Madagascar

major macro economic indicators

(e): Estimate (f): Forecast

RISK ASSESSMENT 

Growth underpinned by ore

Affected by inflationary pressures linked to higher rice imports, higher local fuel prices and two cyclones that led to supply disruptions, the country's economic growth slowed in 2023. Faced with the collapse in vanilla sales, in April 2023 the authorities abolished the floor price effectively applied since November 2022 to black vanilla exports (USD 250 per kilo), without abolishing the minimum price for green vanilla (5 kilos of green vanilla required for one kilo of black vanilla) paid to producers, set at 75,000 ariary per kilo (USD 17.0). But given the size of stocks and growing competition from other countries, the price might not be respected. However, exports resumed at the end of 2023, and this recovery should continue in 2024. This will also be the case for gold, as the government decided in March 2023 to lift the ban on its exports dating from 2020. It is the development of the minerals sector that will stimulate growth the most in 2024, thanks to the implementation of the new mining code, revised and approved by the Constitutional Court in July 2023. The legislation increases the combined royalty and community rebate rates to 5% (from 2%) and reduces the validity of a mining licence to 25 years (from 40), renewable once for 15 years (from 20). Despite the tougher conditions, foreign and domestic investment, which has been at a standstill for over 20 years, is expected to increase. This is due to a more attractive legal and regulatory environment and sustained global demand for the country's mineral resources (graphite, nickel and cobalt), which are essential to the energy transition. The commissioning of large graphite extraction facilities will also boost mineral exports. Public investment will support the construction sector by targeting infrastructure projects, such as the construction of a water pipeline in the south and a new motorway to link Antananarivo and Toamasina by 2026. Private consumption is expected to remain weak in 2024, while inflation will remain high. Poverty affects 80% of the population. The Indian embargo on non-basmati rice exports, introduced in July 2023, will further drive up food prices, especially as 90% of Madagascar's rice imports come from India. In 2023, the Central Bank of Madagascar (“BCM”) increased its deposit facility and marginal lending rates to 9% and 11% respectively, to moderate prices. With inflation expected to slow in 2024, the BCM could ease its monetary policy to stimulate growth.

Falling twin deficits

In 2023, the budget deficit narrowed slightly thanks to higher revenues (foreign aid and taxes) than expenditure. Increased losses at the national water and electricity production and distribution company, Jirama, following an accident at a hydroelectric power station in 2022, weighed on the budget balance. The government has had to increase its transfers to stop the accumulation of arrears and ensure the supply of electricity. In addition, in 2023, the government and fuel importers/retailers offset the government's liabilities arising from the freeze on pump prices against unpaid taxes by oil companies. The introduction of an automatic mechanism for setting fuel prices at the beginning of the year, and reforms to the Jirama, will reduce the budgetary risk in 2024. Capital spending on the government's infrastructure projects will remain high, but the budget deficit will narrow thanks to revenues from the mining sector and ongoing structural reforms. These aim to streamline budget execution, improve cash management and fight corruption. They are supported by the IMF, which in March 2021 granted an Extended Credit Facility of $312 million, of which $228.7 million has already been disbursed, with the balance to be disbursed by July 2024. The budget deficit will be financed mainly by concessional foreign loans. Public debt will remain at a sustainable level, with the external portion (40% of GDP) mainly held by multilaterals and the domestic portion (15.3% of GDP) by state-owned enterprises.
In 2024, the current account deficit will narrow slowly thanks to an increase in exports of minerals, vanilla and textiles (US demand and Mauritian investment), which will outstrip the rise in imports. As a result, the trade deficit will fall as a proportion of GDP, although it will remain at a high level due to the durably high price of imports (oil, basic foodstuffs). Remittances from expatriates (6% of GDP in 2022) will far exceed dividend repatriations from foreign investors. The continued recovery in European tourism will help balance the purchase of services required by mining. The deficit will continue to be financed by international project aid and foreign direct investment, including the development of the nickel and cobalt mine by Japanese and Korean companies. However, the Australian project at the Toliara base (ilmenite) is still on hold.

A presidential election in a climate of socio-economic discontent

In November and December 2023, the two rounds of the presidential election in which the outgoing president is a candidate will take place. In office since 2019, Andry Rajoelina had already become head of state following the coup d'état in 2009, and presided over the Transition of the Republic of Madagascar until the 2013 elections. His current administration is being challenged for its shortcomings in governance, notably corruption (his chief of staff was arrested in August 2023 in London). Two former presidents, Marc Ravalomanana and Hery Rajaonarimampianina, are also running for office, and the alliance of their two parties forms the main opposition force for the 2024 legislative elections. Accompanied by nine other opposition candidates and several hundred supporters, they marched peacefully on 2 October, but were dispersed by tear gas used by the police. The opposition will contest the election results if the incumbent wins after an electoral campaign that was sealed off by the government. The risk of a coup d'état is a possibility given that the army has already intervened in the past during contested transitions (most recently in 2002 and 2009). In March 2023, the government banned all forms of political demonstration and will crack down on opponents in the event of protests. These elections are taking place against a backdrop of widespread discontent, fuelled by weak growth, high inflation and a food crisis resulting from external supply shocks, persistent drought in the south and recurrent cyclones. Added to this is a high poverty rate (80%) and prevalent crime and banditry (which rose by 8% in 2021). In 2024, the country will continue to depend on international aid (multilateral organisations, as well as France and the United States).

Last updated: November 2023