Madagascar WT/TPR/S/80
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I. ECONOMIC ENVIRONMENT
(1) MAJOR FEATURES OF THE ECONOMY
1. The Republic of Madagascar is an island nation situated in the Indian Ocean off the
south-eastern coast of Africa.  The total area of Madagascar is 587,041 sq. km.  Antananarivo is
Madagascar's capital and largest city.
2. With a per capita GNP of US$260 in 1998, Madagascar is one of the least developed
countries.1  Agriculture accounts for some 30% of GDP.  The sector had been expected to register
healthy expansion in 2000 and 2001, but the impact of cyclones in February and March 2000 – which
led to the displacement of some 600,000 people – is likely to undermine its performance.2  T h e
fluctuating nature of agricultural production, due both to climatic conditions and ongoing, but
incomplete, economic reforms, along with variat ions in commodity prices, including the sharp
increase in world oil prices from US$10/barrel in January 1999 to US$30/barrel in March 2000, has
had a major impact on Madagascar's economic performance.  Because Madagascar is dependent on
commodities for its export earnings, its terms of trade have deteriorated as commodity prices have
generally declined.  Madagascar's manufacturing sector (12% of GDP) is underdeveloped and suffers
from a variety of inefficiencies that need to be addressed for the sector to contribute moresubstantially to Madagascar's economic well-being.  The services sector, approximately 52% of GDP,
is predominately characterized by commodity transport, construction and public works,
telecommunications, and tourism.  A large informal sect or exists to the detriment of the formal sector.
Madagascar's GDP growth increased markedly over the period 1995-99 (Chart I.1).
3. Madagascar's population was 15 million in 1998;  the average annual growth rate since 1990
has been approximately 3.2% (Table I.1).  The urban population increased from 1.6 million (18%) in
1980 to 3.9 million (28%) in 1998.
3  The percentage of public expenditure on health between 1990
and 1997 was 1.4% of GDP.4  The official language is Malagasy while French is the language of
international communication.  According to the UNDP, Madagascar ranked 141st of 174 countries in
its human development index (HDI).  The HIV/AIDS  epidemic is relatively nascent in Madagascar,
providing the Government a unique opportunity for effe ctive intervention.  Nonetheless, the cost of an
effective prevention campaign and treating those already infected is expected to impose great strainon the economy.
4. The currency unit is the Malagasy franc.  The official exchange rate is determined on the
interbank foreign exchange market, established in 1994, where the euro is the only currency quoted.
5
In the past three years, the Malagasy franc has tended to depreciate in line with Madagascar's higherrate of inflation relative to trading partners;  overall, the real effective exchange rate has been broadlystable.
5. Madagascar is one of the most heavily indebted countries in the world.  Of its approximately
SDR 3.0 billion (after debt relief) external debt burden (around SDR 200 per capita), SDR 1.2 billion
is owed to bilateral creditors, SDR 1.4 billion to international organizations, and the remainder to
private creditors.  The debt servicing requirements are enormous obstacles to Madagascar's economicdevelopment.
                                                     
1 The GDP per capita for 1999 is estimated at some US$255 by the Central Bank of Madagascar.
2 EIU (2000).
3 World Bank (1999a), Table A.2.
4 World Bank (1999a), Table 7.
5 IMF (1999).  From May 1994 to December 1998, the French franc was the only currency quoted.WT/TPR/S/80 Trade Policy Review
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01234567
1995/96 1996/97 1997/98 1998/99 1999/2000 2000/2001a
b
Source: Chart I.1
Madagascar's real GDP growth, 1995-2000
Per cent
Estimate.
Projection.
Information provided b y the Mala gasy authorities.a b
6. In June 2000, the International Monetary F und (IMF) completed the mid-term review under
the Poverty Reduction and Growth Facility (PRGF) for Madagascar, and augmented the credit
arrangement by SDR 24.2 million (approximately US$32 million). 6
7. Madagascar is also in line to receive additional debt relief under the enhanced Heavily
Indebted Poor Countries (HIPC) Initiative to cushi on the adverse economic effects of its foreign debt.
A decision is expected in this regard in July 2001.  While the specific level of assistance has yet to benegotiated, Madagascar's inclusion in the HIPC programme is, in part, the result of the country's
continued progress in implementing the authorities' medium-term programme, and of stringent
measures laid down by the World Bank and the IMF.
