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IMF Executive Board 2017 Article IV Consultation with Madagascar

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IMF Executive Board 2017 Article IV Consultation with Madagascar

IMF Executive Board 2017 Article IV Consultation with Madagascar
Photo credit: Top10great.com

On June 28, 2017, the Executive Board of the International Monetary Fund (IMF) completed the first review of Madagascar’s economic performance under a program supported by an Extended Credit Facility (ECF) arrangement. It also approved the authorities’ request to augment access under the program for SDR 30.55 million (about US$42.39 million) or 12.5 percent of the country’s quota.

Madagascar is a fragile low-income country striving to recover from political instability. Madagascar has a long history of weak economic growth – barely keeping up with rapid population growth – and social welfare indicators have deteriorated. Recurrent political crises and natural disasters have aggravated these challenges. As a result, Madagascar has become one of the poorest countries in the world, and some of its education, health, and nutrition indicators rank among the lowest in the world. The government is aiming to break a cycle of low growth and investment by accelerating public investment and structural reforms under its 2014 National Development Plan.

Economic developments were encouraging in 2016. Driven by public investment, increasing textile exports, and accelerating activity in agroindustry, economic growth reached 4.2 percent in 2016 – the highest level since 2008. The execution of the 2016 budget was in line with the government’s objectives. Fiscal spending was under control, even though the financial performance of the public utility, JIRAMA, weakened toward the end of the year. Reforms continued in revenue administration, and fiscal revenue exceeded targets. Inflation was contained at 7.0 percent at end-2016. The external position strengthened significantly, benefitting from a positive shock to vanilla export prices and strong growth in manufacturing exports.

Budget execution has encountered challenges in 2017 however. In late 2016 and early 2017, Madagascar suffered a serious drought and a major cyclone – the worst in 13 years. The cyclone imposed total economic costs (damage plus lost production) estimated at about $400 million (4 percent of GDP). The drought reduced the supply of cheap hydropower for electricity generation, thereby increasing JIRAMA’s needs for government transfers. In addition, the launch of a planned strategic partnership for Air Madagascar, will require a costly one-off recapitalization to offset past losses while it is expected to strengthen operations over the medium term.

In spite of current challenges, the medium term outlook is favorable. Growth is projected to accelerate, driven by the investment scaling up, tourism, garments and other light manufacturing, mining, and productivity gains in agriculture. Partly because of the recent disasters, average inflation is forecast to rise temporarily to about 8.5 percent in 2017, and then to fall back gradually to around 5 percent over the medium-term. Imports should increase with the scaling up of public investment and reconstruction efforts, although rising current account deficits are expected to be financed in a sustainable manner thanks to concessional official sector loans and foreign direct investment.


Staff Report

Context: A strategy for investment scaling up and improved governance

Madagascar has a long history of weak economic growth amid recurrent political instability. Successive political crises and weak governance have held back revenue collection, public investment, social spending, external donor support, and private investment, especially FDI. As a result, growth has suffered – at best barely keeping up with rapid population growth – and social welfare indicators have deteriorated. Madagascar’s development has also suffered from its high vulnerability to natural disasters. Madagascar has become one of the poorest countries in the world, with over 80 percent of the population living on less than $1.90 a day.

The government aims to break the cycle of low growth and political instability by accelerating public investment and structural reforms under its 2014 National Development Plan (NDP). During the political crisis following the military coup (2009-13), tax collections declined from 12 percent of GDP in 2008 to 9 per cent in 2013, while donor support fell as low as 2 percent of GDP in 2012 (from 14 percent of GDP in 2006). To help finance scaling up investment and social spending, Madagascar’s development partners made pledges estimated at $6.4 billion (over 60 percent of GDP) at the donor conference in December 2016.

In the face of deteriorating governance indicators, the government has revived the fight against corruption. During the five-year crisis period, Madagascar’s governance indicators regressed, while other countries in Sub-Saharan Africa (SSA) advanced. Under the National Strategy to Fight Corruption adopted in 2015, the government aims to reverse this adverse trend, starting with bringing the legal framework into compliance with international standards. At the same time, reforms are underway to boost fiscal transparency and controls.

