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Report No. 1099a-MAG
Madagascar: Economic Memorandum on CurrentEconomic Position and
Prospects and SelectedDevelopment IssuesDecember 20, 1976
Eastern Africa Country Programs II
FOR OGFICOAL USE ONLY
Document of the World Bank
This document has a restricted distribution and may be used by
recipientsonly in the performance of their official duties. Its
contents may nototherwise be disclosed without World Bank
authorization.
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CURRENCY EQUIVALENTS
1970 US$1.00 - FMG 277.71FMG 1 - US$0.0036
1971 US$1.00 - FMG 277.03FMG 1 - US$0.0036
1972 US$1.00 - FMG 252.21FMG 1 - US$0.0040
1973 US$1.00 - FMG 222.70FlMG 1 - US$0.0045
1974 US$1.00 - FMG 240.50FlMG 1 - US$0.0042
1975 US$1.00 - FMG 214.32FMG 1 - US$0.0047
Fiscal Year
January 1 to December 31
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FOR OFFICIAL USE ONLY
Foreward
This report is based on the findings of a missionto Madagascar
in October/November, 1975 consisting ofMr. P. Landell-Mills (Chief
of Mission), and Messrs. L. Currat(industrial economist), F. Gamble
(educator), M. Purvis (agri-cultural economist), J.F. Rischard
(general economist),G. Schreiber (national accounts economist), G.
Sciolli (publicfinance economist)'. The draft report was discussed
with theGovernment in August, 1976 and it has been subsequently
updatedand revised.
This document has a restricted distribution and may be used by
recipients only in the performanceof their official duties. Its
contents may not otherwise be discklsed without World Bank
authorztion.
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MADAGASCAR
ECONOMIC MEMORANDUM ON THE
CURRENT ECONOMIC POSITION AND PROSPECTS
AND SELECTED DEVELOPMENT ISSUES
TABLE OF CONTENTS
Page No.
MAP
BASIC DATA
SUMMARY AND CONCLUSIONS ........................... i - vi
I. INTRODUCTION ......................................... I
Background ..........
............................................. 1
The Plan and the Charter ............... ... 1......
II. PRODUCTION AND INCOME ........... .....................
4
Overall Growth .................................. 4
Uses of Resources ................................... 7
Prices ....... .................. 8
III. PUBLIC FINANCE ...... .................................
11
Overview ........................................ 11
Current Expenditure ..... ........................ 12
Current Revenue ..... ............................ 14
Central Government Investmentand its Financing .....
........................ 16
The 1976 Budget ................................. 17
IV. MONEY, CREDIT AND THE BALANCE OF PAYMENTS ............
18
Money and Credit . ...... .............................*.
18Balance of Payments ............. .. .............. 21
V. MAIN ISSUES ................................ ..........
25
Agricultural Planning ........................... 26
The Parastatal Sector ........................... 28
Industrial Development ..... ..................... 29
Manpower .......................... ........... . 30
Statistics ......PECTS......................... 31
VI. FUTURE PROSPECTS
...................................................... 32
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TABLE OF CONTENTS (Continued)
VII. ANNEXES
Annex I - Agriculture: Recent Developmentsand Prospects
Annex II - Manufacturing: Past Performanceand Future
Prospects
Annex III - The Parastatal Sector
Annex IV - Human Resources' Planning
Annex V - Statistical Tables
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IBRD 10331FEBRUARY 1973
MALAGASY REPUBLIC f 0-SUAREZ
POPULATION DISTRIBUTION - 1971 dosumo Each dot represents 2,000
inhabitants Hell-VIIe,
* Over 60,000 Inhabitonts* 20000 - 60,000 Inhabitonts ao l0,000
- 20,00 Inhabitonts
* . ~~~~~~~AntaIahOW
MAJUNGA? t
Li~~~~~~~~jL M
Amboton*d,azakaTAMATAVE
siroanomond "'y t,Mormna
Q0 mEIIrrr JJ
k -; -+;#O~~~~~~~~~~~~Anissraeth
N4 norandavo, * *
* . 5 v -. /Manonjary
IhOtO0 ' .n oln k0ra
\ *.I C *'•iFarafangonoTUEAs? *, *, * * S
\-a~~ ~ 0 b4Duh 50 100 ISO 200 km
AFRICA
XMAIAGASYREPUBLIC
-
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I%Fi toe 'FO F ccF, FI W - K, b. I RI, LI I, I---, 1Fian-e
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lF.I.- f' -cc .70 lo]-FFF ''I.5 Fdatlafi rAd12-d pears of ago.
MOST RLFENT EST C4ATt Ia RaInoII11PP I poyla:occssder IS I.r - d
o'F,F' lllo at, / 9,1 IFt laing -515L-55FF
La I-byaao g
sF09,. ~~~~~~ ~~~~19701 aL Registerd only, /b 1962-69,J Ratio
FIIpFt F5 .OFFV,FdF?OF F0 c labor10c I 0FF- 1-09Iyeas/d Labor foote
age 15-59 year /o lra olFFF s I U',b.FFF s d I 1FOr, ,f, S er
fao
FRFFIAU dA-B R1F1'f0 it 1970 'a 'yii, lcyilt a FI, Ft 19t4-6h,,
tLF0Fsdc G t o'ti I'
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ei' F a y 917-t ' 'IC7 /Ft Inside anIy
RO. JFI 1 2 7 lOft
DEFINITIONS OF SOC10L VOittATFlRO
Food dons (tlc- a1-) "caalnp0cOFF~1 OO-' 1 alsIa diid,d ar -csbo
af pracr-OngOFl-Tata1 norfa- area onnpo taiag land area end Inland
.sin-. saeadfcanFrdFF FF55'rtn"o cr ld FF5.ed
p,, -FFFF lv Ino rnp7 P.~ yacrs. abr6 hi_bo od ec In lie Pt5lFF
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lor,l o oaeotoeooaaeoodas nld lock AIda, 11971-75 7s-nF, Pe-Fyt
'' -F 'a-'OFO'lI.OFrslo.n.... cFard100 n..ogy19,F.7 16F and 1979
daco oqoloolso5 .FF FF1 10,01
07fF/F /55 osailotlo cocoancry Fer oa1Fita per day,.l- -,-
Lilaloccon (eci-po etlI Ia ) - As Of Jaly fll, Irac l,, if
otLcalable, 'c -and . ,,2d 'ip sIcg and lo-FFF as. cliototbatian,
c~an
ra oF-ooc ac,19601.190 an 195 de.Lo rooc'c,d F" 'oF osd
-scFo,1golcesfrcne otct
I ry P- q"- I., ,~~~~~~~~9'lsttloFon F osat i-o, o'd ollcailg
105, for IateoF hsanebldI ~ mo donsty - ]Frr qasre no -Mid-yea
pepalars- pro ac-r 011FF- IoeI.FFc,c/.FFlacdccaFcz. poroq-s- kIcoIf
atrac land C- fsp-d ashOOOF f-o -sppo ctsFy,F of f,007 yItF I,ti,
_o'Fpploo lanid to detcndII
cOF'c rdo2.cdcsFsoFo"f"I77101 055FF505F00 '00cc ,,oc '0'. and if
dra"co a' Os coalt -- d polsd-preteaFF of I b-FFh.
ana isen-ynar average ceding1 Ia 1975 fnec..st re..nt estiate.
.c-eds,.F sr.F0 .acri ..prccsd l.aIV,f 7FIIr cso" fc-F Anold trodl
OscnecondoJI h-c O.pFOtFoad -- 1oa dratba per thnaaaad of ntd-ors
Pec,Fl riiaFf-oesaca e .0 P-LO.ctIat-pfiy of fond
pocciacoon, cnn-roan srirtcoeclo aoerage- ending Le 1960 aM
1970, aM dtrofd ro oc-itcd fF sea FaeaapCO floe-year.. aeega sidIng
la 1975 fee most -snat estimate. LoFF c/07c)aa - Anncco clolb
yhrIrcho,-Osd in ace. 9-pa
00001 crcsl 'y oateIF tnLh -j A....n! deats, of snfaecsond-r sa
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-oallo (cnoa a.... ap--s ending Fe 1960, 1970 and 1975 f-r
flcoFFF
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scOnci - Feeo/iiseaAl of alt sgea an, 'r, . 1-11 .11
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pocnenopi,r a nbnI-ge'FoFFO, l-rbda otidren agdh07 n a no-Ina
-rodacoan perid if ste -apera--n prsn sL a- 6-l nt hocc , e '
ifs'ctogt Fptnsneaain
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Ft ater'Indco '0oco .ne s ntcnn 1005,1070 sad 1975 fr- d-otntg
osctn inoo noo ...pc s.or taco- or h-s Fe offlist scbaa age-hF tt
701 0000' ff)- tota - OCnp-nd acos-foah IIles ofno A arc/ac
sce,oodco-ooc - I -pated as abnsconfo 1956-66 1960-70 end 19/0-75.