                                                     
6 On 22 November 1999, the IMF's concessional facility for low-income countries, the Enhanced
Structural Adjustment Facility (ESAF), was renamed the Poverty Reduction and Growth Facility (PRGF) and itspurposes were redefined.  It is intended that PRGF-supported programmes will in time be based on
country-owned poverty reduction strategies adopted in a participatory process involving civil society and
development partners, and articulated in a poverty reduction strategy paper (PRSP).  This is intended to ensure
that each PRGF-supported programme is consistent with a comprehensive framework for macroeconomic,structural, and social policies to foster growth and reduce poverty.  The PRSP, once broadly endorsed by theExecutive Boards of the IMF and World Bank, is intended to provide the policy framework for future reviewsunder the country's PRGF arrangement.Madagascar WT/TPR/S/80
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Table I.1
Social and economic indicators
Area 587,041 sq. km. GNP per capita (1998) US$260
Population (1998) 15 million Enrolment rate in education (1998) 40%
Population density 25 per sq. km. Exchange rate MGF/US$ (October 2000) 6,814
Urban population (1998) 3.9 million Inflation (third quarter 1999) 14%
Annual average population growth 3.2%
Life expectancy (1998) 58 years
Adult illiteracy
Male 28%
Female 42%
Source: World Bank (1999), World Development Report 1999/2000  [Online].  Available at:  http://www.worldbank.org/
wrd/2000/pdf;  and UNDP (2000), Human Development Report  [Online].  Available at:  http://www.undp.org/
hdro/HDR2000.html.
(2) ECONOMIC DEVELOPMENTS
8. The civil unrest of the early 1970s (ten years after the independence of Madagascar in 1960)
contributed to economic stagnation characterized by a scarcity of investment, a general decline in
living standards, and failure to meet modest development goals.  Socialist reforms, launched in 1975,were aimed at bringing the French-held sectors of the economy under government control, and
gradually centralizing government control over key sectors of the economy, including banking and
agriculture.  The country's pursuit of a development strategy based on economic nationalism and
pervasive state control resulted in severe macroeconomic imbalances, declining output, and increased
poverty.
9. In order to ensure the infusion of foreign assistance necessary to keep the economy
functioning, the Government adopted more pragmatic policies in 1982 in the context of a structural
adjustment programme based on disengagement of the state, fiscal and administrative reform, and
economic and financial liberalization.  The political instability of the early 1990s had slowed the
economic reforms.
10. Following the 1996/97 elections, an ambitious economic programme was adopted in 1998.
The programme called for a quickening of the pace of structural reforms and institutionalimprovements aimed at strengthening public finances.  However, during most of 1998, the political
transition process hampered a vigorous pursuit of the reforms.  Notwithstanding the uncertainties
associated with the political transition, the government achieved its objectives for the year in terms of
economic growth and inflation.  In the course of 1998, major fiscal reforms were initiated, aimed at
strengthening the government's capacity in revenue collection, and expenditure monitoring andexecution in the medium term.
11. The structural reform measures adopted in 1998 – aimed at strengthening tax and customs
administration, eliminating a large number of exemptions under the value-added tax (VAT) and other
levies, and increasing excise taxes and levies on petroleum products – resulted in an increase in
government revenue to 11.4% of GDP in 1999 up by 0.8 percentage points of GDP from 1998.  Inaccordance with its obligations under the Cross-Border Initiative, Madagascar has streamlined its
external tariff structure and reduced the number of applicable rates from six to four, with a maximum
rate of 30%.  This process resulted in a reduction of two percentage points in the average tariff rate
in 1999 (Chapter III(1) and (2)(iii)(a)).  Likewise, the institutional and operational independence of
the Central Bank of Madagascar, as from 1 January 1993, has contributed to containing increases inmonetary aggregates and reducing inflation from 49% in 1995 to 7.6% in 1999 (Table I.2).WT/TPR/S/80 Trade Policy Review
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Table I.2
Inflation rate, 1995-99
(Per cent)
1995 1996 1997 1998 1999
Quarterly
basisAnnual
basisaQuarterly
basisAnnual
basisaQuarterly
basisAnnual
basisaQuarterly
basisAnnual
basisaQuarterly
basisAnnual
basis
First
quarter8.3 48.6 5.1 34.1 -1.0 2.4 4.1 5.2 2.6 5.8
Second
quarter7.8 59.3 1.9 26.7 3.0 3.6 2.5 4.7 3.2 6.5
Third
quarter10.4 53.4 -1.4 13.2 0.0 5.0 1.7 6.5 2.2 7.0
Fourth
quarter7.1 38.2 3.0 8.8 -1.9 0.0 -1.1 7.4 2.4 10.9
Annual
averageb 49.0 19.8 2.8 5.9 7.6
a Changes in the consumer price index from one quarter to the corresponding quarter one year later.
b Measured by changes in annual average consumer price indices.
