is also behind, but some significant steps were taken in 2009: the port of Ehoala near Fort Dauphin, which opened in July, should make it easier to export the region’s mining output; and fibre-optic technology arrived in November with the Lower Indian Ocean Network (LION) submarine cable. After some delay, the Eastern Africa Submarine Cable System (EASSy), another fibre-optic cable, was connected in March 2010.

Madagascar has one of the highest levels of biodiversity in the world and substantial natural wealth. Many plant and animal species are endemic. Biodiversity is threatened, however, by deforestation and degradation of natural areas. The year 2009 saw several significant lapses in environmental protection. A government ordinance temporarily authorising exports of rosewood indirectly encouraged illegal felling. Some protected animal species (notably lemurs) are collateral victims of this renewed logging, as they are being decimated to serve as food for forest workers. Several non-governmental organisations have raised the alarm about this assault on Madagascar’s environment. In a single year, the country’s forest cover diminished by 15 250 hectares in the Marojejy-northern Masoala area and by 5 200 hectares in the Makira-southern Masoala area.

The lack of land title deeds is a considerable barrier to rural development in Madagascar. For this reason, the country launched a major reform in 2004 under the National Land Programme (Programme national foncier – PNF), with support from a number of donors. The PNF aims to decentralise land management to the district level, which led to the creation of district land offices. Despite the crisis, the land tenure policy was maintained in 2009. These reforms have encouraged investment and thus helped to increase farm yields, particularly for rice. Unfortunately, the termination of the Millennium Challenge Account programme (a direct consequence of the unconstitutional change of regime) deprives the PNF of an important source of funding. A USD 6 billion (US Dollar) agricultural project with Daewoo Logistics Corp, to produce maize and other crops on 1.3 million hectares was cancelled by the president of the High Transitional Authority (Haute autorité de transition – HAT).

Tax pressure in Madagascar is among the lowest in Africa. Between 2000 and 2009, tax revenue fell from 11.1% of GDP to 9.6%, but it did not follow a linear trend. It fell to 7.7% as a result of the political crisis of 2001-02, then gradually climbed back up to 12.9% in 2008, as a result of the rationalisation of the tax system through the 2007 reform. The political crisis of 2009, however, has drastically reduced revenue once again. Non-tax revenue excluding grants remained below 1% of GDP throughout the 2000-09 period and was not overly affected by the two political crises. Grants, however, were much more volatile over the period: they generally ranged from 3% to 4% of GDP when the political situation was stable, but reached a high of 8.2% of GDP in 2004 and fell to 1% in 2009 as a result of the political crisis. The country received assistance under the Multilateral Debt Relief Initiative in 2005.

On average, tax revenue amounts to 75% of total revenue. Tax policy is set out in the general tax code (for domestic taxes) and the customs code (for taxes on international trade), these codes being supplemented and modified each year by special provisions of the budget act adopted by parliament. The budget act, in turn, may be modified during the year by a budget reconciliation act. In 2004, Madagascar adopted an Organic Budget Law, whose main innovation concerning budget preparation was to introduce programme budgeting. The year 2009 is an exception in the budgeting process: since parliament was dissolved in March, the 2010 Budget Act was adopted on 31 December by order of the president of the HAT.

Taxes on trade, and more specifically on imports (exports are not taxed) remain the main source of tax revenue, although their share in total tax revenue declined over the 2000-09 period; setting aside the crisis years 2002 and 2009, this share fell from 53.5% of tax revenue in 2000 to 48.3% in 2008. Domestic indirect taxes are the second-largest revenue source, accounting for a relatively constant share of about 30% of tax revenue. The share of direct taxes increased from 17% of tax revenue in 2000 to 27% in 2008 and 2009. The ratio of direct taxes to GDP rose from 1.9% in 2000 to 3.5% in 2008, then fell to 2.7% in 2009, whereas the GDP shares of indirect taxes and external trade taxes were relatively stable at 3% and 6% respectively. The trend in direct taxes reflects the government’s efforts to broaden the tax base.