an,Odsro edo-c- -eq--re otF s tsarI' oass o apocd pln~ynocnFoeaoF
osse (7) - arba- - OCepat-d It, g-rcch rac of -olIj cnrctc p0001
des g-oc-I oocsoII0tetbtsoli
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-coln inodad Ii onrd -c-od 1nva1) - TsIl o-so of'IF_non dofancin nf
obn rasny IffeI ocP_oaiity of dIFa Foi'lcF.- oontF IFII
oocIFF,FIooIIcoto ttcnL1 a- beI par--
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dot' .le:cnndsosytst,ia.orea 64 sidn ner15-o 6 ndI'oIF IO.so
to--o cocdosFntFsocdr'iatAI e IIIns7oac,dofend-ny racl - Ratio of
FoaaFF5ador 15 and nIIFst as,FFoo OO i F nasFoF/e S5osod00
ornf bioth-tenceo d_locdraspiss of o-ccooi F sl ess ctc- 0c002
oF'sF .sor asosprrssH
tFc oF I osrolod neinon Ia sane age ocp d-slFF"' ocF c 01sos ta
n d recad pIped
andf--on sed a--nleye ba,t nasloInghccetcs atdeF Fc-isoI'cc
'o
forottro boating and ft-hlng) as p--.ocag of total lalbr
fart,-Oncpon I7 f labnr fnr-e - LnoIy --dae nsI ly d.fF-danttco
Cscscin
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RAn.-lr-crscoo (jceo tico.i pool oIl -p,,P f ncFnt foe radIo
broa.d-fF7 b,noingmakno r,oynsb _Flpetebrreeeatt. LdIfrdto:n-,se
roclositari- o nyoose oacasco
lsscaaa dtatrtbstaon - Poroantago a prFoaetc LnFs- (both ic, cah
sod 01721 arto,lestaegbt yp--in -tsld-t -nbat r- hearse andossoiod
b rIFIFeL 5% tlnc%, 20onoc O. and Ifanoess 407 o aitc- otile
hacoobalds, tino~~~~~~~~~~~~~~~~~~~~~~~~~~~~~F-r-to I0 (kaoF/se
Jpas -opl A- I Inso --niepci ofLdIrF ,ssFcsott-ao sd snnratlp-Poena
,so land r-nd by soIcIenJ- geooIyha'iicyacsFOFdn itIcit tt.L ar tor
Fade In-10.ad poorest I0 of isdenr,oa ciolc,'o .c prsad scrso
tancn
PojcaIattos,_p- phyatnten - inpalattin di,,ldeId by esec,n of
pr--al loPIcIcYntt-dn qsaltftd fro o -ndissl e-h-ant so .. jnorai
1-so
-
Page 3 of 4 pages
ECONOMIC INDICATORS
GROSS NATIONAL PRODUCT IN 1974 ANNUAL RATE OF GROWTH i%]
constant prices)
US$ Mln. % 1966 -70 1970 -72 1972-197L
GNP at Market Prices 1532.2 100.0 5.5 1.7 0.4Gross Domestic
Investment 223.7 14.6 7.4 - 4.6 5.9Gross National Saving L/ 171.7
11.2 24.8 -10.0 24.1Current Account Balance - 52.1 - 2Exports of
Goods, NFS 288.6 18.8 1.8 - 0.6 - 5.9Imports of Goods, NFS 3149.7
22.8 -1.1 2.2 -14.4
OUTPUT, LABOR FORCE ANDPRODUCTIVITY IN 197L
Value Added?v Labor Force'/ V. A. Per WorkerUS$ Mln. % Mln. % US
T %
Agriculture 653.6 41.8 3.51 82.8 186 50.4Industry 277.3 17.8
0.24 5.7 11146 310.6Services 576.3 36 9 0.48 11.14 (134
(353.4Unallocated 54.9 3.v - - 130 35
Total/Average 1562.2 100.0 4.23 100.0 369 100.0
GOVERNMENT FINANCECentral Government
(Eg_bill.) % Of _ DP1m7: 197h 1970-72
Current Receipts 49.4 13.1 15.8Current Expenditure 43.0 11.4
12.7Current Surplus 6.4 1.7 2.9Capital Expenditures 13.3 3.5
6.8External Assistance (net) 3.3 0.9 1.2
MONEY, CREDIT and PRICES 1970 1971 1973 1974 19751lllon FMG
outstanding end period)
Money and Quasi Money 55.2 58.5 65.4 67.8 81.2 82.3Bank credit
to Public Sector (net) - 7.9 - 9.1 - 2.7 - 4.2 5.0 12.6Bank Credit
to Private Sector 52.8 59.7 59.5 59.8 70.0 72.5
(Percentages or Index Numbers)
Money and Quasi Money as % of GDP 22.1 21.8 23.9 22.6 21.6
20.5GDP Deflator (1970 - 100) 100.0 103.9 106.6 119.4 147.3
155.1
Annual percentage changes insGDP Deflator .. 3.5 3.0 12.0 23.4
5.3
Bank credit to Public Sector (net) -102.6 -14.4 70.6 -59.1 116.8
154.1Bank credit to Private Sector 17.3 13.0 - 0.3 0.5 17.1 3.5
NOTEt All conversions to dollars in this table are at the
average exchange rate prevailing during the periodcovered.
1/ Including current transfers from abroad.
2/ At market prices.
/ Total labor force; unemployed are allocated to sector of their
normal occupation. "UnallQcated" consistsmainly of unemployed
workers seeking their first job.
2 Import duties.
not availablenot applicable
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Page 1!ofb pages
TRADE PAYMENTS AND CAPITAL FLOWS
BALANCE OF PAYMESTS MERCHANDISE EXPORTS (AVERAGE 1972-74
1972 1973 197h US $ Mln 7/(Millions US $)
Coffee 56.9 25.0Exports of Goods, NFS 229.7 2b5.5 288.6 Vanilla
14.6 7.2Imports of Goods, NFS 262.2 279.8 3U9.8 Cloves & clove
oil 22.ii 11.3Resource Gap (deficit =-) - 5 - 3C 3 -61.2 Meat &
meat products 18.6
Fish & shell fish 10.5 5.2Interest Payments (net) 2.1 2.0
3.6 Sugar 6.7 3.3Workers' Remittances - 29.3 - 22.9 -22.5 Petroleum
products 13.L 6.6Other Factor Payments (net) - 12.7 - 8.2 -11.1
Chromite L.2 2.1Net Transfers 36.5 33.1 39.0 All other commodities
55.o 27.3Balance on Current Account - 359 - -7TI Total 203.L
100.0
Direct Foreign Investment 21.9 15.3 9.8 EXTERNAL DEBT, DECEMBER
31, 1)/5Net MLT Borrowing
Disbursements 12.2 26.2 23.1 US $ MlnAmortization 6.2 8.8
6.3Subtotal 6.0 17.b 16.8 Public Debt, incl. guaranteed 167.9
Capital Grants 13.3 3.8 1.X8 Non-Guaranteed Private Debt *-Other
Capital (net) L.8 157 -12 Total outstanding & Disbursed
167.9Other items n.e.i 3 - I 1/Increase in Reserves (+) 6.3 10.8
-36.1 DEBT SERVICE RATIO for 197hr
Gross Reserves (end year)V/ 52.2 67.) '.L Net Reserves (end
year)2/ 50.7 67.L 3L.9 Public Debt, incl. guaranteed 3.3
Non-Guaranteed Private DebtTotal outstanding & Disbursed
3.3
Imports of crude petroleum 12.2 lb.) bL.7
RATE OF EXCHANGE
US$ 1.00 FMG 1.00 IBRD/IDA LENDING, (Nov. 30 ,19?f) (Million US
$)= FMG =US$
IBRD IDA1272 252.21 0.00b01)73 222.70 0.0015 Outstanding &
Disbursed 25.83 6h.50197 2L0.50 O.00b2 Undisbursed 6.75 47.601975
21L.32 0.00o7 Outstanding incl. Undisbursed 32.o 114.10
1/ Ratio of Debt Service to Exports of Goods and Non-Factor
Services.
2/ Central Bank only
not available
not applicable
20 December, 1976
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SUMMARY AND CONCLUSIONS
i. Over the past four years Madagascar has passed through a
testingperiod of transition from which it has emerged apparently
strengthened.Although the country gained independence in 1960,
links with France remainedvery strong until 1972. In that year
General Ramanantsoa replaced PhilbertTsiranana as President;
fundamental reforms were initiated and the Coopera-tion Agreements
with France were substantially revised. In January 1975General
Ramanantsoa resigned and Madagascar subsequently experienced a
phaseof political uncertainty, which ended with the appointment of
CommanderRatsiraka as President in June 1975. A referendum held in
December 1975resulted in an overwhelming vote in favor of a new
constitution based on astrong presidential system and confirmed
President Ratsiraka as Head ofState.
ii. The basic political orientation of the new Government has
beenset out by President Ratsiraka in the Charter of the Malagasy
SocialistRevolution. Major institutional and policy changes aim at
placing controlof the economy in the hands of the Malagasy,
promoting social justice andfostering local democracy.
iii. Greater Malagasy participation in commerce and industry is
beingachieved by a substantial increase in public enterprise. The
commercialbanks, insurance companies and a number of other key
businesses previously inforeign ownership have been nationalized,
and it is intended that the Stateshould become a majority
shareholder in all enterprises of national importance.Foreign
private investment is to continue to play an important role,
beingregarded as a source not only of capital but also of technical
expertise.
iv. To correct inequalities between different regions,
investment isto be channeled to the least favored areas and as many
government activitiesas practicable are to be decentralized. A
radical reform of the educationalsystem is planned; all children of
school age are to be enrolled in a five-year program of basic
education with a curriculum adapted to the needs ofeach region.
This ambitious reform calls for an additional million primaryschool
places to be created by 1979.
v. The Charter makes the reform of local government a central
featureof the new development strategy. The traditional village
council, or"fokonolona", is being adapted to enable villagers to
participate activelyin improving local conditions. The fokonolona
are to undertake the marketingof crops, the retailing of essential
commodities and the channeling of credit.They have begun to collect
levies on the sale of produce and to use theproceeds to finance
schools and other services. A hierarchy of newinstitutions based on
the fokonolona is to be created to replace the existingsystem of
local government.
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- ii -
vi. Between 1966 and 1971, GDP in real terms rose by about five
percentper annum, while the investment rate was at or above 15
percent. Following thechange in Government in 1972, a comprehensive
reappraisal of economic policieswas undertaken. The major
institutional reform of the economy has beenaccompanied inevitably
by initial management problems. These, combined withthe recession
in the world economy, have had an adverse impact on overalleconomic
trends. In 1975, real GNP (in market prices) was still
slightlybelow the level reached in 1971, after two years of decline
in 1972 and 1973and a very slow recovery in the two following
years. Per capita income in1975 is estimated at about US$195 (in
current prices). Gross fixed capitalformation, having reached a
peak in 1971, fell sharply (by 18 percent) in thenext year and has
grown by only 1.5 percent per annum since then. In 1975, itamounted
to only 12 percent of GDP in market prices. The domestic
savingsrate has followed a similar trend.
vii. Agriculture dominates the economy: 85 percent of the
populationlive in the rural areas, and agriculture presently
contributes more than 40percent to GDP and 80 percent of export
earnings. In contrast, manufacturingcontributes only 13 percent of
GDP and mining less than one percent. Between1970 and 1974,
agricultural output rose by 2.7 percent per annum with most ofthe
growth taking place in 1974. The expansion of coffee and cotton
productionin particular has been encouraging. However, the slow
progress made inexpanding rice output, which has lagged behind the
growth in population,is the most serious problem facing Madagascar.
