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Madagascar: Country Brief

Political context

Since January 2009, Madagascar has been in the throes of a political crisis. The turmoil was generated by the change of power led by Andry Rajoelina (at that time the mayor of the capital city Antananarivo) through street movement and army dissent against President Marc Ravalomanana, forced into exile in March 2009. Andry Rajoelina took the title of President of the High Authority of the Transition (HAT). This unconstitutional access to power was rejected by the international community.

Crisis mediation efforts by the African Union (AU), the Southern African Development Community (SADC), the United Nations (UN) and the Organisation Internationale de la Francophonie (OIF) initially focused on reaching an agreement between the current de facto President and the three ex-Presidents -- Ravalomanana, Ratsiraka and Zafy -- on the establishment of an inclusive transitional government and a timetable for elections.  A power-sharing deal was eventually reached on Aug. 9, 2009 in Maputo, Mozambique, but failed to be implemented and the deal was dismissed by the HAT. This led to sanctions imposed by the AU including travel bans and assets seizure for a number of individuals of the de facto government.

After months of intense negotiations and a mediation process led by SADC, a draft road-map for an exit to the crisis was initialed on March 9, 2011, by a number of political parties participating in the mediation and a new government was formed which saw the re-appointment of the same Prime Minister. However, the three former-Presidents that signed the Maputo agreement rejected the legitimacy of the government and called for the revision of the road-map which in their view is too favorable to the HAT and would prevent Ravalomanana to contest elections.

The SADC pursued attempts to reach a more inclusive adoption of the roadmap through a series of summits. As recommended by the SADC Heads of State at their meeting in South Africa in June 2011, an amended roadmap including the unconditional return of ex-President Ravalomanana was finally signed by the representatives of all key political leaders (with the exception of ex-President Ratsiraka) in Antananarivo on September 16, 2011. However, the return of ex-President Ravalomanana is still in doubt, as the HAT issued an order of arrest in case he returns. A new Prime Minister was appointed and a new Government formed on November 21, 2011, under the auspices of the SADC Troika. Opposition leaders rejected the legitimacy of the Government despite the inclusion of their representatives, arguing that it is biased in favor of the HAT which keeps control of the “strategic” Ministries. A new Parliament was appointed on December 2, 2011, and the restructuring of the Independent Electoral Commission (CENI) is now underway. The AU, at its meeting of December 8, 2011, noted the positive developments but conditioned the lifting of sanctions on further evidence to be provided by the SADC of satisfactory implementation of the roadmap including on the article that deals with the return of ex-President Ravalomanana, an agreement on an electoral calendar and making an amnesty law official. 

Economic Overview/Performance

Madagascar has showed chronic political instability and declining economic trends over the past few decades. In the1960s, the country was among the better off African countries, with an educated elite, strong institutions, good infrastructure, and an income per capita above the developing country average. It lost this position after several decades of economic mismanagement and recurrent crisis. From the 1970s until the second half of the 1990s annual growth of GDP averaged only 0.5 percent compared with a population growth of about 2.8 percent.

Between 2002 and 2008, Madagascar embarked on an ambitious transformation path that brought gradual improvements in social, economic and governance indicators. The economy grew at an average of 5 percent per year, and poverty declined to 69 percent in 2008 from its peak of 80 percent in 2002. But governance continued to be weak, and social indicators were still low by international standards -- the country continued to be ranked at the bottom of the Human Development Indicator. Magnifying these challenges, significant and persistent deficits in physical and human capital, continued to place enormous demands on the government and the economy -- first to educate its people,  then to connect them and, ultimately, to generate enough jobs. Furthermore, Madagascar is faced with the challenge of preserving its unique environment and biodiversity, which is of global significance.

Since early 2009, the political crisis has led to a decline in economic growth, at the beginning exacerbated by the negative impact of the global financial turmoil on export-oriented activities. GDP growth turned to be negative by about 4 percent in 2009 but yet weakly rebounded in 2010 (with an estimated growth slightly above 0 percent.) Prudent fiscal and monetary policies have helped to keep the macroeconomic framework under control, with reasonable fiscal and external balances, and relatively stable financial indicators. The inflation rate remained around 10 percent on annual basis and the exchange rate is stable. Foreign reserves have remained stable at about $1 billion, or about four months of imports. The stock of Madagascar external debt burden at $1.2 billion or 12 percent of GDP is low as the country had benefited of an HIPC debt reduction agreement in 2007. Madagascar remains current in its debt obligations towards the Bank and other IFIs. The effect of the crisis on the economy is perhaps not as visible but it remains extremely perverse because it is contributing to increased fragility and to a dramatic impact on poverty and social distress.  The political crisis had marked differentiated impacts across sectors. Most export-oriented activities, as well as those linked to public sector funding (such as construction) have been in disarray, as reflected by the fall in exports (down by 50 percent between 2008 and 2010) and  in public investment (down by 30 percent). Concurrently, the primary sector has been resilient with an exceptional rice harvest in 2009 (up by 40 percent from 2008 levels). The mining sector production jumped significantly thanks to the QMM project that started its production by mid-2009. The informal sector has seen a rebound due to resurgence of illegal trade, and the liberalization of the food industry.