Source: Information provided by the Central Bank of Madagascar.
12. Slippages in fiscal management overshadowed the positive impact of the reforms.  The
slippages were compounded by a deferment of aid disbursements, and by the end of 1998 the fiscal
stance was a cause of concern.  Significant further progress was made in 1999.  The fiscal programme
for 1999 included funding for additional structural reforms, including privatization, in particular infinancial/banking, fishing, and telecommunications, wage decompression, civil service and justice
reforms, and indemnification for past expropriations.  Furthermore, with the exception of outward
foreign direct investment, Madagascar has liberalized capital movements since 1996.
13. Overall, Madagascar has made significant strides in reforming its economy and liberalizing
the various components of its trade regime.  Because th e reforms fell short of social targets, strategies
are being formulated to reduce poverty.
(3) T
RADE PERFORMANCE
14. Madagascar's balance of trade has been consistently in deficit despite the continuing process
of economic reform.  Driven by higher exports generated mainly in the fishing, tourism, and
manufacturing sectors, as well as a sharp rise in free-trade-zone exports, GDP growth in 1999 reached
4.7%.  The external current account improved beyond that envisaged under the Government's
programme;  the actual deficit (excluding offici al grants) is estimated at 6.5% of GDP in 1999,
compared with 7.9% in 1998.  Details of Madagascar's balance of payments for the period 1995 to
1999 are summarized in Table I.3.Madagascar WT/TPR/S/80
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Table I.3
Balance of payments, 1995-99
(SDR million)
Items 1995 1996 1997 1998 1999
Trade balance -43.9 -83.6 -128.9 -112.9 -115.4
Net services -193.4 -171.4 -160.7 -168.0 -139.4
Receipts 162.4 210.8 200.3 217.2 245.8
Payments -355.8 -382.2 -361.0 -385.2 -385.2
Net private transfers 49.5 60.3 84.2 61.3 78.1
Current account (excluding grants) -187.7 -194.7 -205.3 -219.6 -176.7
Official grants 67.0 91.0 140.2 86.1 103.1
Current account (including grants) -70.7 -103.7 -65.1 -133.5 -73.6
Net capital movements -112.3 26.8 84.9 6.9 68.8
of which foreign direct investment 6.4 7.0 10.0 11.9 42.7
Overall balance -183.0 -76.9 19.8 -126.6 -4.8
Source : Information provided by the Central Bank of Madagascar.
(i) Trade in goods
15. In 1990, the top sources for Madagascar's imports were France, Germany, the
United Kingdom, Italy, the Netherlands, Japan, Iran, and the United States.  A diversification of the
sources of imports to Madagascar during the 1990s has led to a substantial decline in the share of itsimports from the European Union (Chart I.2).
Chart I.2
Imports by origin, 1990 and 1999
Per cent
EU  51.31990
South Africa 
1.5
Japan  6.3United States 
4.1China  2.3Other 
28.81999
EU  32.2
Iran 12.5Japan 5.1
United 
States  3.0South Africa 
5.1
China  6.7Other 
26.7
US$ 569.3 million US$ 505.3 millionIran  5.7
Source:   UNSD, Comtrade database.Bahrain
8.7WT/TPR/S/80 Trade Policy Review
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16. The nature of Madagascar's imports changed little between 1990 and 1999.  Machinery and
transport equipment, food, fuel, and chemicals characterized imports throughout the period (Chart I.3
and Table I.4).  The significant increase in the importation of food and foodstuffs towards the end of
the period is largely attributable to the loss of domestic agricultural production caused by severe
droughts.
Chart I.3
Imports by major commodity group, 1990 and 1999
Per cent
Machinery 
18.81990
Fuels
17.2
Transport equipment
14.2Chemicals 12.8Other semi-
manufactures
11.3Other consumer 
goods 5.8
US$ 569.3 millionFood 11.21999
US$ 505.3 millionMachinery 
16.3
Fuels
24.2
Transport equipment
10.5Chemicals 11.3Other semi-
manufactures
9.2Other consumer 
goods 6.9
Food 13.7Other 
7.9Other 
8.7
Source:   UNSD, Comtrade database.