Recent economic developments, outlook, and risks

The economic recovery following the political crisis gained speed in 2016, although it took longer than expected to emerge. Investment, the anticipated driver of the economy, remained subdued in 2015, and growth was estimated at only 3.1 percent. Public investment grew faster in 2016, which supported construction activity; together with increasing textile exports and accelerating activity in agroindustry, it helped boost growth to 4.2 percent. Inflation remained under control at 7.0 percent at end-2016.

The execution of the 2016 budget was in line with program objectives. Gross revenue collections over-performed program targets by 0.2 percent of GDP in 2016, reaching the highest tax-to-GDP ratio since 2009. Reforms continued in revenue administration, including: better riskbased and ex-post auditing, the establishment of a unique tax identification number (TIN), clearer litigation rules for tax disputes, and performance-based contracts at customs. Lower-priority transfers remained within budgeted amounts, even though the financial performance of the public utility, JIRAMA, weakened toward the end of the year. The escrow account for VAT reimbursements operated smoothly at both customs and taxes, and the ambitious plans for arrears repayment in 2016 (1.2 percent of GDP) were implemented successfully.

In late 2016 and early 2017, Madagascar suffered a serious drought and a major cyclone, the worst in 13 years. Preceding the cyclone, a serious drought afflicted the central plateau region, which includes the capital and is the economy’s heartland. The cyclone, which hit in March, imposed economic costs (damage plus lost production) estimated at about $400 million (4 percent of GDP), of which approximately one-third fell on the public sector and two-thirds on households and the private sector. Public spending needs for relief and reconstruction are estimated in the range of $100 million for 2017-18. These two shocks also hit agricultural production and the balance of payments, with an estimated impact in 2017 of $225 million.

The medium-term macroeconomic outlook is favorable but challenges remain. Notwithstanding the negative effects of the natural disasters, growth is expected to remain steady at 4.3 percent in 2017, supported by growing public and private investment, textile exports, tourism, and agroindustry. An expected recovery in private sector credit (9.9 percent growth in real terms) will buoy the expansion in 2017. Driven by the planned scaling up, growth is forecast to peak at 5.9 percent in 2019 and stabilize around 5 percent a year over the long term. In addition to public investment, the main drivers of medium-term growth are expected to be tourism, garments and other light manufacturing, mining, and productivity gains in agriculture, especially the shift from subsistence to export-oriented agribusiness (for example vanilla and cloves). Madagascar’s growth is expected to exceed the average for Sub-Saharan African countries over the next few years. Partly because of the recent disasters, inflation is forecast to peak around 8 percent in 2017 before falling gradually to around 5 percent over the medium-term, as the vanilla and natural disaster shocks unwind and monetary policy responds with restrained money growth.

Policy Discussions

Realizing the full potential of scaling up investment and accelerating structural reform will depend critically on also strengthening institutions, governance, and financial sector development. Policy discussions focused on four key objectives and the policy priorities to pursue them: (i) promoting inclusive and sustainable growth, especially through scaling up public investment; (ii) creating more fiscal space, enhancing revenue and containing lower priority spending; (iii) enhancing economic governance, especially fighting corruption; and (iv) strengthening financial sector development and stability.

Promoting Inclusive and Sustainable Growth

Only sustained and inclusive growth can reduce poverty and improve living standards in Madagascar. Economic growth strategies must therefore be sustainable and provide broadly distributed benefits. The NDP launched in 2015 emphasizes the need to: (i) increase economic growth by improving infrastructure, strengthening public-private dialogue, and enhancing the legal framework for good governance; (ii) make growth inclusive by devoting more resources for education, health, and social protection; and (iii) ensure sustained growth by managing Madagascar’s rich natural resources in a sustainable manner with broad benefits. The Economic Development Document published by the authorities in connection with the ECF arrangement highlights the NDP’s efforts for poverty reduction, including progress toward the Sustainable Development Goals.

The elements of the development strategy will also help enhance the inclusiveness of growth, reduce inequality, and promote financial inclusion. While poverty is very high, income inequality – with a Gini coefficient of 42.7 in 2012 – is close to the average of Sub-Saharan African countries and fell slightly over 2001-12.

