An economy on the rocks

In the wake of continual skirmishing between the President of the Republic, Albert Zafy, and the Prime Minister appointed by Parliament, Francisque Ravony, which punctuated political life in the country throughout the last year, September's constitutional referendum -(entitling the Head of State to appoint the head of government) was intended to strengthen the country's leadership.

1995 began with a budget war between the new Prime Minister and his Finance Minister, which did not augur well for the future. Two budgets were submitted to Parliament, but the President and legislature were unable to reach agreement. During that time, the conclusion of negotiations with the World Bank and the International Monetary Fund (IMF) was repeatedly postponed, although donors were waiting for the go-ahead to send funds to the Republic once again. The country was unable to wait any longer: all the newspapers spoke of famine, which was beginning to take hold in the South, and virtually all the economic and social indicators made depressing reading.

Agriculture is the most important sector of the economy, representing 41% of Gross Domestic Product and providing three quarters of all jobs. It is, however, built on fragile foundations. The Malagasy Republic is the world's principal exporter of vanilla, but the price of this commodity is declining, as a consequence, among other things, of the availability of artificial flavourings. Vanilla is a fragile crop and suffers greatly from the effects of tropical cyclones.

The real driving force behind the rural economy is rice, which covers 40% of cultivated land. This crop is essentially grown on areas of burnt land, however, and the result is considerable erosion. 80% of the country's forests have already disappeared, and the loss is continuing at a rate of 200 000 hectares per year.

In addition to vanilla and cloves, the Republic's other main exports are cotton and coffee. Coffee exports fell sharply in 1994 - by nearly 20% compared with 1993 - which was regarded as an average year. In addition, the quality of Malagasy coffee is becoming poorer all the time owing to the lack of investment and poor monitoring.

Stock-rearing has the potential to be a source of foreign exchange earnings, but this sector is very poorly managed. Although the country has 10.5 million cattle, 1.5 million pigs and two million sheep, it is unable to meet its quota under the LomV Beef Protocol. This allows for seven and a half thousand tonnes of Malagasy meat to be exported to the European Unlon on highly preferential terms. This failure meant that for last year, the quota was cut by 2000 tonnes.

Successive devaluations of the Malagasy franc have also prevented farmers from looking after their livestock and from modernising their farms. Between the time the currency left the franc zone (in 1973), and 1982, the Malagasy franc was stable against the French franc. The slide began in 1983 with a depreciation of 15% and in the following year, the currency plunged by no less than 65%. The trend has continued ever since. In May 1994, the rate was FMG 330: FF1. By September 1995, it had reached 920:1. The inflation rate has hovered consistently around 50% per annum.

The impact of this has been seen in bank interest rates which are in the region of 40%; enough to stifle many small and medium-sized businesses. In addition, those at the lower end of the income scale have been affected by economic liberalisation, one of whose effects has been a drop in the minimum monthly wage. Recently, this stood at just FMG 110 000, (less than FF 120). Unemployment is rife and private investment, at just 5% of GDP, is stagnant. Those companies that offer the best hope of creating jobs, namely the SMEs, are unable to take on staff and, with the state no longer recruiting, the average age of civil servants is now more than 50. The informal sector accounts for 70% of the economy. Public works, state education and health services are neglected and, according to the FAO, 85% of the population are short of food. 66% of the inhabitants are classified as living in poverty and only 31 % of dwellings have lavatories. This helps to explain the resurgence of diseases, exemplified by the plague outbreak that occurred in Mahajanga last year.

The state is unable to meet its obligations for a number of reasons. In the first place, it has a crippling debt burden. The country's external debt, which stood at 560 million SDR (Special Drawing Rights) in 1994, reached 1.3 billion by the end of 1995. There is also a problem of corruption and embezzlement which has prompted many bilateral and multilateral donors to stop making payments. The revelation, for example, that the Central Bank was the victim of an international fraud resulting in the loss of almost four million dollars has hardly helped to instil confidence.

Moreover, the Bank of Madagascar does not appear to have any clear or coherent financial policy. It grants disguised subsidies and tax exemptions to food manufacturers, and to companies involved in agriculture and petroleum. It also gives export aid which appears difficult to justify. In 1994, these allocations amounted to FMG 200 billion, out of a meagre national budget of FMG 900 billion. It is not particularly surprising to learn that income from taxation is low as a proportion of GDP. Usually it is around 9% - in 1994 it was just 7.7%!

In 1995, World Bank and IMF officials visited the country on four separate occasions to examine the situation and discuss the financial crisis with the authorities. The outcome was an agreement on the structural and sectoral measures that should be taken to stabilise the currency. These included reforms in the public sector, privatisation of state enterprises, reorganisation of the banking sector, and liberalisation of air transport, the petroleum sector, telecommunications and the vanilla industry. The aim is to reduce the inflation rate, running at 48% in 1995, to 15%. On the fiscal side, the World Bank is recommending that state income be boosted by an increase in tax on petroleum products, while the VAT rate would be held at 25%.

Against this gloomy background, one positive factor has been the recent development of the free zone. This has led to an increase in industrial added value of 10% per year over the last two years and has created ten thousand jobs.

The fact is that, despite the difficulties, Madagascar has considerable assets which could be exploited further. Agriculture falls short of realising its full potential, but fishing has made a good start, particularly in the sea-food sector. There are, for example, two large fish farming businesses - one in the Mahajanga region and the other in the South - that have the capacity to boost exports substantially. Tourism is also on the increase. The number of visitors is still low, given the natural beauty and wealth of the country, but there has been a threefold increase over ten years, with 60 000 tourists choosing to holiday in Madagascar in 1995.

The greatest hope for the Malagasy Republic must lie in the people's growing awareness of the need to tackle the crisis. This awareness includes a recognition of the importance of democracy and transparency of government. There is hope for a better future although much work remains to be done. H.G.