Table I.4
Imports by major commodity group, 1990-99
(US$ million)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Food 63.7 45.6 52.4 65.5 66.1 89.3 68.7 87.0 80.2 69.1
Machinery 106.3 93.1 67.2 78.2 75.8 78.5 94.9 81.1 81.4 82.4
Fuels 98.1 49.4 77.4 88.7 64.4 77.1 164.5 120.6 103.9 122.1
Transport equipment 81.3 72.0 44.9 58.2 53.8 62.2 57.8 66.5 62.1 53.3
Chemicals 72.7 43.7 50.6 61.3 56.3 69.9 67.4 73.1 66.4 57.1
Other semi-
manufactures64.1 43.1 38.3 45.1 40.8 56.0 55.6 52.5 56.6 46.6
Other consumer
goods34.6 24.5 29.1 29.8 35.4 38.0 44.4 40.9 42.2 34.9
Iron and steel 21.9 15.8 13.1 15.6 17.5 44.1 21.1 20.2 28.2 16.2
Textiles 11.3 8.0 4.7 9.5 7.2 8.4 11.1 15.8 13.3 11.5
Agricultural raw
materials7.8 4.9 5.6 7.6 5.6 10.1 7.7 7.6 6.2 2.9
Source : UNSD, Comtrade database.Madagascar WT/TPR/S/80
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17. Trade liberalization reforms have contributed to both geographical and product diversification
of Madagascar's exports.  The destinations of Madagascar's exports shifted significantly during the
1990s:  in 1990, the European Union, the United States, Japan, and Singapore accounted for most of
the country's exports;  in 1999, exports to Japan and the United States fell to 1.4% and 5.4% (from
6.9% and 17.8%) of total exports respectively, while exports to the European Union had increased
(Chart I.4).
Chart I.4
Exports by destination, 1990 and 1999
Per cent
Source:   UNSD, Comtrade database.EU  52.41990
United States
17.8Japan 
6.9Mauritius 2.4Other 14.4
US$ 292.4 millionSingapore 6.11999
EU  56.8
Japan 1.4
United States 
5.4Thailand 4.8Other 23.3
US$ 232.8 millionSingapore 7.5South Africa 
0.8
18. Although by 1998, Madagascar's reliance on agricultural products for exports had lessened
somewhat, Madagascar's commodity exports continue to rely heavily on agricultural products.  In
1990, exports of food and agricultural raw materials accounted for over 75% of all exports;  in 1999,
that figure had dropped to 42.5% of exports.  Exports of textiles increased from 4.5% to 29.3% during
the period (Chart I.5 and Table I.5).
Table I.5
Exports by major commodity group, 1990-99
(US$ million)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Food 213.2 195.0 183.4 174.0 255.8 243.4 173.5 152.5 100.4 84.7
Ores and other minerals 22.4 20.8 17.5 26.2 11.7 24.3 46.4 18.4 16.7 8.8
Textiles 13.3 20.2 14.6 12.8 10.0 18.0 19.1 50.8 43.4 68.3
Agricultural raw materials 10.7 16.1 8.6 10.0 12.1 21.0 19.8 17.3 15.3 14.2
Other semi-manufactures 6.5 5.5 6.5 6.1 6.5 8.4 8.3 12.3 8.5 19.1
Chemicals 4.4 8.1 3.7 4.4 4.2 7.5 6.0 5.8 6.1 6.8
Machinery and transport
equipment4.9 6.7 4.2 9.2 1.1 3.1 2.2 2.0 17.7 4.5
Other consumer goods 5.9 6.9 3.9 4.0 12.3 8.2 6.4 4.0 6.7 15.4
Source: UNSD, Comtrade database.WT/TPR/S/80 Trade Policy Review
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Chart I.5
Exports by major commodity group, 1990 and 1999
Per cent
Other
10.91999
US$ 232.8 millionTextiles 29.3Food 36.4
Agricultural 
raw material 
6.1
Ores and other 
minerals 3.8Chemicals
2.9
Other semi-
manufactures 8.21990
Food 
72.9Other 
6.7
US$ 292.4 millionOres and 
other 
minerals 7.7Textiles 4.5Agricultural raw 
materials 3.7Clothing 2.3Other semi-
manufactures 2.2
Fuels 2.4
Source:   UNSD, Comtrade database.
(ii) Trade in services
19. Madagascar is a net importer of services (Table I.6).  The services sector was one of the
engines of the 1997/98 economic recovery.  The dynamic tertiary subsectors were commodity
transport, construction and public works, telecommunications, and tourism.  Tourism grew by 22% in
1997, although it still represents only a marginal share of value added in the tertiary sector.