Large shortfalls in domesticrice production led to record rice
imports in 1973 and 1974, at at total costof over US$50 million.
Livestock production, too, has lagged with cattlenumbers actually
declining over the past five years, resulting in a decreasein meat
exports in 1973 and 1974.
viii. Between 1970 and 1974, manufacturing production grew by
3.3 percentannually in real terms. Owing to the drop in effective
demand followinga poor harvest and the departure of many
expatriates, a small decline wasrecorded in 1973, but there was a
strong recovery in 1974. Output is mostlyprocessed agricultural
products and consumer goods for the domestic market.However, for
long term growth, Madagascar will need to develop exportindustries;
in particular, there is potential for the further processingof raw
materials. Political uncertainties since 1972 have resulted in
asharp downturn in foreign private investment, such that by 1974
the netoutflow of direct investment income matched the new inflow
of privatecapital. Medium and long term credit for manufacturing
has fallen 30percent over the same period, which is also indicative
of the drop inprivate sector investment in manufacturing.
ix. Despite world inflationary pressure, consumer prices rose
byonly 6-7 percent annually between 1970 and 1973. Large increases
in importprices, combined with a doubling in the price of rice,
gave rise to a rateof inflation approaching 20 percent in 1974;
since then, however, inflationhas greatly moderated. In an attempt
to protect the living standards of theurban poor, the wages of the
lower paid workers were raised approximately
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- iii -
40 percent in 1974. Extensive price controls have successfully
delayedthe passing OLL of increased wage costs to consumers. The
net effect of
the Government's incomes, prices and tax policies has clearly
been to improve
overall income distribution.
x. In the past the administration of public finance has been
relativelyconservative, but the most recent budget indicates a
determination to usepublic expenditure to boost development. In the
period 1970 to 1974 CentralGovernment revenue grew much less than
GDP, and expenditure both current andcapital actually declined in
real terms after 1972. The current budgetarysurplus was reduced by
more than 55 percent between 1971 and 1972, but there-after it grew
steadily, financing more than one third of capital expenditurein
the following three years. Since 1971 the Government has resorted
to
increased internal short and medium term borrowing, but it was
only in 1974,when the Treasury borrowed FMG 10 billion to finance
emergency rice imports,that it reversed its traditional position of
being a net depositor with thebanking system.
xi. The ratio of tax revenue to GDP has fallen from 15 percent
in 1971to less than 12 in 1974, partly owing to the abolition of
the cattle and polltaxes which were previously levied on the rural
population. However, thecommissions now collected by the fokonolona
on the sale of farm produce,although lower, have in part replaced
local taxes as a source of revenue forvillage development. There is
scope for increasing the tax effort, but onlygradually and after a
thorough evaluation of various alternative tax measures.
xii. The investment budget has been substantially underspent
recently,
particularly in 1974, indicating that problems have been
encountered inproject implementation. Political uncertainties and
frequent changes in
personnel have been partly responsible, but cost increases have
also createddifficulties in the award of contracts. The 1976 budget
provides for a levelof investment nearly double actual expenditure
in 1975, but it remains to be
seen whether the capacity to implement development projects has
expandedcorrespondingly. Current expenditure has also been
substantially increased in1976 (22 percent); part of this increase
is to enable the salaries of junior
employees to be raised. Of note, too, is a 41 percent increase
in the budgetedexpenditure for education which is required to
finance the proposed reform.Although revenue is estimated to grow
by 17 percent in 1976, almost no current
budget surplus will be generated. However, the Government
intends to useincome derived from state enterprises and part of the
reserves of the cropstabilization funds to finance almost one third
of the investment budget.
xiii. The banking system has undergone substantial changes in
the past
three years. In July 1973, Madagascar left the Franc zone,
replacing itscurrency board with an independent central bank. The
opportunity has been
taken to direct credit to priority sectors and to give
preference toMalagasy nationals. After stagnating in 1972 and 1973,
credit to the
-
- iv -
private and parastatal sectors jumped 21 percent in 1974 mainly
to enable theincreased cost of imports to be financed. Medium and
long term credit tothese sectors have declined since 1972,
reflecting the slack in privateinvestment.
xiv. Madagascar was faced in 1975 with a serious shortage of
foreignexchange, principally owing to the sharp deterioration in
the terms of trade.While the volume of merchandise exports grew by
over 4 percent between 1972 and1974, the volume of imports was
reduced no less than 28 percent by the imposi-tion of strict
quantitative controls. As a result, the balance of paymentscurrent
account showed a much reduced deficit in 1973. However, in 1974
theimport price index rose 63 percent while export prices rose only
34 percent,resulting in a FMG 12.5 billion (US$52 million) deficit
in the current accountof the balance of payments. Net inflow of
capital declined each year between1971 and 1974, the drop in
private investment not being compensated fully bythe increase in
public capital receipts. The external situation improvedlittle in
1975 and, by the end of the year, international reserves stood
atonly US$36 million, the equivalent of five weeks of merchandise
imports.However, in the first half of 1976 international reserves
rose sharply,totalling almost US$67 million by mid-year.
xv. Madagascar's recent economic difficulties may be seen as
theresult of adverse external trends, combined with the short term
effectsof a major reorganization of the economy. Now the stage has
been set fora concentrated effort to boost production so that the
population may enjoysteadily improving living standards. The
Charter provides a clear politicalframework; the task ahead is to
elaborate in detail a plan which relatesprecise policies to the
general objectives and specific projects to globaltargets. For this
work greatly improved statistics are required. Particularattention
needs to be given to strengthening agricultural planning,
improvingthe management of state enterprises, boosting industrial
investment andtraining skilled manpower.
xvi. The strengthening of agricultural planning should enable a
moreeffective investment program to be formulated. There is
considerable scopefor raising agricultural production, but without
a detailed and well coordi-nated plan only slow progress may be
expected. The main problems to beovercome include (i) poor roads,
(ii) unsatisfactory marketing arrangements,(iii) an inadequate
supply of farm equipment and inputs, and (iv) the lack ofcredit
facilities for small farmers. At the same time, greater
priceincentives could be offered, especially in those cases (e.g.
meat and rice)where the producer price is below the import parity
price. The expansionof rice production to enable Madagascar to feed
itself is of paramountimportance. If present trends continue, the
country's rice deficit couldreach 500,000 tons by 1990.
xvii. The expansion of state enterprise may have adverse
consequencesfor economic growth unless satisfactory management is
instituted. It isnoteworthy that where the state has progressively
taken control of anestablished enterprise, the activities of the
entity have usually continued
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- v -
in a sound manner. However, where the state has attempted to set
up atotally new organization, the results have been disappointing.
The short-age of managers with relevant commercial experience has
been a criticalconstraint. To achieve better management of
parastatal organizations, itwill be necessary to improve the system
of accounts and to develop proce-dures for internal communications
so as to ensure greater coordinationbetween the different operating
departments. The training of managers isof the highest
priority.
xviii. If private investment in industry is to grow, steps will
beneeded to clarify policy, particularly with regard to incentives
andprofits, and to accelerate project preparation in those cases
where thestate is a major participant. There are considerable
opportunities forexpanding small-scale and artisanal industries,
which could be aided bya package of services, including the supply
of inputs, the marketing ofproducts and the provision of credit,
backed by advice on productiontechniques and accounting
methods.
xix. Madagascar is faced with a growing number of educated
unemployed,yet at the same time there are acute shortages in
certain categories ofskilled manpower. Out of a total population of
some 9 million, growing at 3percent annually, approximately 4.4
million belong to the active labor force,of whom about half a
million are in salaried employment. Over the next tenyears the
active population will grow by one million, of whom less than
onethird are likely to find salaried jobs. More particularly, given
existingtrends it is unlikely that each year more than 20,000 will
be placed in jobsrequiring a full primary education or more, yet
the present output of thepost-primary educational establishments is
already 17,500 per annum, and afurther 37,000 complete six years of
primary education each year. Thus theeconomy's requirements for
academically educated manpower would be satisfiedwithout any
expansion of secondary education; the need is for
increasedtechnical and vocational training carefully tailored to
the demand for skilledworkers.
xx. To achieve sustained growth now requires a sharp increase in
theinvestment rate. In the mission's view it would be feasible for
Madagascarover the next decade to raise industrial production by 6
percent per annumand agricultural production by 3.5 percent per
annum, giving an overallannual growth rate of 4 percent. This
indeed would appear to be a minimumtarget if living standards are
to improve perceptibly; nevertheless, itwould require a 50 percent
increase in the investment rate by 1980.
xxi. The prospects for the balance of payments in the near term
appearfavorable as a result of the projected improvement in world
coffee prices.After 1980, the terms of trade are expected once
again to move againstMadagascar, causing a widening resource gap.
Assuming that exports grow atthe same rate as GDP, by 1985
Madagascar may require a net capital inflow ofUS$200-250 million,
equivalent to approximately 30 percent of projectedinvestment.
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xxii. It may be concluded that, given conditions of stability
whichpermit the consistent implementation of current policies,
Madagascar has
good prospects of reversing the recent decline in per capita
income and
achieving a steady improvement in living standards. The actual
rate of
growth will depend primarily on the Government's ability to
accelerate
public investment, improve the management of public enterprises,
and provide
the labor force with relevant skills. It will also greatly
depend on the
effectiveness of the fokonolona as an institution for promoting
peasant
agricultural production.
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MADAGASCAR
ECONOMIC MEMORANDUM ON THE
CURRENT ECONOMIC POSITION AND PROSPECTS
AND SELECTED DEVELOPMENT ISSUES
I. INTRODUCTION
Background
1. The present report was prepared by a mission which visited
Mada-gascar in October/November 1975. It updates the economic
report (No. 167a-MAG) distributed in July 1974. The latter was
based on the findings ofa mission which visited Madagascar in
October-November 1972, shortly afterGeneral Ramanantsoa replaced
Philbert Tsiranana as President. In January 1975General Ramanantsoa
resigned and Madagascar subsequently passed through aperiod of
political uncertainty finally ending with the appointment of
Com-mander Ratsiraka as President in June 1975. Reflecting the new
politicalorientation of the Government, a major revision of
internal and externalpolicies has been initiated, involving a
fundamental restructuring of theeconomy. Consequently, substantial
changes in the economic situation haveoccurred since 1972; these
are discussed in the present report.
