This edition of the Madagascar Economic Update is part of a series of short economic updates produced by the World Bank on a biannual basis. The first part of this brief has the World Bank’s assessment of recent economic developments and the outlook over the short to medium term. The second part of this update focuses on Agriculture and Rural Development.

Part One: Recent Economic Developments

International and Regional Developments

The global economy is evolving in a context of low commodity prices, weak global trade and reduced capital flows. The 2016 global growth forecast has been revised downward to 2.4 percent against an initial forecast of 2.9 percent at the beginning of the year. This revised outlook is driven by weaker demand in the more advanced economies, where sluggish growth in China in particular has impacted global trade and the demand for commodities.

These global conditions, combined with political uncertainty and drought in certain parts of the region are affecting economic activity in sub-Saharan Africa. Overall, the growth forecast for the continent has been reduced to 1.6 percent, the lowest level in 20 years. The growth trajectory diverges significantly between countries. Major exporters of natural resource commodities such as Nigeria, Angola and Chad have been most affected, while economic activity in importing countries such as Mauritius, Rwanda and Kenya has remained strong.

The Malagasy economy may be subject to changing demand from trading partners and commodity price volatility. Madagascar’s largest trading partner is France, although trade levels have been declining. Other important trading partners include the United States, China and European Union countries such as the Netherlands and Germany. Lower commodity prices have presented mixed fortunes for Madagascar. On the one hand, as a net fuel importer lower oil prices have benefitted the economy. On the other hand, lower nickel prices have affected production and export values. These trends highlight the importance of Madagascar continuing with reforms and policies to promote competitiveness, while also improving sources of internal growth through enhancing productivity in key sectors such as agriculture.

External Sector

In 2016 the current account balance continued to improve. Foreign direct investment (FDI) flows have contributed to an improvement in the current account balance. Foreign currency reserves have increased the months of import cover from 2.9 months in 2015 to an estimated 3.3 months in 2016. Following the completion of investments for the two major mining operations in 2011, FDI flows related to the extractive industries have declined. The most recent data available suggests that FDI is increasingly oriented toward financial sectors, telecommunications and manufacturing activities.

Broader changes in the economy have improved the current account balance. The completion of the investment phase of mining operations in 2011 moderated capital intensive imports. The effects of lower commodity prices for imports such as petroleum products and rice, and the intensification of exports from the mining sector since 2013 has further strengthened the current account balance.

Non-mining exports performed well in 2016. Exports recorded between January and October 2016 are estimated at US $ 1,687 million, a 17 percent increase compared with the same period last year. However, the fall in nickel prices since 2015 and declining production volumes has adversely affected exports. In the first ten months of 2016 Madagascar exported US$ 410 million worth of mining products, a decline of 10 percent compared to the same period the year before. The value of non-mining exports increased by 22.3 percent in 2016, largely driven by higher revenues from vanilla and cloves. Exports from free zone companies also increased from US$ 434 million in 2015 to US$ 546 million in 2016, mainly resulting from textiles and shrimps exports to the Euro zone area. Under the Africa Growth and Opportunities Act the value of Madagascar’s exports is estimated to have tripled in 2016.

The cost of imports has been moderated as global petroleum prices remain favorable. Imports in 2016 are estimated at US$ 2,337.7 million. The main components of these imports are raw materials with a large proportion destined for free zone enterprises, petroleum products and foodstuffs, where the latter cost more in 2016. However, crude oil prices are forecasted to rise in 2017 from US$ 53 per barrel to US$ 55 per barrel, which will affect the cost of imports and subsidy provision to JIRAMA.

Economic Outlook

The medium-term economic growth outlook is positive. Based on current projections, economic growth is expected to surpass the performance of recent years. The intensification of public works activities is a key growth driver, which may also spur activity in related sectors, provided investments are carefully selected on the basis of their expected economic and social returns. Madagascar’s participation in the African Growth and Opportunities Act should also invigorate growth as production accelerates. Provided climatic conditions remain favorable the agriculture sector should continue to contribute to growth. If much anticipated reforms to Air Madagascar are implemented the tourism sector can expect to grow. And finally, over the medium term, there may be opportunities to expand mining activity, particularly if commodity prices for nickel and other raw materials rise. Such prospects may be further boosted by the revision of the Mining Code, which could enhance investor confidence.

However, this positive growth trajectory is dependent on maintaining political and macroeconomic stability, and implementing key reforms. The positive growth period presents opportunities to benefit broad sections of the society. Madagascar’s history has shown that in the past positive growth periods have been followed by political crises. Avoiding this outcome requires commitment from all stakeholders to respect democratic processes and commit to stability. Ensuring that the benefits of growth are felt more inclusively will be critical in this endeavor. Concretely, this requires scaling up pro-poor expenditures including in those areas which are the least well-served, improving the productivity of sectors such as agriculture which engage a large proportion of the poor, and generating jobs through private sector led growth. To achieve this, it is critical to maintain the momentum for implementing key reforms, particularly increasing fiscal space to spend in line with policy priorities, and improving the performance of JIRAMA to enhance access to affordable electricity supply.