Madagascar has a severe infrastructure shortfall relative to other countries. For example, of 138 countries surveyed for the World Economic Forum’s Global Competitiveness Index in 2016, Madagascar was ranked 138th on road quality, 135th on mobile phone penetration, and 130th on quality of electricity supply.

To meet these infrastructure needs, the government has developed plans for prioritized investments and enhancements to its investment management capacity.

  • Over the medium-term (2017-22), the plan assumes total public investment of about 9½ percent of GDP a year, peaking at 10½ percent of GDP in 2019.5 Nearly all the external financing (about 7 percent of GDP a year) was identified following the donor conference in December 2016. Madagascar received external financing commitments that were larger and on better terms than assumed in the original program, which enabled the authorities to increase planned investment spending by a cumulative 6½ percentage points (2017-2020) while maintaining a moderate risk of debt distress.

  • The prioritized investment plans – developed in consultation with development partners and representatives outside government – focuses on transportation, energy, agriculture, and social spending.

  • The ambitious plans pose numerous challenges, including most immediately for implementation capacity but also for preserving macroeconomic stability. To help monitor and manage these risks, the authorities established an investment coordination unit at the Presidency in February 2017. The unit will closely monitor absorption capacity, which will be reinforced by refining national and sectoral strategies, including an update of the NDP implementation plan. Ongoing efforts to improve medium-term budget planning and execution will support these efforts (with TA from the IMF, World Bank, and US Treasury).

  • The authorities are also developing a medium-term strategy to enhance the public investment management capacity (end-December 2017 structural benchmark). The strategy, accompanied by an interim action plan, addresses priorities identified in the Public Investment Management Assessment (PIMA) conducted in 2016, as well as in recent IMF TA: (i) strengthening the institutional framework for public investment management; (ii) improving project selection and evaluation; (iii) enhancing the supervision of investment; and (iv) improving donor coordination.

With agriculture helping support 80 percent of the population, enhancing productivity in the sector is also central to reducing poverty. Efforts to expand land tenure security, improve infrastructure, and develop skills in modern farming play a central role. Only about 8 percent of household heads hold formal title to their land, which prevents the use of land as collateral and inhibits investment in productivity-enhancing improvements like irrigation and terracing. Inadequate infrastructure increases transport costs and reduces profits from investment in agriculture. The authorities’ sectoral policy and investment plans, developed with development partners, address these challenges, including through the shift toward export-oriented agribusiness and more weather-resilient practices in vulnerable regions. Discussions between the authorities and staff also addressed the challenges of improving the coordination of policies for rural development across sectors and increasing the low levels of fertilizer use in a cost-effective and affordable manner.

The authorities and staff agree that the growth impact of scaling up public investment depends in part on promoting private investment, including FDI. The main impediments to private sector-led growth are weak governance, poor infrastructure (especially transport and electricity), and a shallow financial system with limited access to financial services. The authorities are focused on “quick win” reforms for improving the business climate, while still advancing on fundamental reforms. With support from the Word Bank, the Economic Development Board of Madagascar has a program to improve the country’s score in the Doing Business Indicators (it ranked 167th out of 190 countries in 2017, compared to the Sub-Saharan Africa average of 143rd). Already, there were improvements in the 2017 survey in opening a business and ease of international trade. Broader reforms to address key structural weaknesses, such as infrastructure (including roads, ports, and airports), electricity, and access to financing, are also vital but will take longer to yield fruit, despite the ambitious efforts underway. Moreover, the authorities are reviewing and revising commercial law. In March 2017, the decrees implementing the new Public Private Partnerships (PPP) law were adopted, which creates new opportunities with appropriate safeguards for public finances. The authorities are also drafting new or revised laws intended to promote activity related to mining, petroleum, special economic zones, and industrial development

Enhancing resilience to natural disasters is also central to sustained and inclusive growth. Madagascar is highly vulnerable to natural disasters, given its geographical location, low income levels, weak institutional capacity, and heavy reliance on rain-fed agriculture (Annex III). During the period 1990-2014, Madagascar was hit by 55 natural disasters that killed at least 3,561 people and left 10 million people with an urgent need for aid (EM-DAT database). Madagascar also has high average recorded economic damage compared to peers. Staff research shows that frequent disasters hold back growth and poverty alleviation, so enhancing resilience needs to be a priority element of the inclusive growth strategy. Madagascar has made progress in integrating disaster resilience into development plans. The priorities are to implement plans for more resilient physical infrastructure and land planning (especially in the capital), develop smallscale rural investment in resilience (e.g., better water management and more drought-resistant agriculture), and institutional infrastructure for social protection (such as registration for social assistance and access to primary health care for relief efforts).