2. Madagascar gained independence in 1960, yet links with the
for-mer colonial power remained very strong up to 1972. Within the
Governmentheavy reliance was placed on French technical assistance
personnel. Theprivate sector was dominated by French-owned firms
and, as Madagascar was amember of the Franc Zone, France had
considerable influence over monetarypolicy. After the change of
Government in 1972 the Treaties of Cooperationwith France were
substantially revised and many adjustments have been made.
3. Over the past four years, Madagascar has passed through
atesting period and has emerged apparently strengthened. This is a
majorachievement indicating a fundamental consensus in favor of
national unity.A referendum held in December 1975 resulted in an
overwhelming vote infavor of a new constitution based on a strong
presidential system. The ref-erendum also confirmed Didier
Ratsiraka as President. The Malagasy Republichas been renamed the
Democratic Republic of Madagascar.
The Plan and the Charter
4. In 1973 President Ramanantsoa's Government published the
NationalDevelopment Plan 1974-77, which outlined its development
strategy and es-tablished production targets. The Plan envisaged a
steady acceleration inthe rate of economic growth from 2 percent in
1974 to 5 percent in 1977 andcalled for a total investment, both
public and private, of about US$750million (FMG 169 billion) over
the Plan period. Two thirds of investment
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-2-
was to be financed from domestic resources, implying an
exceptionally highlevel of domestic savings. The industrial sector
was projected to growat 4.5 percent per annum and was to absorb one
fifth of total investment,while agriculture was expected to grow by
3 percent, or 0.5 percent fasterthan the projected rate of growth
of population. The Plan did not presentany detailed government
budget projections, but it was stated that currentexpenditures
would be increased at the same rate as GDP.
5. While many of the policies and objectives described in
thePlan have been retained by the present Government, in a number
of impor-tant respects the emphasis has changed. The basic
political orientationof the new Administration has been set out by
President Ratsiraka in theCharter of the Malagasy Socialist
Revolution, published in September 1975.Both the Plan and the
Charter proposed reforms aiming at:
(a) placing control of the economy in the hands of Malagasy;
(b) fostering local democracy; and
(c) promoting social justice.
The Charter, however, is more explicit than the Plan in its
socialist orien-tation. Although it is not an economic plan, the
Charter goes beyond broadprinciples to specify in certain instances
a number of precise actions to betaken by the Government.
6. Control of the economy is to be achieved by a substantial
increasein state enterprise. 1/ The Plan specifies a number of
sectors which are tobe reserved to the State. To these the Charter
adds a number of other sectorswhich the State will control through
equity participation. In September 1975,the Government took over
full ownership of the commercial banks, insurancecompanies and a
number of key businesses on terms to be subsequently negotiated.It
is intended that the State should become the majority shareholder
in allenterprises of national importance. For certain activities
the State has setup new state corporations; for example, the
marketing of essential foodstuffs- rice, maize and groundnuts, in
particular - is the responsibility of SINPA,2/while the
distribution of certain imports and exports is undertaken by
SONACO; 3/
1/ For details, see Annex III.
2/ Societ'e d'Interet National pour les Produits Agricoles.
3/ Societe Nationale du Commerce.
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both were made monopolies to enable the State to have full
control overproducts considered vital to the economy. In future,
rather than create newparastatal bodies, the Government intends to
seek, where it deems necessary,either a majority or a minority
share of the equity capital of foreign enter-prises through the
medium of sectoral state holding companies. The Govern-ment's share
will vary depending on the nature of each business. It is
notintended that the State should intervene in day-to-day
management, whichthe Government wishes to be based on sound
business principles. Rather,through participation in meetings of
the executive Boards, the Governmentwill guide overall policies to
ensure they are consistent with nationalobjectives.
7. Inequalities in income and level of development between
differentregions, compounded by an over-centralization of
decision-making in Tanana-rive have been a source of discontent in
the past. There is little dataon the distribution of income and
wealth, but there is a striking contrastbetween conditions in the
capital, Tananarive, and the rest of the countryand between the
densely cultivated High Plateau and the arid South, wherethe
population barely subsists. To correct this imbalance, the
Governmentproposes, as far as practicable, to channel investment to
the least favoredareas. The Charter also proposes that the regional
administrations shouldbe greatly strengthened. As many government
activities as practicable areto be devolved to the regions, which
will be granted a large measure ofautonomy.
8. To foster local initiative a comprehensive reform of local
gov-ernment was introduced in 1973. The Charter makes this reform a
centralfeature of the policies of the present Government. The new
system is animaginative adaption of the traditional village council
(called "fokono-lona") which is being transformed into a democratic
institution, gearedto development. The new system enables villagers
to share in the decision-making process and thus participate
actively in improving local conditions.The intention is to create a
four-tier hierarchy of representative institu-tions roughly
corresponding to the commune, canton, sub-prefecture and
pre-fecture, with extensive powers and responsibilities. The
fokonolona areexpected to engage directly in communal economic
activities, such as thecollection and sale of crops to SINPA and
other agencies, the retailing ofessential commodities and the
channeling of credit. They are empowered tocollect levies on
marketed produce and to use the proceeds to finance schoolsand
other services. Fokonolona have been established throughout the
country -some 10,000 in all - a large proportion of which has
already begun developmentprojects such as the construction of
roads, communal buildings and smallirrigation works. l/
1/ For details, see Annex I, pp. 5-7.
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- 4 -
9. The Charter expresses great concern that government action
shouldbe directed towards minimizing inequalities among social
groups. Theintention is to reduce gradually salary differentials.
An important re-lated measure envisaged is land reform; large
estates which remain unex-ploited are to be subdivided and
distributed to small farmers, while farmsowned by absentee
landlords are to be reallocated to the sharecroppers whoactually
work the land.
10. In contrast to earlier policies which sought to promote
develop-ment through large state-owned and mostly expatriate
managed farms and ag-ricultural development corporations, the
emphasis is now being placed onsmall projects which can be planned
and implemented by Malagasy at the foko-nolona level. While the
main unit of production is to be the individualpeasant farmer,
stress is placed on the formation of socialist cooperativeswithin
the framework of the fokonolona system, both for production and
mar-keting. Fokonolona are also encouraged to establish communal
plots.
11. Consistent with the Charter's policies of "democratization,
decen-tralization and malagasization," the Government has embarked
on a radicalreform of the educational system. All children of
school age are to be en-rolled in a five-year program of basic
education with a curriculum adaptedto the needs of each region. The
Charter envisages doubling the enrollmentat the primary level by
1979 (this would involve putting an additional mil-lion children
into school) and the training of some 18,000 national service-men
as teachers. At the higher levels the curricula are to be made
morerelevant to the circumstances of Madagascar and its regions.
The schools anduniversity are to play a major role in the
mobilization of the population insupport of the reforms described
in the Charter.
1/II. PRODUCTION AND INCOME
Overall Growth
12. In the period immediately following Independence in 1960,
theeconomy stagnated and GDP per capita declined slightly. In 1965
a recov-ery set in, and from then until 1971 GDP grew on average by
almost 5 per-cent annually, while the investment rate reached
almost 18 percent of GDP in1971. In this period, the economy was
characterized by a high marginalsavings rate of 40 percent and a
small resource gap. The comprehensivestructural reform of the
economy which has been taking place since 1972 hasbeen accompanied
inevitably by initial management problems. These, combinedwith the
recession in the world economy, have had an adverse impact on
overall
1/ In view of the limited availability of official statistics
the Missionundertook extensive work to prepare the statistical
tables presented inthis report from available primary data.
However, owing to major defi-ciencies in the latter, figures quoted
should be treated with caution.
-
economic performance. Real GDP in 1975 was only 3.6 percent
above the level
reached in 1970. This small increase has been spread unevenly
over time, with
GDP actually falling in 1972 and 1973, followed by a slow
recovery in 1974 and
1975.
Table 1: GROWTH OF PRODUCTION AND INCOME
1970 1971 1972 1973 1974 1975
GDP m.p. (current prices, bill. FMG) 249 269 274 300 376 401
GDP m.p. (1970 prices, bill. FMG) 249 260 257 251 255 259
Income effect of changes in theterms of trade (bill. FMG) - -2
-2 -4 -12 -19
GDY (1970 prices, bill. FMG) 249 258 255 247 243 240
GDY per capita (1970 prices, US$) 118 119 114 107 102 98
Population (millions) 7.60 7.82 8.05 8.30 8.56 8.84
Source: Mission estimates (Annex V, Tables 2.2, 2.4, and
2.6.
13. GDP per capita in current prices rose from US$118 in 1970 to
US$182
in 1974 (on a straight exchange rate conversion). However,
measured in 1970
prices, it only reached US$107 in 1974. Moreover, the cumulative
losses
arising from the adverse movement in the terms of trade amounted
to approx-
imately US$72 million between 1970 and 1974 (in constant 1970
prices), with
the result that gross domestic income (GDY) in 1974 estimated in
1970 dollars
amounted to only US$102 per capita. Thus, over the period
1970-74 real per
capita income declined by an estimated 15 percent, and by a
further 4 percent
in 1975.
14. Between 1970 and 1974, both agriculture and industry
slightly grew
considerably faster than services and public administration. In
current
prices, agriculture's share in GDP jumped from 30 percent in
1970 to 42 per-
cent in 1974; this is explained primarily by the doubling in the
price of
rice. The service sector showed a small decline in value added
after 1971,
mainly owing to a decline in the contribution of trade,
reflecting the fall in
the volume of imports. The value added of the public
administration sector
declined mainly owing to the sharp fall in the number of
technical assistance
personnel from 1,454 in 1970 to about 600 in 1974.
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Table 2: SECTORAL COMPOSITION OF GDP(percentages)
1970 1974 1974 Real growth(1970 prices) (1970 prices) (1974
prices) 1970-74
Agriculture 29.6 32.3 41.8 +11.5
Mining 0.4 0.5 0.5 +40.0Manufacturing 13.2 14.7 13.3
+14.0Electricity and water 1.2 1.5 1.1 +34.5
Construction 3.7 3.4 2.9 - 5.4Transport and communications 7.0
7.5 6.5 + 9.8Trade 13.5 12.5 10.7 - 5.3
Banking and insurance 1.6 2.1 1.8 +31.7
Other services 11.0 10.5 7.5 -2.5Public administration /a 13.5
11.8 10.3 -11.0Import duties 5.3 3.2 3.5
100.0 100.0 100.0
/a Including defense.