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Part Two: Special Focus Section on Agriculture and Rural Development

Introduction

Improving the productivity of the agriculture sector is critical for promoting rural development and livelihoods. Rural households are far more likely to live in poverty. The great majority of poor households are engaged in the agriculture sector, which provides the main source of income, primarily for subsistence purposes. And while agricultural production has increased, the pace has not kept up with population growth. Realizing the untapped potential in the agriculture sector would increase food security, promote growth, and improve the well-being of those who are least served. This special focus section provides a background to agriculture and rural development, discusses key constraints facing the sector, and opportunities for overcoming these.

Agriculture is Closely Linked with Rural Economic Development

Poverty and food insecurity are predominantly a rural phenomenon. Madagascar has a very high poverty rate, with 70 percent of the population living in absolute poverty in 2012. There remains a sharp contrast in urban and rural development indicators. 78 percent of the absolute poor live in rural areas compared with 35 percent in urban areas. Rural areas are characterized by lower life expectancy rates, illiteracy being more widespread, a higher malnutrition prevalence, and a greater proportion of households without access to safe drinking water and improved sanitation.

The majority of poorer households are engaged in the agricultural sector. Agriculture is the main sector of employment for the household head for the poorest 80 percent of the population. Only the richest 20 percent of the population are engaged in other sectors such as services, manufacturing, and public administration.

Agricultural activity provides the main source of income for rural households. Approximately 50 to 90 percent of total household income comes from agriculture depending on the regions and years. The importance of rice for household incomes is increasing and the crop is harvested on approximately 85 percent of farms (Agricultural census 2004/05). Over 10 million people from agricultural households depend on rice farming for income generation, and the subsector is estimated to provide 70,000 regular jobs. Cassava is the second most cultivated crops, on approximately 70 percent of farms, although half of the production comes from the South.

There has been limited real growth in the agriculture sector. The growth of the agriculture sector is subject to volatility, particularly due to exogenous, climatic-related effects. Agricultural growth peaked to 8 percent in 2009 largely due to favorable rainfall conditions (even though real GDP growth took a significant downturn) but registered negative 7 percent outturn in 2013. Over the period 2004 to 2014 the agricultural contribution to GDP growth was 1.3 percent, far below peer countries and the average for sub-Saharan Africa.

Agricultural production output is struggling to keep up with population growth. Over the last 30 years, the total production index has been increasing. However, the net per capita production index decreased significantly during the same period, meaning that production cannot keep pace with the population growth rate. Further, agricultural production has increased mainly through the expansion of cultivated areas rather than from the use of improved technologies or inputs, putting pressure on Madagascar’s natural resource base.

Agriculture remains predominantly a subsistence activity. Approximately 60 percent of farming produce is consumed within the farming household. From the surplus that is marketed, 47 percent comprises of maize, 20 percent is cassava and 20 percent is rice. However, there is a large untapped export potential. Madagascar is already the world’s leading exporter of cloves and vanilla, which alongside lychee and shellfish have dominated the agricultural export basket. There is significant potential to increase these exports and to develop other promising industries such as sea cucumber aquaculture and inland aquaculture, which are relatively underdeveloped.

Constraints and Opportunities in the Agriculture Sector

The agriculture sector is affected by a number of constraints. The three most commonly ranked constraints by community groups include: access to seeds and fertilizer, inadequate land area, and a low selling price, which are discussed in detail below. These factors are intensified by low levels of human capital, dilapidated production and transport facilities (particularly rural roads), high exposure to climatic effects, and lack of improved water management to facilitate irrigation.

Increasing the use of fertilizers

Madagascar’s fertilizer consumption is one of the lowest in the world. Fertilizer consumption is approximately 5 kg/ha of arable land per year, compared with a sub-Saharan African average of 15kg/ha. In comparison, otherrice growing countries have a much higher consumption of fertilizers, such as 160 kg/ha for Thailand, 203 kg/ha for Indonesia, 253 kg/ha for Bangladesh, and about 327 kg/ha for Vietnam in 2011-13. Only an estimated 15 percent of Madagascar’s cultivated land receives mineral fertilization (Agricultural census 2004/05).

Affordable access to fertilizersis an issue. At current price levels the cost-benefit ratio of utilizing mineral fertilizers is subject to exogenous conditions, such as climatic variations. Farmers usually do not have sufficient cash and therefore have to rely on credit to finance the supply of inputs. However, given the high interest rates charged by microfinance institutions, the expected net profits are negated in the absence of insurance against technical and climate risks. Therefore, with the exception of highly profitable intensification operations such as in high value added subsectors, farmers are unlikely to use credit to finance fertilizer use.