Annex I. External Balance Assessment

Staff assesses the 2016 external balance to be stronger than values consistent with fundamentals and desirable policy settings. Improvements in the terms of trade, most importantly due to higher vanilla prices have contributed to a significant strengthening of the external position. However, the expected reversal of vanilla prices to more normal levels and especially increasing reconstruction- and investment-related imports are projected to bring the current account closer to its norm. International reserves are adequate but in the lower end of the target range.

The trade balance has improved in recent years. Large mining projects, which boosted imports and created huge trade deficits between 2007 and 2010, are now generating significant export earnings. In addition, the terms of trade have improved, particularly as vanilla prices more than tripled in 2016, resulting in the first current account surplus since 2001. The positive transfer balance has generally been slightly higher than the deficit in the income balance. Staff assess the current account to be about 2.7 percent of GDP stronger than values implied by fundamentals and the desirable policy setting. While the actual 2016 current account reported a surplus of 0.8 percent of GDP, Madagascar benefited significantly from a temporary spike in vanilla prices. If the price of vanilla in 2016 had been identical to the average price over 2004-16, then Madagascar’s export earnings from vanilla would have been about $300 million (3.0 percent of GDP) lower. After adjustment for vanilla prices, the adjusted current account therefore reported a deficit of 2.3 percent of GDP. At the same time, the EBA-lite current account model estimates Madagascar’s fitted current account to a deficit of 3.5 percent of GDP. Deviations from desirable policies – a constrained fiscal stance (1.0 percent of GDP), limited private credit disbursements (0.3 percent of GDP), and relatively rapid reserve accumulation (0.2 percent of GDP) – added up to a policy gap of 1.4 percent of GDP. After adjustment for the policy gap, the current account norm for Madagascar corresponded to a deficit of 5.0 percent of GDP. Consequently, the adjusted current account (a deficit of 2.3 percent of GDP) was 2.7 percent of GDP stronger than its norm in 2016. The high deficit for the current account norm reflects the long-term development needs of the country, which explain the high external financing needs.

The current account is expected to adjust to its norm as terms of trade return to historical levels and especially as public investment scales up. Based on historical evidence, the vanilla price boom will probably be short lived. In addition, given Madagascar’s current level of development, investment needs will remain significant for the foreseeable future. Imports are likely to increase because of the ongoing scaling up of investment and reconstruction work following the cyclone Enawo. Growing current accounts deficits will be offset by related surpluses in the capital and financial accounts from public sector grants and loans and foreign direct investment. The existing constraints to external borrowing should decrease with increasing political stability and implementation of policies supported by an IMF arrangement that reinforce Madagascar’s relations with its development partners. At the same time, improvements in the business climate would make Madagascar more attractive to foreign investors. In this context, to maintain debt sustainability and macro-economic stability, the authorities need to scale up investment gradually (as planned), ensure that investment projects are well targeted, and rely on resources with the most attractive financing conditions.