The 2007 reform sought to simplify the tax system by, among other things, switching to single-rate taxes. Personal income tax was a progressive tax until 2008, when it was replaced by a single-rate tax set at 24% in 2009 and reduced to 23% in 2010, levied on income above a stated threshold level. This tax is deducted at source. The rate of business profits tax was aligned with that of personal income tax, and here again the tax applies only above a threshold level, which varies according to the type of business. Non-residents benefit from a preferential rate of 10%. Certain businesses in export sectors, chiefly textiles and fisheries products, were granted free-zone status. Taxes on goods and services include an ad valorem excise tax levied on alcoholic beverages, tobacco products and mobile telephone services, at rates ranging from 7% to 250% depending on the product. Value added tax (VAT), the government’s main revenue source, has been levied at the single rate of 20% since 2008, before which it was 18%. Exports are not subject to VAT, and certain other products are also exempt, such as agricultural inputs and equipment and, since the 2008 food crisis, rice and kerosene. Customs tariffs on imports are being liberalised, and exports do not carry a tariff. A proactive investment policy adopted in 2009 aims to make a large number of inputs and capital goods exempt from duty.

At the same time as the reform of the tax system, an action plan for reform of the tax administration (2007-11) was implemented. Its strategic objective was a simpler, more efficient administration geared to provide better service to the public. The administration consists of the central tax directorate, tax centres, regional business tax departments and a large enterprises division. The reform aims to extend the integrated tax management software system SIGTAS to the regional business tax departments and to set up government-approved management centres, in partnership with business associations, to assist businesses with their tax declarations. The customs administration, also seeking efficiency gains, has adopted the automated customs data system ASYCUDA++ and the TradeNet system. In contrast, very little has been done to decentralise tax revenue.

The tax administration is understaffed. There are not enough tax audits to dissuade tax dodgers, particularly at the devolved level where capacity is lower still. An e-declaration system has been set up, but its effectiveness is still unknown because service was interrupted in 2009 due to the crisis.

The main problems concerning mobilisation of tax revenue are i) the size of the agricultural sector; ii) the informal sector’s large share of the economy and iii) the loss of the notion of tax morality, which, along with the complexity of the system, leads to tax avoidance.

To enhance transparency and taxpayer access to information, the reform calls for developing the websites of the General Tax Directorate and General Customs Directorate, conducting a taxpayer satisfaction survey, preparing and disseminating an auditing guide, etc. All of these actions were in the 2009 work plan of the tax and customs directorates, but unfortunately could not be implemented owing to the political situation and the shortage of funds.

Efforts have been made to fight corruption in government, particularly in the tax administration. An anti-corruption law has been adopted and two bodies created: the Integrity Safeguard Committee (Comité de sauvegarde de l’intégrité – CSI) and the Independent Anti-corruption Bureau (Bureau indépendant de lutte anti-corruption – BIANCO). A “complaints box” is available on the website of the General Tax Directorate.

The country was plunged into a new political crisis in January 2009. Abuses of governance caused weeks of social agitation that culminated, under pressure from the army, in the resignation of President Marc Ravalomanana and the establishment of the HAT. The president of the HAT is the mayor of Antananarivo, Andry Rajoelina, who is regarded as the leader of the opposition. One of his first decisions was to suspend parliament. The international community condemned the unconstitutional change of government, and part of Madagascar’s external aid was suspended. International pressure for a consensus-based and inclusive transition recognised by the majority of Madagascar’s partners led to the signature of an agreement in Maputo, Mozambique in August and an Additional Act in Addis Ababa, Ethiopia in November. The agreements specified a power-sharing arrangement among the four main political camps: that of the former president, that of the HAT and those of former presidents Albert Safy and Didier Ratsiraka (the last two were involved in negotiations from the start). However, disputes among the factions delayed implementation of the agreements. The difficulties in finding a compromise to satisfy all camps led to the definition of transitional institutions so cumbersome that there was a serious risk of paralysis, including in daily government management.

The transitional institutions provided for in the agreements are: i) a president and two co-presidents from three different political camps, forming a presidential council; ii) a government of national unity consisting of a prime minister, three deputy prime ministers and 31 ministers, drawn from all four camps; iii) a transitional congress (lower house) with 258 members; iv) a higher transitional council (upper house) with 65 members; v) a national reconciliation council with 9 members; vi) an economic and social council with 9 members; vii) a high transitional court with 11 members; viii) an independent national electoral commission; and ix) an advisory committee on national defence and security.

In late 2009, the HAT cancelled the establishment of these bodies and the implementation of the agreements among the four camps. It announced unilaterally the abrogation of the Maputo Charter of the Transition and the Addis Ababa Additional Act, on the grounds that power sharing was impossible. The HAT rejected the last international mediation attempts to establish a government of national unity and unilaterally announced its intention to organise elections as soon as possible, against the advice of the mediators.