Source: Mission estimates (Appendix V, Tables 2.1 and 2.2).
15. Agriculture dominates the Malagasy economy: 85 percent of
thepopulation live in the rural areas, and agriculture contributes
over 40 per-cent of total GDP and 80 percent of export earnings. In
contrast, manufacturingcontributes only 13 percent of GDP and
mining less than one percent. Rice,the staple food, accounts for
about one third of the gross value of agricul-tural production and
is mostly consumed on the farm. In addition to rice, themajor cash
crops include coffee, sugar, vanilla and cloves, but there is alsoa
wide variety of other crops. Animal husbandry is important, too,
with anational herd estimated at 8 to 10 million head.
16. Between 1970 and 1974, agricultural output rose by 2.7
percent per
annum with most of the growth taking place in 1974. There are
marked annualfluctuations in the production of specific crops due
mainly to varying climaticconditions. The slow progress made in
expanding rice output production isthe most serious problem facing
Madagascar. 1/ The production of paddy, themain cereal, has lagged
behind the growth in population. While Madagascar hadbeen a
substantial net exporter of rice in the 1960s, the situation has
beenreversed since 1970. Large shortfalls in domestic rice
production led tolarge rice imports in 1973 and 1974, costing in
total US$51 million in foreignexchange. The good harvest in 1974/5
sharply reduced the need for riceimports in 1975. Two notable
successes in the agriculture sector recentlyhave been the expansion
of coffee and cotton. The production of coffee,
1/ The constraints to agricultural development are discussed in
detail in
Annex I.
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the main export crop, rose 40 percent between 1971 and 1974,
following asimilar decline between 1966 and 1971; it is grown
mostly by smallholders.Cotton production has increased by almost 80
percent since 1970, replacingimports and yielding a small surplus
for export. Livestock production haslagged, with cattle numbers
declining between 1970 and 1974, owing to theeffects of drought and
disease. On the other hand, fishing is making anincreasingly
important contribution both to production and to export
earnings.
17. Since independence in 1960, manufacturing has made steady
prog-ress, raising its contribution to GDP from about 5 percent to
13 percent in1974. Existing factories are almost entirely devoted
to the processing ofagricultural products and the production of
consumer goods for domestic use.As manufacturing has expanded, the
imports of non-food consumer goods havedeclined as a percentage of
total merchandise imports from 42 percent in 1960to 14 percent in
1974, while imports of raw materials and intermediate prod-ucts
have increased. Over the past five years the real rate of growth
inmanufacturing has slowed to an average of 2.5 percent per annum;
a smalldecline was recorded in 1973 followed by a strong recovery
in 1974 and renewedstagnation in 1975. In 1973 a poor agricultural
harvest, combined with anexodus of expatriates, resulted in a drop
in effective demand. Recently, as aresult of price controls in the
face of rising costs, profits were severelysqueezed.
Uses of Resources
18. As domestic income in real terms declined between 1970 and
1974 (seepara. 13), total private consumption also declined in real
terms after 1972.The level of real per capita private consumption
in 1974 was 10 percent belowthe level of 1970. Public consumption
also declined in real terms; whileinvestment rose sharply in 1971
and, after a severe decline in the followingyear, increased
satisfactorily until 1974. Gross domestic fixed invest-ment, 1/ as
a proportion of GDP in current prices, fell from 14.6 percent
in1970 to 12.5 percent in 1974 and domestic savings fell from 14.5
percent to10.4 percent over the same period.
1/ Actual investment may be somewhat higher as the data probably
under-estimate smallholder farm investment and the construction of
traditionaldwellings.
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- 8 -
Table 3: USES OF RESOURCES
(in constant 1970 prices: billions of FMG)
p1970 1971 1972 1973 1974 1975
Origin of Resources
GDP 249 260 257 251 255 258
Net inflow of resources /a 3 13 8 7 10 5Losses from terms of
trade - -2 -2 -4 -12 -19
Use of Resources
Private consumption 167 175 182 175 171 166
Public consumption 46 51 45 42 42 42Investment 39 46 35 37 40
37
Saving
Domestic 39 39 37 35 39National (excluding transfers) 28 28 27
28 33
p = provisional.
/a Resource gap (i.e., imports of goods and services in
constantprices minus exports of goods and services deflated by the
import
price index).
Source: Mission estimates (see Annex V, Tables 2.4, 2.6 and
2.7).
19. Data on the composition of fixed capital formation are
veryfragmentary. Private fixed investment, measured in real terms,
fell in the
period 1971-73, but began to rise again in 1974. Public
investment stagnated
throughout the entire five-year period. These trends are also
reflected in
the decline in value added of the construction sector from FMG
9.2 billion in1970 to 8.7 billion in 1974 in real terms. Political
uncertainties over thepast three years have resulted in a sharp
downturn in foreign private invest-ment; the net inflow, including
profits reinvested, fell from FMG 7.6 billionin 1971 to FMG 2.6
billion in 1974. 1/ Nevertheless, for the same period the
inflow of private capital was 50 percent higher than the direct
investment
income outflow, although in 1974 the outflow slightly exceeded
the inflow.
1/ DAC data is contradictory (see Annex V, Tables 3.3, 3.4 and
3.8) but
the discrepancy remains unexplained.
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-9-
Prices
20. The evolution of internal prices over the past five years
hasbeen largely determined by two factors, namely the increase in
the prices ofimported goods and changes in the domestic price of
rice. The FMG price ofimports jumped by 63 percent in 1974, more
than triple the cumulative increaseoccurring in the three preceding
years. This increase, which in dollar priceswas 12 percent higher
than the average for the non-oil producing LDCs, wasmainly due to
the preponderance of rice imports, which recorded a 100
percentprice increase in 1974, and the impact of the increase in
the prices ofpetroleum and petroleum products.
21. In order to stimulate rice production, the producer price of
paddywas doubled between 1972 and 1974. As a consequence the retail
price ofrice also nearly doubled to FMG 65 per kilo in 1974, which
was neverthelessFMG 28 lower than the average cost of imported rice
(c.i.f. Tamatave) inthat year. 1/ Rice constitutes a major
component of the household expend-itures of the majority of
Malagasies. To protect the living standards oflow income urban
families, statutory wage rates were raised approximately 40percent
in March 1974 for the lower paid workers. Inevitably this has
givenrise to new inflationary pressures throughout the economy, but
in many instancesprice controls have at least delayed the passing
on of increased wage coststo consumers. 2/
22. The success of the price control measures in protecting the
liv-ing standards of the low income families may be seen in the
movement in theofficial price indices, which relate to the cost of
living of low and highincome households in Tananarive. After
jumping 22 percent between 1973 and1974, mainly as a result of the
increase in the retail price of rice, the lowincome index rose only
8 percent in the twelve month period after June 1974.The high
income index, in contrast, rose only 11 percent between 1973
and1974, but the rising cost of imported consumer goods caused a 14
percentincrease between mid-1974 and mid-1975. In the period June
1975 to June 1976,the low income index rose by 5 percent and the
high income index by 10 percent,indicating that the rate of
inflation had moderated. Nonetheless there is oneconsequence of
price controls which is not reflected in the official
cost-of-living indices. Scarcities of certain key commodities have
risen from time totime and have resulted in the development of a
black market with pricesconsiderably above the official prices.
1/ For a fuller discussion of agricultural prices see Annex I,
Section E.
2/ For a fuller discussion of price controls affecting industry
see AnnexII.
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- 10 -
Table 4: COST OF LIVING INDICES IN TANANARIVE1974-76
(1970 = 100)
Low Income Households High Income Households
Year/Month General Food General Food
1974 January 129 139 120 128April 144 161 126 135
July 145 162 127 137October 150 163 131 144
1975 January 155 172 138 153April 154 169 141 157
July 156 169 146 158October 157 169 151 160
1976 January 159 172 154 164April 162 175 158 171July 165 177
160 172
Source: INSRE (see Annex V, Table 6.2).
23. The Mission calculated a variety of indices while estimating
thenational accounts aggregates in constant prices. The overall
deflator forGDP in market prices was estimated at 147 for 1974,
taking 1970 as the baseyear, more than half of the increase being
recorded in the last year. Theprice index for private consumption
was estimated as having risen 64 pointsover the same period, while
that for fixed investment increased by only 34points.
Table 5: SELECTED PRICE INDICES
(annual averages; 1970 = 100)p
1971 1972 1973 1974 1975
GDP deflator 103 106 119 147 155Private consumption 104 108 125
164 181Fixed investment 103 107 115 134 139Merchandise imports 103
106 118 193 193
CoL. High income urbanfamilies /a 106 113 115 L28 145
CoL. Low income urbanfamilies /a 105 111 118 144 156
CoL. Food (low income urbanfamilies) /a 105 112 122 159 170
p = provisional./a = Index covers Tananarive only.Source:
Mission estimates.
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III. PUBLIC FINANCE
Overview
24. Between 1970 and 1972, public expenditure, both current and
capital,increased in real terms and then declined in the following
years. However,availability of finance does not appear to have been
the most critical factorin explaining the low level of investment
in the public sector in 1973 and1974. Each year there was
substantial under-expenditure on the capital budgetindicating the
existence of non-budgetary constraints to the implementationof
development projects. Given the political uncertainties which
existed, itis not surprising that public sector investment has
slowed down. Furthermore,the rapid change in personnel inevitably
has had a significant impact onproject implementation.
25. Between 1970 and 1971, Central Government revenues grew by
14 per-cent, only to drop by 5 percent in the following year. In
contrast, currentexpenditure continued to rise steeply (by 11
percent) and in consequence theCentral Government current surplus
available for investment was reduced bymore than 55 percent to only
FMG 4.6 billion. Since then there has been agradual recovery; by
1974 the current budgetary surplus had grown toFMG 6.4 billion,
still well below the level achieved in 1970. Since the levelof
foreign aid remained essentially unchanged, the Government resorted
toincreased internal short and medium term borrowing to finance its
investmentprogram, particularly in 1972 and 1973.