Madagascar has a floating exchange rate regime. The central bank intervenes in the interbank market to smooth large exchange rate fluctuations and meet foreign reserve targets. In 2015, the central bank intervened heavily in the foreign exchange market with so-called buyback operations. The interventions maintained the published official exchange rate at a more appreciated artificial level until the buyback operations were completely abolished in September 2015. Madagascar has restrictions on exports and imports of domestic currency and certain goods (e.g. gold, rose wood), requirements to repatriate export proceeds from goods and services, and some controls on capital transactions. The international reserves are adequate but in the lower half of the target range. By end-2016, reserves are estimated to have covered 3.9 months of current import compared to 2.9 months at end 2015. This import coverage is in the lower half of the target range given an assumed cost of holding reserves of 6 percent, the heavy reliance on mining exports, and the challenging international environment. The accumulation of central bank reserves exceeded projections in 2016. Because of the spike in vanilla export prices, un-banked small vanilla producers received large cash payments. Currency in circulation expanded and drained bank liquidity. In response, the central banks started buying substantial amounts of foreign exchange, which increased bank liquidity and satiated the demand for local currency. The reserve accumulation is expected to level off in 2017. The above normal amounts of currency in circulation are expected to return to the banking system when (as is likely) vanilla prices retreat to more typical levels. At that time, the central bank may sell some foreign exchange to avoid excess liquidity and keep the inflationary pressure under control. Following a projected rapid increase in imports, the import coverage of reserves is likely to fall in 2017. The reserve accumulation is projected to continue at a gradual pace over the medium term.


Selected Issues paper

Governance and Corruption

Madagascar’s governance indicators weakened significantly during the transition period 2009-13. Governance indicators that generally were on par with middle-income countries in Sub-Saharan Africa (SSA) ten years ago have regressed and converged to the average of fragile SSA countries. It is likely that this deterioration in governance is currently reducing Madagascar’s economic growth by about ½ percent a year (or possibly more) and the tax revenue-to-GDP ratio by 3 percent or more. More generally, corruption is associated with less macroeconomic and political stability, potentially creating a vicious circle. After the return of constitutional order in 2014, the government has started to address corruption, mainly through the introduction of new laws so far. More emphasis is needed on effective implementation and raising sufficient resources to fight corruption. This paper summarizes the current situation, surveys the economic costs of corruption, and provides a few ideas on how to advance anticorruption reforms.

Weaknesses in governance manifest themselves economically in various forms, with the weak institutional environment enabling corruption to thrive. Rose wood and precious stone traffic, smuggling of rare and protected species, corruption among customs and tax officials, the rigging of public procurement markets, drug smuggling, and kidnapping are some of the symptoms of generalized corruption. Because of the weakening of institutions, activities such as money laundering through real estate purchases and trafficking in precious stones, to cite just some examples, are spreading and cannot easily be punished by the legal system. At the same time, lack of information (e.g. inadequate property registry), imperfect tax and bank records, and limited international cooperation are obstructing the use of domestic and foreign information to tackle financial crime. Since 2004, only four cases of suspected money laundering have been tried and this resulted in two convictions.

Costs of Corruption

Most of the theoretical literature, as well as case studies and micro evidence, suggest that corruption severely impedes economic performance. Corruption reduces social welfare through several channels, including by diverting resources for private gain; weakening institutions, reducing government legitimacy, and increasing the risk of conflict; eroding the business climate and lowering the quantity and quality of investment; and by increasing fiscal instability. By its very nature, corruption is not done in the open, so it is inherently difficult to quantify these costs. Lower economic growth and macroeconomic instability

Business climate and investment

Corruption reduces private-sector investment because it acts as a tax on capital and raises the hurdle rate of return. Payments of bribes, delays, distortions etc. increase the cost of investment. Entrepreneurs opening new businesses need permits and licenses, putting them at the mercy of corrupt public officials. Corruption also creates an uneven playing field and stifle genuine competition with the result that more human capital will be allocated to rent seeking instead of productive activities that promote business development.

Corruption is a challenge for the private sector in Madagascar. The private sector is concerned by the lack of fair competition in many sectors because of the presence of business groups with close ties to politicians. The 2016 Doing Business Survey ranked Madagascar 164 (out of 189 countries) on ease of doing business and several indicators of corruption are well above the SSA average. Market restrictions that require permits and licenses facilitate rent seeking. For exporters, many products require documentation linked to regulatory controls and this process can require a significant amount of time, costs, and possibly bribes. Exporting firms that use imported inputs suffer twice, because of demanding import and export procedures. Companies that could otherwise participate in international value chains by specializing on specific parts or tasks become less competitive.

