Madagascar

major macro economic indicators

(e): Estimate (f): Forecast

RISK ASSESSMENT 

Investment momentum tempered by sluggish external demand

Plunged in 2020 into one of the worst recessions in its history by the Covid-19 pandemic, the economy recovered slowly in 2021-22. It remains dependent on the evolution of the virus, with a vaccination rate of less than 6% in September 2022 (third wave observed at the beginning of 2022) and has been affected by several violent climatic episodes (five tropical storms in just one month at the beginning of 2022, strong and persistent drought in the south of the island), as well as by the inflationary shock linked to the war in Ukraine. In 2023, growth is expected to accelerate, although it will remain below the pre-COVID-19 pace. The country will continue to benefit from high prices for nickel, cobalt, cloves and vanilla, and consumption is expected to strengthen after being impacted by the COVID-19 crisis and weather episodes. Furthermore, growth is expected to be driven by increased capital spending. The construction of new road infrastructure, the development of water supply, and investments in the energy and mining sectors should be carried out within the framework of the Plan Emergence Madagascar (PEM), financed by both public actors, primarily international partners, and private entities. The Island Games, which bring together the islands of the Indian Ocean every four years, will be held on the island and should lead to the construction and renovation of sports infrastructure. However, although direct trade links with Russia and Ukraine are limited (around 0.6% of Madagascar's trade), the war in Ukraine will continue to weigh on the country, as the import bill will continue to be burdened by high energy and food prices, the recovery of the tourism sector hampered by international uncertainties, and demand for exports - particularly textiles - weakened by the slowdown in external demand, especially from the European Union, which receives 32% of Madagascar's exports. In this context, inflation, which reached a record level in 2022 due to the rise in energy and food prices, is expected to remain high and to continue to weigh on the purchasing power of households. Although the central bank has raised its key rate several times since 2021, bringing it to 8.9% at the beginning of August 2022, potential persistent inflation could lead to further increases, weighing on private investment. Moreover, a second-round effect linked to the rise in real wages in the public sector (which should average 17% in 2022) could be felt. However, inflation should remain below its 2022 level, as the government has shown its willingness to contain consumer prices, notably by capping prices on certain essential goods (rice, sugar, flour). The economy remains very dependent on the evolution of COVID-19, as the vaccination rate is still very low, and on the occurrence of new climatic episodes.

Still large twin deficits

The structural deficit in trade in goods and services explains the current account deficit. Investment needs are high, while domestic savings capacity is low, as is manufacturing capacity. In 2023, it will remain important, albeit shrinking, given the persistence of high import prices, sluggish external demand, expatriate remittances squeezed by the economic situation in host countries, as well as lower than expected tourist flows. The deficit will continue to be financed by international aid and foreign direct investment. Reserves will remain at an adequate level, above four months of imports.

The budget deficit, which has widened since 2020, will narrow slightly owing to the revenues generated by stronger growth, but will remain high. The measures implemented by the government to limit the impact of inflation on the population and businesses will continue with the prospect of the presidential election at the end of 2023. In particular, public sector wage increases are expected to raise the wage bill by 0.9% of GDP. Due to the sharp rise in their production costs, the government will continue to provide financial transfers to fuel distributors and the national company JIRAMA, which provides the island's water and electricity supply, to reduce their net liabilities and limit fiscal risks. As part of the hosting of the 2023 Island Games, the budget of the Ministry of Youth and Sports will increase significantly. Deficit financing will continue to rely on multilateral and bilateral project loans and local banks. Public debt will remain at a high but stable and sustainable level, as it is overwhelmingly composed of concessional loans.

The presidential election will be held in 2023 in a tense social context

The presidential election will take place in November 2023 and will thus open the door to the position currently held by Andry Rajoelina, who was elected in 2018 and whose presidency has been strongly contested by part of the population, particularly because of his management of the pandemic and the lack of fundamental reforms to improve the country's governance and its development prospects. This election, which should confirm Andry Rajoelina’s hold on power thanks to his mastery of the state machinery, could exacerbate tensions and the fragility of the country in a complicated social context, in tandem with growing political polarisation. The country is plagued by extreme poverty, which is expected to remain close to 80% until 2024, almost double the average for sub-Saharan Africa and still above the pre-crisis level. Unemployment is increasingly high. Due to years of underinvestment and a long period of severe drought, Madagascar is experiencing one of the worst food crises in its history. Food insecurity could increase in the coming years due to the island's vulnerability to more frequent violent climatic events and the economy's heavy dependence on the agricultural sector. Moreover, despite the establishment of an anti-corruption system, enforcement of anti-corruption policies remains limited.

Last updated: November 2022