TABLE 6: SUMMARY OF CENTRAL GOVERNMENT REVENUE AND
EXPENDITURE
(in billions of FMG)/b
1970 1971 1972 1973 1974 1975
Current revenue 38.8 44.3 42.1 45.6 49.4 52.9Current expenditure
30.8 33.8 37.5 40.5 43.0 47.5Surplus 7.9 10.4 4.6 5.1 6.4
5.5Capital expenditure 11.0 12.8 16.0 14.5 13.3 13.1Overall deficit
3.1 1.4 11.4 9.4 6.9 7.6
Financing
Foreign borrowing 3.8 2.8 2.4 5.1 3.3 n.a.Domestic borrowing 0.7
-1.6 6.1 5.8 2.9 n.a.Others /a -1.5 0.2 2.9 -1.5 0.7 n.a.
/a Includes contributions from stabilization funds, deposits
with theTreasury and changes in liquid assets.
lb Provisional.
Source: Ministry of Finance and Planning (see also Annex V,
Tables 5.1and 5.2).
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- 12 -
26. It was not possible for the mission to obtain a
comprehensive viewof the overall public finance situation, as
detailed accounts of the var-ious governmental and parastatal
entities were not available. Changes in thegovernment structure
have complicated the picture. The provincial budgetswere merged
with that of the Central Government at the beginning of 1973.
Thebudgets of the Ports 1/, Posts and Telecommunications, the Radio
and Tele-vision Network and the National Printing Office continue
to be annexed to thecentral government budget, but the railways
organization was separated in 1975and is now treated as a
semi-autonomous public enterprise. A number ofparastatal bodies -
the most important being the crop stabilization andpension funds -
maintain accounts with the Treasury, but are in other
respectsautonomous. A further complication is that the government
budget records onlythose investments financed by domestic funds or
loans, but not those paid forout of foreign grants. The latter were
reported by the OECD's DevelopmentAssistance Committee as amounting
to US$17 million (FMG 3.8 billion) in 1973and US$20 million (FMG
4.8 billion) in 1974. 2/ Lastly, the large ricesubsidy, which was
provided in 1974, was financed by a Central Bank loan tothe
Treasury. By the end of 1974 the debt outstanding arising from
ricepurchasing operations, for which the Treasury must ultimately
bear re-sponsibility, amounted to over FMG 9 billion (US$37
million), equivalent toapproximately one fifth of total tax revenue
in that year.
Current Expenditure
27. In nominal terms current expenditures of the Central
Governmenthave recently shown sustained growth, increasing on
average at 9 percentper annum between 1970 and 1975, a rate
comparable to the nominal growth inGDP (i.e. 10 percent p.a.).
Partly as result of taking over the budgets ofthe provincial
administrations and partly owing to salary increases, a
growingproportion of the central government budget has been spent
on wages andsalaries at the expense of expenditures on goods and
services. Sinceexpenditure in real terms has hardly increased,
there has been a decline inexpenditure on goods and services in
real terms; this has had some adverseconsequences for
development.
1/ The port of Tamatave was separated in mid-1972.
2/ It is possible that these figures contain some funds used for
currentexpenditure.
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Table 7: LEVEL AND COMPOSITION OF CENTRAL GOVERNMENTCURRENT
EXPENDITURE
/a1970 1975
Billions Billionsof FMG Percentage of FMG Percentage
Wages and salaries 15.4 50 29.2 61Goods and services 10.9 35
10.9 23Transfers and subsidies 3.2 10 6.1 13Public debt interest
1.3 /b 4 1.2 3
Total 30.8 100 47.4 100
/a Provisional figures.
/b Including some amortisation payments.
Source: Mission estimates (see Annex V, Table 9.1).
28. One serious aspect of the decline in real expenditure on
goodsand services has been a reduced amount of road maintenance.
Notwithstand-ing large investments made in expanding the road
network, expenditure onroad maintenance fell by 25 percent in
nominal terms between 1972 and 1975;in real terms the decline has
been much greater. The funds made availablehave been insufficient
to prevent the roads from deteriorating; eventually,the cost of
rehabilitating them will probably be higher than the cumulativecost
of carrying out normal maintenance.
29. The mission was unable to obtain information on actual
governmentexpenditure by economic function for recent years. If
data for 1973 arecompared to the budget estimates for 1975, it
appears that a declining pro-portion of the budget is being
allocated for economic services, and thatcurrent expenditure has
shifted slowly in favor of social services. Thefall in the share of
agriculture, public works and transport has been moremarked than in
the case of other economic services. On the other hand,
theproportion of expenditure devoted to general administration,
defense andsecurity has increased in the past two years, in
contrast to the sharp declineregistered between 1968 and 1973.
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/aTable 8: CENTRAL GOVERNMENT CURRENT EXPENDITURE:
COMPOSITION BY MAIN FUNCTIONS(in percent)
/b1968 1973 1975
Administration 34 24 26Economic services 24 26 23Social services
32 33 34Others 10 17 17
100 100 100
/a Includes provincial budgets.
/b Budget estimates.
Source: Ministry of Finance and Planning.
Current Revenue
30. During the period 1970-74, Central Government revenue grew
moreslowly than GDP, the ratio of revenue to GDP falling from 16 to
13 per-cent. 1/ A major reason for this was the heavy reliance
placed on customsduties, which in 1970 contributed 34 percent of
total domestic revenue;the volume of imports declined markedly
between 1970 and 1974, and particu-larly sever2 restrictions were
placed on the more highly taxed luxury imports.Direct taxes grew
more slowly than GDP - 25 percent (in nominal terms) ascompared to
51 percent - which may be partly explained by the decline incompany
profits. The poor yield from these sources was to a great
extentcompensated for by the revenue derived from consumption and
value addedtaxes.
31. A major change in the fiscal structure in the period
underreview was the abolition of the poll and cattle taxes which
used to accrueto the provincial administrations. The principal
reason for eliminatingthese taxes, which by reputation were closely
associated with the colonialregime, was that their administration
had given rise to abuses and injus-tice and that the taxes had
become increasingly unpopular. In 1972, thefinal year the taxes
were levied, their total yield amounted to FMG 5.7billion, equal to
approximately 12 percent of tax revenues from allsources. Other
modifications of the fiscal system have included: (i) ex-tending
the pay-as-you-earn collection system to cover the entire countryin
1973, (ii) the introduction in 1974 of a uniform 10 percent value
added
1/ If the cattle and poll taxes, which were collected by the
ProvincialAdministrations, are added to central government
revenuein 1970, the ratio of revenue to GDP is 18 percent.
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tax in place of a two-tier system under which luxury goods were
taxed at12 percent and other goods at 5 percent, (iii) the
steepening of the gen-eral income tax schedule with a maximum rate
of 60 percent on incomes aboveFMG 5 million per annum, and (iv) the
raising of consumption taxes on cer-tain goods (e.g., milk, sugar,
wine). Efforts, too, are being made toreduce tax evasion, mainly by
the creation of special tax brigades to makein-depth examinations
of the affairs of selected tax-payers. The formationof tax brigades
was one of the measures proposed in the National DevelopmentPlan
1974-77; other measures, yet to be implemented, included the
restruc-turing of indirect taxes, the use of wealth indicators to
assess high incomeearners, merging of the personal and profit tax
for individual entrepreneursand the extension of fiscal monopolies
to products other than tobacco.
Table 9: CENTRAL GOVERNMENT CURRENT REVENUE 1970-75(in billions
of FMG)
/a1970 1971 1972 1973 1974 1975
Direct taxes 6.6 6.9 6.5 9.3 8.2 9.3Consumption taxes 4.9 5.8
5.6 6.1 6.4 6.6Value added taxes 6.8 7.7 7.2 7.4 8.9 10.2Import
taxes and duties 11.2 13.7 12.3 11.1 12.1 14.4Export taxes and
duties 2.1 2.4 2.4 2.9 3.1 5.5Other indirect taxes 4.1 5.0 4.5 4.0
5.7 2.9Non-tax revenue 3.3 2.8 3.7 4.9 4.9 4.1
Total 38.8 44.3 42.1 45.6 49.4 52.9
/a Provisional.
Source: Ministry of Finance and Planning.
32. The ratio of tax revenue to GDP, a measure of the tax effort
of acountry, was 12 percent in 1974. This is comparable to other
developingcountries, taking into account per capita income and the
structure of theeconomy, although it is a little below the average
for African countries.To achieve a higher tax effort careful tax
planning would be required, basedon a thorough evaluation of the
impact of various tax increases. For indirecttaxes, a study of
price and income elasticities of particular goods is required.In
particular, there would appear to be scope for increasing duties on
luxuryimports; there are advantages, too, in relying on high duties
rather thanon quantitative import controls to protect import
substitution industries andto limit imports as a means of
preserving foreign exchange.
33. With the abolition of the poll and cattle taxes, the tax
burdenon the rural population has been much reduced. The imposition
of producelevies by the fokonolona as a source of revenue for local
developmentmay be regarded as a substitute, but the yield has been
generally much
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lower. If the fokonolona are to make a significant contribution
to thefinancing of local development, the levies will have to be
increased. Thecontrol and management of these local funds presents
a considerable admin-istrative problem.
Central Government Investment and its Financing
34. The level of central government capital investment reached a
peak ofFMG 16 billion in 1972. Preliminary estimates for 1975
indicate that centralgovernment investment in that year was lower
than in any of the previousthree years. The detailed breakdown by
sector, data for which is availableonly for 1973 and 1974,
indicates that transport receives the major share.Investment in
education amounted to an exceptional FMG 900 million in 1974.
/aTable 10: CENTRAL GOVERNMENT INVESTMENT
1973-741973 1974 Percentage
(in billions of FMG)
Agriculture 4.8 4.8 34Transport 6.7 5.5 44Other 3.0 3.0 22
14.5 13.3 100
Total authorized expenditure: 17.7 21.0
/a Excludes investment financed by external grants.
Source: Ministry of Finance and Planning.
35. The annual investment budget has been underspent over the
past threeyears. In 1973, 82 percent of authorized expenditure was
spent; in 1974 thefigure was 63 percent. The size of the budget was
reduced by 25 percent in1975, but substantial underexpenditure is
nevertheless expected. One of thecauses has been delays in making
funds available at the beginning of the year,complicated in 1973 by
the introduction of a system of zero budgeting. 1/ Amore serious
problem has been the slow pace of project preparation
andimplementation. Rapid inflation has created special difficulties
with con-tracts, when the bids received were much higher than
foreseen.