Challenges from corruption and the lack of competition are exacerbated by doubts about the impartiality of the judicial system. People in the private sector believe that the justice system is biased and laws are enforced unfairly. Compared with other SSA countries, Madagascar is ranked as having one of the least independent judicial systems according to the World Economic Forum Global Competitiveness Index. Existing laws give the President of Madagascar extensive power over the judiciary. The Supreme Council of the Judiciary (Conseil Supérieur de la Magistrature, CSM) manages the career of the judges, with the President as the chairman and the Minister of Justice as the vice chairman. The Constitutional High Court (Haute Cour Constitutionnelle, HCC) also has limited independence from the executive power. HCC has nine members, of which the President directly nominates three, including the HCC President, and the CSM nominates another three members. Against this background, judges can be extremely cautious and often anxious to avoid contradicting powerful decision makers. The judiciary is also vulnerable to manipulation because of a lack of financial and human resources. A variety of cases has illustrated the widespread impunity for officeholders who break the law, especially with regard to the trafficking of natural resources.

Studies analyzing the growth impact of corruption probably underestimate the extent to which corruption and distortions reduce productive private sector investment. Money-laundering diverts resources to less productive investment and thereby reduces growth. For example, receipts from rose-wood traffic are often used for “sterile” investment like real estate and as a result, real estate prices increase, causing general overpayment for real estate and crowding out of more productive investments. Another corruption effect is the transformation of productive companies into sterile investments because they are operated solely for money laundering. Corruption is also likely to increase imports. To help launder money, corruption money is occasionally used to import goods that are then dumped on the domestic market with a negative impact on the private sector.

While corruption is clearly negative for private-sector investment, the effect on public investment is more complex. On one hand, corruption shrinks tax collections and reduces funds available for fiscal spending and investment. On the other hand, corrupt officials have an incentive to increase public spending in favor of large projects with the potential for large private gains for the policy maker himself (for example, large defense contracts) regardless of the quality of investment. There is empirical data supporting a generally positive correlation between public expenditure and corruption. That said, corruption reduces the quality and efficiency of public investment. Moreover, in a highly resource-constrained environment like Madagascar, corruption is more likely to cost more in foregone resources for investment than is gained in incentives.

Strategies to Reduce Corruption

Reducing corruption will be challenging if there is doubt about the political commitment to fight corruption. Strong support from the country leadership – the President, the political parties, and the military (topics beyond the scope of this paper) – is essential in the combat against corruption. In several countries that have been successful in reducing corruption (e.g. Georgia, Philippines), the determination of the leadership to combat corruption was crucial.

The current government has taken steps against corruption. While the “National Strategy against Corruption, 2004-2014” established the basis for the current anti-corruption framework, the impact was limited due to the 2009-13 crisis and weaknesses in the institutional framework. The government elected in 2014 has elaborated a new “National Strategy to Fight Corruption, 2015- 2025” with the vision to put in place an effective rule of law by strengthening state capacities, sanctioning corruption, and reducing risks and opportunities for corruption. The strategy includes: (i) strengthening anti-corruption legislation; (ii) increasing the independence and resources of the public anti-corruption agencies; (iii) developing an information system to track all legal anticorruption cases; (iv) improving the integrity of the judicial system; and (v) making the Council of Budget and Financial Discipline (CDBF) fully operational.

Corruption is a multi-dimensional problem, requiring reforms in several areas simultaneously. An effective strategy requires a prioritized and sequenced approach. Corruption is a symptom of a poorly functioning government, and addressing it requires change on many different levels. Legislative reform is key, but must be accompanied by strong and independent institutions, capacity building, transparency, an empowered civil society, and increasing economic governance while fighting corruption would improve the chances of seeing lasting and sustainable program results in terms of socio-economic performance.

Mindful of limited resources, the anti-corruption strategy should be both meaningful and realistic. Legislative reforms are only credible if enforced by effective institutions, which requires a transformation of behaviors and values. This takes time and expectations should be managed. From an enforcement perspective, such a strategy could initially focus on actions facilitating investigations and recovery of proceeds of corruption laundered by Malagasy officials abroad, while encouraging domestic capacity building in the medium term.