Despite initiatives to improve governance, fight corruption (creation of BIANCO, the financial intelligence service SAMIFIN, the CSI and the High Council of Magistracy), strengthen public finance management and increase civil society involvement in management mechanisms (through the introduction of community score cards), the quality of Madagascar’s institutions remains low and abuses of governance are frequent, leading to inefficient use of domestic or external public resources and a business climate that does not favour private sector development. Transparency International’s corruption perceptions index for Madagascar fell from 3.4 in 2008 to 3 in 2009, lowering the country from 85th to 99th in the ranking.

Progress towards the MDGs, particularly where poverty reduction is concerned, was already slow before the political crisis, and it slowed still further when the crisis hit, along with the loss of external aid and the worsening economic situation. Since the MAP has been dropped, however, the monitoring system used to measure annual progress in priority areas was not operational in 2009 and no reliable data concerning the MDGs are available for 2008-09.

The poverty rate in Madagascar remains high (66% in 2007, the latest year for which data are available) and when any progress is made it is regularly brought to nothing by the effects of political instability. In 2007, the urban poverty rate had still not fallen back to its level before the 2001-02 crisis. The current political crisis, which has been accompanied by a rise in unemployment, particularly in urban areas, should lead to a further increase in the poverty rate.

Progress towards universal primary education is continuing. The elementary school completion rate rose from 53% in the 2006/07 school year to 60% in 2007/08, and was clearly higher for girls (66%). The gross enrolment rate is 124%, with near gender parity. Unfortunately, the reduction in external aid and the public budget and the financial difficulties faced by households may well have a negative impact on access to schooling in 2009/10. The education budget was cut 20% in 2009. This reduction, in addition to a certain disorganisation in the central departments due to the replacement of a large number of technical directors, delayed the implementation of the basic education reform and the primary school construction programme. According to the Multi-cluster Rapid Assessment Mechanism (McRAM) survey conducted by the United Nations Children’s Fund (UNICEF) in November 2009, 52% of parents thought that educational quality had declined during the crisis and 75% of them stated that they have difficulty in paying school fees, resulting in transfers from private to public schools. The dropout rate increased sharply, as many children were obliged to leave school to help offset the decline in family income. The survey also revealed an increase in sexual exploitation of children.

Infant mortality seems to be declining, but the preliminary results of the Demography and Health Survey, under way since late 2008, have not yet provided an update of the 2004 data (58 per thousand). Immunisation coverage has increased: for example, the coverage rate of diphtheria-tetanus-pertussis vaccine (DTP3) rose from 80% in 2007 to 88% in 2008. Similarly, the proportion of babies delivered in basic health centres and district hospitals rose from 22% in 2007 to 29% in 2008, but this rate remains very low, reflecting the country’s lag in terms of maternal health. Here again, the reduction in external aid, the public budget and household incomes may quickly have a negative impact on the progress accomplished.

The health system experienced a number of disruptions in 2009: drugs were supplied late or not at all to basic health centres; there was a resurgence of drug thefts and the health budget was cut by 30%. The progress made in immunisation is endangered in 2010: the central government traditionally pays 50% of the cost of the standard vaccinations (BCG, polio, measles, tetanus), but the availability of a budget for this in 2010 has not been confirmed; moreover, vaccine stocks are exhausted or very limited and may be hard to preserve due to cuts in electricity budgets. If the situation remains unchanged in 2010, then 770 000 children under one year of age and 870 000 pregnant women will not be vaccinated, which will have lasting consequences for the children’s health and will compromise the country’s chances of reaching the MDGs. In addition, the nutritional status of the population, particularly children, is a matter of deep concern, as the nutrition project financed by the World Bank was interrupted by the crisis.

HIV/AIDS prevalence is low, but so is the level of prevention. As HIV/AIDS programmes are chiefly financed by foreign aid, they also suffered from lack of funding in 2009.

Progress on access to clean water and sanitation is too slight to achieve the goals set for 2015. This sector has long suffered from a lack of institutional capacity; the Ministry of Water was created only in 2008. Rates of access to clean water and sanitation are 45% and 12% respectively at the national level, and 35% and 10% respectively in rural areas. After the cuts in the general budget, the appropriation for the Ministry of Water covered only 2% of what is needed to meet the country’s objectives, and despite its small size, only 36% of the appropriation was actually spent. As a result, only 47% of those who were supposed to be supplied with clean water in 2009 were in fact so supplied. Moreover, only 19% of primary schools and 15% of basic health centres have a drinking water tap. According to the UNICEF McRAM survey, the share of household spending devoted to water fell in 2009 in favour of spending on food, due to households’ financial difficulties.