1/ This system requires executive ministries to seek renewed
authoriza-tions for all budget allocations relating to ongoing
projects; theobjective is to deter departments from earmarking
funds which theycannot in fact spend in the current year.
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36. Recently about half of all central government investment has
beenfinanced by budgetary savings. This has only been possible
because invest-ment has declined. As a percentage of GDP, central
government investmenthas fallen from 4.5 percent in 1970 to 3.5
percent in 1974. Foreign bor-rowing has averaged about FMG 3.5
billion over the past five years, butwithout any clear upward
trend. There was little recourse to domestic bor-rowing until 1972
when the fall in revenue led to a threefold increase inthe overall
budget deficit. In that year the Government raised FMG 6 bil-lion
by issuing government bonds, mainly short and medium term. Since
1972,there has been a decline in domestic borrowing. Other sources
of financehave included surpluses derived from the annexed budgets
and transfer fromthe crop stabilization funds.
The 1976 Budget
37. The 1976 Central Government budget provides for a 22
percentincrease in current expenditure and for an investment budget
amounting toFMG 24.7 billion, or nearly double the actual
expenditure in the precedingyear. Current budget receipts are
projected at FMG 63 billion, approximatelybalancing recurrent
expenditures. The investment budget is to be financed by(i) income
from investments (FMG 4.0 billion), (ii) foreign and
domesticborrowing (FMG 11.6 billion), (iii) contributions from the
stabilization funds(FMG 3.2 billion) and (iv) use of Treasury
assets to meet the balance. Theannexed budgets are balanced at FMG
9 billion, including provision of FMG 2billion for capital
expenditure.
Table 11: GOVERNMENT BUDGET ESTIMATES, 1975 and 1976(in billions
of FMG)
1975 1976
Central government current expenditure 51.2 62.6Central
government current revenue 56.0 63.0Annexed budgets current
expenditure 5.2 7.1Annexed budgets current revenue 9.1 9.2
Central government capital expenditure 15.6 24.7Annexed budgets
capital expenditure 3.9 2.1
Total capital expenditure 19.5 26.8
To be financed by:
(i) Central government currentbudget surplus 4.8 0.4
(ii) Annexed budget current surplus 3.9 2.1(iii) Investment
income and stabilization
funds - 7.2(iv) Net borrowing 9.6 9.6(v) Use of treasury assets,
and
other treasury operations -0.6 7.5(vi) Central Bank advances 2.0
-
Total 19.5 26.8
Source: Ministry of Finance and Planning.
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38. Part of the increase in current expenditure is explained by
asubstantial rise in the minimum wages of the lowest paid
government em-ployees announced in January 1976. The cost of this
wage rise is esti-mated at FMG 3 billion, equivalent to 5 percent
of current revenue. Ofnote, too, is the increase in the budgeted
expenditure for education whichhas been raised 41 percent to FMG
15.5 billion, and now amounts to 25 per-cent of the total current
budget expenditure.
39. The projected increase in current revenue amounts to 17
percentover the provisional estimate for 1975. To assist in
reaching this target,customs duties have been raised on a range of
goods, the most notable beingimports from the EEC. A considerable
increase in customs duty revenueis foreseen as a result of a higher
volume of imports. A special effortis envisaged to collect tax
arrears. The achievement of the revenue targetwill greatly depend
on the actual growth of dutiable imports; yet, at thesame time, the
development of the economy would suggest that this categoryof
imports should continue to be limited so that foreign exchange
might bereserved to finance investment and intermediate goods. The
large estimatefor investment income from state enterprises is a new
item.
IV. MONEY, CREDIT AND THE BALANCE OF PAYMENTS
Money and Credit
40. The banking system has undergone substantial changes over
thepast three years. In July, 1973 Madagascar left the Franc zone,
replacingthe Currency Board by an independent Central Bank. This
has given the Gov-ernment the opportunity to exercise greater
flexibility in the management ofmonetary matters. In particular,
steps have been taken to direct credit topriority sectors and for
preference to be given to Malagasy nationals. Thiswas achieved by
instituting a system of prior authorization by the CentralBank for
all loans and advances to firms having total outstanding credit
inexcess of FMG 100 million. To encourage the commercial banks to
lend toMalagasy nationals, the Central Bank discounts without prior
approval, follow-ing a simplified procedure, short and medium term
credit of less than FMG 5million extended to citizens for
production and professional purposes.
41. Following the establishment of the Central Bank, the
Governmentacquired a majority share in the equity of two of the
four commercial banks.In June 1975, all commercial banks were
nationalized and considerationis being given to reorganizing the
banking sector to create a more rationaland efficient system.
1/
1/ See Annex III, Section IIB.
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42. After growing 11 percent in 1971, credit advanced to the
privateand parastatal sectors stagnated in the two following years,
only to jump by21 percent in 1974 and to fall off again in 1975.
Deflated by the GDP priceindex, the level of private credit at the
end of 1974 stood 9 percent belowthe level attained at the end of
1970. The expansion of credit in 1974 wasnecessary in order to
finance both the increased cost of imports in generaland of
imported rice in particular, in addition to the expansion in
theproduction of cash crops which took place D-. that year.
Table 12: ASSETS AND LIABILITIES OF THE BANKING SYSTEM(in
billi;,rs o- FMG; end of year)
1970 1971 1972 1973 1974 1975
Assets
Credit to the private sector 53 60 59 60 70 72Net credit to
Government -8 -9 -3 -4 5 /a 13Net foreign assets 17 16 19 22 19
12
Total 61 67 76 77 94 97
Liabilities
Money 46 47 53 57 67 68Quasi-money 9 12 12 11 14 14Other
liabilities 6 8 11 10 13 15
/a This does not include credit for the importation of rice.
Source: Central Bank and IMF (see also Annex V, Table 6.1).
43. The massive rice imports of 1973/74 resulted indirectly in a
sub-stantial increase in Central Bank advances to the Central
Government; creditto SONACO and SINPA, guaranteed by the Central
Government, amounted to as muchas FMG 9 billion at the end of 1974.
1/ As a consequence, during 1975 theGovernment's borrowing from the
Central Bank remained at the statutory ceiling,which is fixed at 20
percent of domestic revenue. Thus, between 1970 and 1975the
Government shifted from being a substantial net creditor to the
bankingsystem to being a substantial net debtor. This change in
position was notsimply the result of mobilizing domestic resources
for development; rather itwas largely a consequence of the large
rice consumer subsidy, aimed primarilyat protecting over a limited
period low income families from the impact of theexceptionally high
price of imported rice.
1/ The advance made by the Central Bank to cover the rice
subsidy wasconverted into a 25 year loan in 1976.
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44. Credit to the agriculture sector grew markedly in 1974,
reflect-ing the good harvest. Although the commercial banks provide
some credit forthe marketing of agricultural products, the National
Development Bank (BNM) isthe principal source of agricultural
credit. In 1974 no less than 98 percentof BNM's lending in the
agricultural sector was in the form of marketingcredit provided to
the parastatals and to private companies. Very littleagricultural
credit reached the small farmers, since the BNM to date
hasrestricted its credit to organized farmers. In view of the
emphasis now beinggiven to rural development, the question of
smallholder credit is receivingmuch greater attention. BNM makes
available approximately 50,000 loansannually to small farmers and
is currently operating accounts with 2,000fokonolona. For the
future it is envisaged that BNM will provide group creditto the
fokonolona, which will be responsible for making individual loans
tofarmers and will act as guarantors.
Table 13: DISTRIBUTION OF CREDIT BY SECTOR(in billions of
FMG)
1970 1971 1972 1973 1974 1975
Agriculture 9.0 9.7 10.2 10.4 15.4 13.3Commerce 14.7 15.0 13.9
15.0 18.0 15.6Mining & manufacturing 19.5 23.9 24.5 21.7 24.1
26.5Other 3.3 3.1 4.2 4.2 4.7 3.8
Source: Central Bank (see Annex V, Table 6.2).
45. Medium and long term credit to the private sector has
declinedover the past three years, reflecting the lack of growth in
investment.Agriculture has received an increasing proportion of
this type of credit,whereas the share of manufacturing has fallen
from 54 percent in 1970 to 48percent in 1975, with an estimated
drop of 40 percent in real terms. Thiscorresponds to the sharp fall
in private sector investment in manufacturing.
Table 14: DISTRIBUTION OF CREDIT BY TYPE(in billions of FMG)
1970 1971 1972 1973 1974 1975
Short term 36.3 39.4 39.0 38.6 50.1 48.7Medium and long term
10.2 12.3 13.8 12.7 12.0 10.4
of which:agriculture 1.4 1.3 1.8 2.0 1.9 1.7manufacturing 5.5
7.7 8.1 6.7 6.0 5.1
Total 46.5 51.6 52.8 51.3 62.1 59.1
Source: Central Bank (see Annex V, Table 6.2).
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46. The banking system is mainly concerned at present to satisfy
shortterm requirements of the economy. The question for the future
is whether ahigher rate of investment will find adequate support
from the banking sys-tem. This may require the commercial banks to
allocate a greater proportionof their credit as long term loans.
Furthermore, a favorable agriculturalseason accompanied by a larger
investment effort will automatically call fora substantial
expansion of credit, and at this point public and private sec-tors
may come into competition, giving rise to a need for careful
planningof credit creation to ensure that adequate credit is
channeled into highpriority sectors.
47. The nationalization of the commercial banks raises the
specificissue of the desirable relationship between the state-owned
banking systemand state corporations. In similar circumstances in
some other countries,where both the banks and the state
corporations are public enterprises, thebanks on occasion have been
led to finance various potentially unviableoperations of state
corporations, thereby allowing the enterprises to build uplarge
debts. The Central Bank may be expected to make efforts to hold
thecommercial banks to the principles of sound lending policy, but
decisionsconcerning state corporations which encounter financial
difficulties are oftentaken elsewhere within the Government for
obvious reasons of overall nationalpolicy. A nationalized banking
system, under these circumstances, couldbecome a means of
channeling additional subsidies in a disguised form.Provided the
banks continue to be required to operate as commercial
entities,autonomous in their day-to-day operations, they would be
more likely to resistpressure for lending to state corporations for
loss-making ventures, thusprecipitating remedial measures when
serious financial problems confront astate corporation. A related
issue is the possible role of the commercialbanks in financing
investment requirements of state enterprises through shortterm
credit. Such practices may provide a state enterprise with the
financialresources to make investment decisions which are not
necessarily in accordancewith government priorities.