Macroeconomic implications of scaling up public investment in Madagascar

Introduction: The Case for Scaling Up

Infrastructure is recognized as a key precondition and determinant of increased productivity and sustained economic growth, although it is difficult to quantify This conclusion has been shown to have particular relevance for low-income countries where, under the right conditions, the payoff to additional infrastructure appears to be greater. In the short term, provided the economy is not at full employment, public infrastructure investment boosts aggregate demand, crowds in private investment, and leads to an expansion of output. More importantly, over the longer term, the improved stock of infrastructure would be expected to generate supply effects to boost output over a long time horizon. However, the magnitude of these impacts will depend crucially on the efficiency of investment, a determining factor that highlights the importance of improved project selection, procurement, and implementation. Additionally, the evidence seems to suggest that such payoffs can be seriously negated if competition and institutions are so weak as to allow excessive corruption and rent seeking.

The political and institutional structure of Madagascar has so far not been conducive to long-term economic development. Promising beginnings in the 1960s – when institutions and per capita income levels were high relative to the rest of Sub-Saharan Africa (SSA) – were cut short by successive periods of political uncertainty and institutional decline. From the 1970s to 1995, a period that included a socialist experiment, annual growth averaged less than ½ percent, leading to serious declines in per capita income levels as the rate of population increase remained high at just under 3 percent per annum. Following a political crisis in 2002 – where GDP fell by over 12 percent – a reformist period up to 2008 produced strong growth and significant poverty reduction.

However, this recovery was cut short by the 2009-13 period of political uncertainty where annual growth again averaged only ½ percent, and governance and international competitiveness indicators underwent an additional decline.

Infrastructure development has been one of the main casualties of this economic history, leaving Madagascar with a significant shortfall in productive capital. The magnitude of the shortfall was quantified in 2010 by the Africa Infrastructure Country Diagnostic (AICD), a large study overseen by an international steering committee and implemented by the World Bank covering ultimately 40 countries in SSA. The AICD identified annual infrastructure spending needs for SSA – for new investment and maintenance of the existing stock – of US$93 billion over the period 2006-15, equivalent to about 15 percent of regional GDP. However, the estimate for Madagascar, given its existing deficiencies, was significantly higher at about 40 percent of GDP, or about US$2-3 billion per annum.

The infrastructure shortfall is also large relative to other countries. With the exception of the 2003-08 period, infrastructure provision and maintenance failed to appreciably close the existing gap with regional peers, particularly in the transportation and energy sectors. Of 138 countries surveyed for the World Economic Forum’s Global Competitiveness Index (GCI) in 2016, Madagascar ranked 133rd overall. It placed last in road infrastructure, and very close to the bottom with respect to mobile phone penetration and quality of electricity supply. Although businesses’ opinion of railroad and port facilities were somewhat better, scores were nonetheless low in all infrastructure subsectors. Madagascar scored lower for infrastructure than in any of the other 11 indicators making up its composite GCI.

A similar story emerges from the annual rankings provided by the African Development Bank (AfDB) in its African Infrastructure Development Index (AIDI). The AIDI – an annual monitoring exercise that grew out of the original AICD – ranked Madagascar’s infrastructure as 43rd out of 50 Sub-Saharan African countries in its 2016 study, ahead only of Eritrea, Democratic Republic of Congo, Ethiopia, Chad, Niger South Sudan and Somalia. It is noteworthy that comparison with the rankings from 16 years ago show little relative improvement, as in 2000 Madagascar was placed 45th of 49 countries.

The need to scale up investment has also been strongly endorsed by the international community. The IMF Executive Board stressed the role of infrastructure development when approving the 40-month Extended Credit Facility Arrangement for Madagascar in July 2016, and at Madagascar’s donor conference in December 2016, the authorities announced pledges of a total of US$6.4 billion (63 percent of GDP) from development partners, and a further US$3.5 billion in planned private sector investments. The funding will allow a significant scaling up of infrastructure expenditure although the pace will depend on absorptive capacity. Financing the bulk of funding externally, especially from multilateral sources like the AfDB and World Bank, will help provide analytical and procedural support for the efficiency of investment management, while debt sustainability concerns will be carefully evaluated and periodically updated in consultations with the IMF and World Bank.

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