Government fertilizer supply programs have had limited success. A National Fertilizer Strategy was initiated in 2006 to improve domestic agricultural production. However, the programs were characterized by massive subsidization that had limited lasting impact on production. The programs were affected by cumbersome procurement procedures, lack of capacity of farmers’ organizations responsible for implementing the programs, mismatch between supply and diversity of local needs, low involvement of inputs distribution networks, and lack of an exit strategy. Massive direct subsidies programs have now been suspended.

Notable examples of success are worth mentioning. Fertilizer and seeds programs that proved most effective are characterized by strong involvement of the private sector in distribution, consideration of the vulnerabilities of small family farms in targeting, availability of technical support to transfer knowledge on inputs, multi-year support, the gradual introduction of local structures such as farmers organizations, and a beneficiary contribution to the cost of inputs to promote ownership and sustainability. Reflecting on the lessons learned in the implementation of fertilizer programs, a number of key recommendations have been identified to improve the use of fertilizers.

Ensuring secure access to land

Ownership rights to land can only be validated through a land title. These land titles are delivered by the land administration. However, in rural areas customary authorities also have a prerogative on the management of access to land, although their powers have no legal value. The decentralization of land management through ‘Local Land Offices’ has improved the affordability and time required to obtain a formal acknowledgment of land rights. The average cost and time needed to obtain an official document has been reduced from six years and US$ 500 for a land title to six months and US$ 14 for a land certificate, which has virtually the same legal value as land titles. These reforms allowed for 120,000 land certificates to be delivered in nine years, although the reform momentum slowed following the 2009 crisis.

There is considerable scope to improve land management. Current estimations suggest that 50 land certificates are distributed annually in the communes. Given the demand for land titles at this pace it is estimated that 75 years are needed to complete this process. Other restricting factors include cost, the education level of the household (female illiteracy in particular limits willingness to pay), and the perceived usefulness of the certificate to protect rights. The decentralized system needs refining, including local capacity building and reinforcement of communal governance.

Obtaining higher prices: contract farming and developing high value products

Contract farming practices can bring significant benefits to farmers. Contract farming has existed in Madagascar since the 1980s. All regions have some contract farming, but they are dependent on the specific production conditions sought by companies. Contract farming offers the prospect of more stable income, and can be a mitigation measure of the lean season when households have to reduce their consumption of staple food.

Contract farming is mainly implemented in export-oriented subsectors or subsector segments. It mainly covers agricultural products with high value added, specific production methods, or niche products. Such products benefit from higher unit prices and high added value, giving farmers opportunities for additional income. Contract farming can potentially be applied to all types of agricultural products, but is generally regarded as more suitable for horticultural or cash crops, including for export markets.

There are some important prerequisites for contract farming. Contract farmers have access to paved roads to transport products and are usually better equipped in terms of production factors such as land surface area and/or herd. Beyond this, there is limited comprehensive information on the characteristics of producers that are most likely to enter high-potential value chains. Firms involved in contract farming are very diverse in terms of size, structure, target markets and activities.

There is the potential to develop high value products and promising value chains. In the agriculture sector, high value products such as hand-picked green beans, artemesia, cocoa or organic subsectors offer opportunities to improve smallholders’ access to global markets. Fishing and aquaculture could also provide opportunities for smallholder producers to integrate into the national market under contract farming or other models of marketing organization, to increase their income. In particular, sub-sectors such as seaweed; sea cucumbers (fisheries and aquaculture development); octopus (traditional fishing), and crab (traditional fishing and aquaculture development) offer great potential for development.

Conclusion

Even though a large majority of poor households are engaged in agriculture, per capita productivity and real levels of sectoral growth remain low. Cultivation practices are based on extensification strategies with implications for Madagascar’s fragile natural resource base, rather than improving the productivity of existing farms and land use. This section has discussed three major constraints facing the sector: low utilization of fertilizers, land insecurity, and low prices. A number of common themes have been identified to address these challenges. Firstly, in terms of institutions, local land offices, farmer’s organizations and extension services should be enhanced. The governance of foreign land acquisition should also be improved. Secondly, an enabling environment for the private sector should be facilitated, through working on agribusiness strategies and increasing access to financing for investments. Thirdly, production and marketing infrastructure needs to be improved including through the maintenance of roads, and the development of alternative energy sources. And finally, there is scope for building the capacity of producers, extension services, production techniques, and safeguards. Focusing on these key areas of intervention can help to address constraints to agricultural productivity, improve the lives of the poor, and promote the inclusiveness of Madagascar’s growth path.