Balance of Payments
48. At the end of 1975 Madagascar was faced with a serious
foreign ex-change constraint, principally owing to the sharp
deterioration in the termsof trade. The volume of exports has grown
in recent years in step with GDPand, in current value terms,
somewhat slower. The volume of imports on theother hand fell 39
percent between 1971 and 1974; however, import pricesincreased by
93 percent during the same period. The current account of
thebalance of payments showed a small deficit in 1970. In the
following yearexpenditure on merchandise imports (f.o.b.) rose 24
percent which was notmatched by an increase in export earnings;
consequently the current accountdeficit more than tripled to FMG 15
million (US$56 million). Tight importcontrols practically
eliminated the trade deficit in 1972 and led to aFMG 6 billion
(US$28 million) trade surplus in the next year.
Despiteexceptionally large rice imports amounting to FMG 9 billion
(US$38 million) in1974, Madagascar nevertheless managed to balance
its trade (f.o.b.). However,net non-factor service imports have
grown considerably, especially as a
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result of the decline in the exports of "other government
services." 1/
The current account deficit reached FMG 12.5 billion (US$52
million) in 1974,
and is estimated to have grown further in 1975. By December
1975, inter-
national reserves stood at only US$36 million, equivalent to
some five weeks
of merchandise imports. Owing partly to much improved coffee
prices, inter-national reserves rose sharply in the first half of
1976, reaching US$61million in August.
Table 15: BALANCE OF PAYMENTS SUMMARY(in billions FMG)
1970 1971 1972 1973 1974
Exports f.o.b. 40.1 40.7 41.8 44.5 58.0Imports f.o.b. -39.5
-49.1 -42.4 -38.3 -58.2Trade balance 0.6 -8.3 -0.6 6.3 - 0.2Net
non-factor services -3.4 -5.6 -7.6 -13.9 -14.5Net factor services
-10.3 -10.8 -10.1 -6.5 -7.2Net current transfers 8.8 9.3 9.2 7.4
9.4
Current account balance -4.3 -15.5 -9.1 -6.8 -12.5
Net private capital inflows 4.6 7.1 5.3 3.1 1.8Net public
capital inflows 7.1 8.3 8.1 7.5 8.0Errors and omissions -1.7 -1.3
-1.8 -0.3 -Monetary movements -1.7 2.1 -1.8 -1.2 -5.9Allocation of
SDRs 0.9 0.8 0.8 - -
Changes in internationalreserves /a +4.9 +1.5 +1.6 +2.4 -8.7
/a Negative sign indicates decrease.
Source: Mission estimates (see Annex V, Tables 3.2, 3.3 and
3.4.
49. Madagascar has a great variety of exports, mostly
agriculturalproducts, the principal items being coffee, vanilla and
cloves. In 1974,these contributed over 41 percent of total export
earnings. In volume terms,
coffee exports have grown impressively, reaching 65,381 tons in
1974, 26percent higher than in 1970. A part of the exports in 1973
and 1974 repre-sented the disposal of stocks after the expiry of
the International Coffee
Agreement. 1974 was an unusually good year for vanilla, with
exports at
a record level. In contrast, exports of sugar were unusually low
at a time of
high world prices, partly because Madagascar withdrew from the
OCAM SugarAgreement, and thus ceased to export to the Ivory Coast
which had previously
been a major outlet, and partly because sales were delayed in
anticipationof even higher prices. In fact, prices fell in 1975 and
stocks were soldbelow peak prices. Over the period 1970 to 1974,
sugar exports declined
1/ This relates mainly to the removal of French bases, which
resulted in
a sharp decline in the export of government services.
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as internal consumption has grown and production stagnated.
Exports oflivestock products have also shown a downward trend after
1972 for similarreasons. The most important new export item is
seafood, mainly crustaceans,which increased almost six-fold in
tonnage shipped between 1970 and 1974, andnow contributes over 6
percent by value of total merchandise exports. Other
than processed agricultural products, Madagascar exports as yet
virtually nomanufactured goods.
Table 16: TRENDS IN PRINCIPAL EXPORT COMMODITIES(in billions of
FMG)
Total Percentage ofpercentage total exportgrowth earnings in
1970 1974 in constant prices 1974
Total exports f.o.b. 40.2 58.5 + 6 100of which:
Coffee 10.9 15.6 +26 27Vanilla 3.6 4.5 +11 8Cloves 4.7 4.0 -4
7Meat and meat products 2.5 4.3 +10 7Sisal 0.7 2.5 - 1 4Sugar 1.5
1.7 -73 3Rice 3.1 1.1 -83 2Seafood 0.8 3.5 +224 6Minerals 1.9 2.9
+24 5
Source: INSRE and Mission estimates (see Annex V, Tables 3.9,
3.10 and 3.11).
50. The decline of imports in real terms in the period 1970 to
1974was particularly marked in the case of capital goods which fell
by 40 percent.Imports of transport equipment, for example, fell 50
percent. The FMG importprice index for crude petroleum leapt 320
points between 1970 and 1974. Themost significant addition to
imports in this period was rice; while in thepast (except in 1965)
Madagascar had been a net exporter of rice, the situationwas
reversed after 1970 with net imports rising to a peak of 92,864
tons in1974. During this period the FMG price of rice increased no
less than 228percent. In 1973/74 the net foreign exchange cost of
rice imports, allowingfor the profitable export of de luxe rice,
amounted to FMG 10.5 billion (US$44million), which was more than
Madagascar's total international reserves at theend of 1975.
51. To correct the trade imbalance, Madagascar has severely
curtailedimports. Despite the rise in international prices, the
total value of Mada-gascar's imports of non-food consumer goods in
1974 was nearly 20 percentlower than in 1971. The decline has been
primarily in tobacco products, soapand cosmetics, and in textile
goods, with local production largely replacingimports. Imports of
beverages, dairy products and processed foods have alsobeen greatly
curtailed, partly as a result of increased domestic production,
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- 24 -
and partly because demand has also fallen as a result of the
departure of alarge section of the expatriate community.
Table 17: TRENDS IN SELECTED IMPORTS(in billions of FMG)
PercentageTotal of total
percentage merchandisegrowth in imports in
1970 1974 real terms 1974
Total imports c.i.f. 47.3 67.3 -26 100Food and beverages 4.9
12.6 -2 19(of which: rice) (0.7) (9.3) +422 (14)Other consumer
goods 8.8 9.4 n.a. 14Crude petroleum 2.4 10.8 +6 16Capital goods
12.9 11.5 -40 17
Source: INSRE and Mission estimates.
52. The overall result of the price trends mentioned above has
beena sharp deterioration in Madagascar's terms of trade, which has
greatlyreduced the country's capacity to import. Indications are
that this ad-verse trend continued into 1975. However, improving
coffee prices towardsthe end of 1975 have started to reverse the
downward trend; a substan-tial improvement in the terms of trade is
expected in 1976 and 1977.
Table 18: FOREIGN TRADE INDICES(1970 = 100)
/a1971 1972 1973 1974 1975
Export volume 102 102 105 106 138Export prices (FMG) 99 102 106
137 128Import prices (FMG) 103 106 118 193 193Exports as "capacity
to import"
(volume) 98 98 94 75 91Terms of trade 96 96 90 71 66Import
prices (US$) 104 117 148 223 250Import prices for all LDCs (US$)/b
103 111 138 201 215
/a Provisional estimates.
/b Excluding oil exporters.
Source: IMF and Mission estimates.
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53. To date France has been by far the most significant trading
part-ner, buying over one third of Madagascar's exports and
providing approxi-mately one third of merchandise imports in 1974;
in 1965, these percentageswere 45 and 63, respectively. The USA has
become increasingly important,especially as a market for vanilla.
Following the recent changes in foreignpolicy, great efforts have
been made to diversify export markets and sourcesof supply, and it
may be expected that France's dominance in trade willfurther
diminish in the future. If this occurs, the Government will need
toreview the present policy of linking the exchange rate to the
French franc.As it is, the revaluation of the franc in relation to
the dollar, whichoccured in 1975, had an adverse impact, tilting
internal prices in favor ofthe consumer of imported goods to the
disadvantage of the producers of exports,whose real earnings have
already suffered as a result of the unfavorablemovement in the
terms of trade. The weakening of the French franc during1976,
however, has more than offset the exchange rate movements that
tookplace in 1975.
54. Despite the departure of many French technical assistance
per-sonnel after 1972, technical assistance grants increased
between 1970 and1974. However, there was a decline in workers'
remittances after 1972 andin the import of luxury goods typically
consumed by expatriates. France'scancellation of debts amounting to
FMG 6.8 billion in 1972 appears in thebalance of payments accounts
as a large increase in capital grants in thatyear and there is an
offsetting item under loan repayments. There was adecline in the
net inflow of capital in 1972, 1973 and 1974; the fall indirect
private investment has not yet been compensated by an increase
inpublic capital receipts.
55. Despite the overall deterioration in the balance of
paymentssituation in 1974 and 1975, Madagascar has not had recourse
to the con-siderable credit available through the various
facilities of the IMF.Thus, although Madagascar's payments position
became critical towards theend of 1975, it had by no means
exhausted its actual and potential for-eign exchange resources. As
short term prospects on balance are favor-able, it would appear
that foreign exchange will be much less of a con-straint to
development than in the recent past. Nonetheless, since im-ports
have been heavily curtailed over the past two years, it must be
ex-pected that the volume of certain categories of imports will now
be rapidlyexpanded. This is particularly true for spare parts for
machinery whichhave been in very scarce supply.
V. MAIN ISSUES
56. The Government has taken determined steps to reform the
institu-tional structure of the economy. The foremost consideration
motivatingGovernment actions has been rapid malagasization. Special
attention hasalso been given to measures which reduce social and
regional inequalities.Progress towards these objectives has been
impressive. Now the stage hasbeen set for a concentrated effort to
boost production so that the popula-tion may enjoy a steadily
improving standard