Construction and public works benefited from the resumption of external aid.
Table I.6
Services account, 1995-99(SDR million)
1995 1996 1997 1998 1999
Services (net) -193.4 -171.4 -160.7 -168.0 -139.4
Receipts 162.4 210.8 200.3 217.2 245.8
Freight and insurance 3.6 3.2 3.3 3.5 4.1
Other transport 44.3 52.3 40.4 42.8 39.9
Travel 38.0 44.7 52.9 65.5 72.8
Investment income 4.6 5.9 5.7 9.5 6.6
Other services, public 16.0 28.3 20.9 19.6 26.9
Other services, private 56.0 76.5 77.1 76.3 95.6
Payments 355.8 382.2 361.0 385.2 385.2
Freight and insurance 67.5 72.4 79.2 78.6 89.3
Other transport 37.6 37.1 34.3 33.6 37.3
Travel 39.7 49.8 56.9 84.8 81.4
Investment income 114.8 114.9 84.2 72.2 46.2
Other services, public 53.6 64.5 69.4 78.2 87.6
Other services, private 42.6 43.5 37.0 37.9 43.4
Source: Information provided by the Central Bank of Madagascar.Madagascar WT/TPR/S/80
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(4) SAVINGS AND INVESTMENT
20. Gross domestic savings in Madagascar, both by the government and the private sector, are
insufficient to meet the needs of Madagascar's growing economy.  In 1999, the gross domestic savings
were 5% of GDP, up from 4.6% in 1998.  Gross domestic investment has risen slightly, from
approximately 11% in 1995, to nearly 13% in 1999 (Table I.7).  Taking into account reconstruction
activity from the recent cyclones, domestic investme nt is expected to rise to 16% of GDP in 2000.
Public investment, mostly financed with official transfers and foreign loans, accounts forapproximately two thirds of gross domestic investment.
Table I.7
Consumption, investment, and savings, 1995-99(Per cent of GDP)
1995 1996 1997 1998 1999
Consumption 96.4 93.7 96.3 95.4 95.0
Gross investment 10.9 11.6 11.9 12.5 12.9
Gross domestic savings 3.6 6.3 3.7 4.6 5.0
Source: Information provided by the Malagasy authorities.
21. Foreign investment inflows have traditionally been the source of most investment funds.
Privatization of state-owned enterprises contributed to a substantial increase in foreign directinvestment in 1999, by nearly 260% (Table I.3).
(5) O
UTLOOK
22. Madagascar's often painful economic reform programme is paying off in terms of business
growth and employment in the urban economy of Antananarivo.  The Malagasy Government'sobjective in its economic programme is to maintain real growth of the economy at approximately
4.8% in 2000 and to increase it to 6.3% in 2001.  Inflationary pressures will have a knock-off effect
on the stability of the Malagasy franc, which depreciated by 10.5% (in terms of annual average
exchange rates) against the euro in 1999.
7  Inflation is targeted to decline to 5.6% by the end of 2000.
The current account deficit is expected to widen to 9.1% of GDP in 2000, owing to higher petroleum
import prices, higher rice imports, and a smaller than originally projected increase in exports due to
the destruction of crops by the cyclones in early 2000.  The impact of the natural disasters on theexternal account deficit is estimated at 1.7% of GDP.  Although Madagascar is finding buyers for
most of its parastatals, the Government's ability to secure the best terms is constrained by the paucity
of competing bidders.
23. Despite falling world prices and inefficiencies in the domestic marketing chain – which see
farmers receive a relatively low return on their production – there are proposals and concrete
investments under way, or under discussion, that could significantly boost food exports.  Therefore,
the volume of exports is forecasted to grow by 5.5% in 2001, compared with a growth rate of 4.4%
projected for imports.
24. Despite the economic progress, Madagascar still faces daunting long-term challenges,
including reduction in poverty, the rehabilitation and extension of infrastructure, and the improvement
of the quality and quantity of social services.  The country's capacity to address these pressing issuesis constrained by low domestic savings, the heavy external debt burden, limited availability of skilled
workers, and a weak public administration network.  The poverty reduction strategy under
development is expected to provide opportunities to strengthen the focus of government activities.
The anticipated alleviation of the external debt burden in the context of the HIPC Initiative will
provide important resources in support of the country's poverty-reduction strategy.
                                                     
7 The depreciation was 3.4% in terms of end-period exchange rates (December 1998 to
December 1999).