The country continues to rank poorly on the ease of doing business indicator (137/183 in Doing Business 2012), knowledge economy (120/145 in 2009) and economic competitiveness (124/139 for 2010-2011).  However, it is worth noting that Madagascar made significant progress in trade logistics efficiency and moved up to 88 out 155 countries in 2010. The Africa Competitiveness Report 2011 reports that the top five constraints for doing business in Madagascar are (in order of ranking): government instability/coups, policy instability, corruption, access to finance, and crime and theft. Expensive and unreliable electricity, land regulation and access to land, uncompetitive practices, and governance challenges are also key constraints perceived by firms as highlighted in various studies. Under the pressures of the political crisis, business activities have slowed down. Small and medium enterprises are the most affected. The cost of doing business is unfavorable for entrepreneurs, which has spawned a large informal sector. Many workers were laid off from textile and garments firms because Madagascar lost eligibility to AGOA preferential access in January 2010. More than 30,000 workers have been laid off with severe social consequences. As a result, most of them have joined the workforce in the informal sector.

The economic and social situation remains extremely fragile, as the path to recovery is closely linked to aid and external factors. Economic recovery will continue to be associated to the resolution of the political crisis and Government recognition by the international community. A large fraction of official aid -- which represents 40 percent of the budget and 75 percent of the public investment program -- remains on hold. That has led to significant cuts in investments, a decline in the delivery of social services and further deterioration of growth prospects. Lastly, while the predominant agricultural sector has performed relatively well it will continue to be dependent on climatic conditions. Unfortunately, Madagascar is considered as the third African country the most exposed to climatic catastrophes, including cyclones and droughts.

According to all criteria used by international development agencies, Madagascar appears as one of the poorest countries in the world. Income per capita barely reaches US$ 400 (World Bank Atlas methodology); above three-fourths of households live under the poverty threshold (World Bank and INSTAT), and the country ranks 143rd in the world in terms of human development index (UNDP).

The current political crisis has increased poverty levels by above nine percentage points between 2005 and 2010, reaching 77 percent of households, the highest rate in Africa (World Development Indicators, 2011). Households are not equal in front of the poverty challenge. On one side there are wide differences among regions (from 57 percent to 77 percent) and between rural areas (74 percent) and urban areas (52 percent.) In addition, income differences between the rich and the poor are large, especially in urban centers (where the ratio between the highest and the lowest income groups may top 10) while they may be lower in rural areas.

Under the current circumstances, there are little chances that Madagascar would achieve most of the MDGs by the deadline date of 2015. The high level of poverty is not only a problem of social equity in Madagascar but it also contributes to slowing down economic growth. Domestic global demand is necessarily limited by the extremely low purchasing power and budgetary constraint, while global supply is concomitantly reduced by the lack of capacity to invest in human and physical capital.

 

World Bank Assistance

The World Bank has been present in Madagascar since September 1963. Before the current political crisis, the portfolio had performed well with low commitment at risk (12 percent) and a high disbursement ratio (33 percent in fiscal year 2008). Over the period the Bank has accumulated significant knowledge and experience.  The World Bank’s assistance had been guided by a Country Assistance Strategy (CAS) for fiscal years 2007 to 2011 which supports the government’s reform program and aims at removing bottlenecks to sustainable and shared growth and improving service delivery. As part of the CAS, the Bank has supported a number of programs including (i) budget support (Poverty Reduction Support Credits); (ii) investment projects in transport, private sector development, energy, health, education, agriculture and environment; (iii) public-private partnerships; and (iv) analytical and advisory activities (AAA). Poverty Reduction Support Credits (PRSCs) have served as a forum for policy dialogue with the government and as a platform for donor harmonization.

An Interim Strategy Note (ISN) is now effective since February 2012, and covers the period until June 2013. The country is not in a position to warrant the preparation of a new CAS due to the implementation of operational procedure OP 7.30 (dealing with de facto governments) since March 2009, which results in  the absence of normal dialogue with an internationally recognized government, and poses restrictions on the borrowing capacity of the country with the World Bank.

The three-year crisis and resulting suspension of international aid by many donors has had a very high cost on one of the world’s poorest populations. As a result, along with a dramatic rise in poverty levels and an alarming deterioration in governance, Madagascar is gradually sinking into a state of increased fragility. Clearly, achieving the Millennium Development Goals (MDGs) has become an increasingly distant target.  The state of health and education is close to an emergency situation because the system of delivery of public services risks paralysis, and humanitarian aid, bypassing public institutions, is showing its limits. The infrastructure is in an alarming state of disrepair. Furthermore, exogenous shocks (financial crisis, food or oil prices) and extreme climate risks (hurricanes, drought) to which Madagascar is prone, ignore the political signals and further aggravate the vulnerability of the poor in a context where the State has only limited capacity to respond.

Given the uncertain environment in Madagascar, and despite the absence of a clear government strategy, the ISN is considered to be the appropriate instrument for the World Bank to review its strategic position and focus its actions during this transition period. This interim strategy focuses on the most immediate short-term problems while maintaining a medium-term vision based on three themes: i) governance and public sector capacity, ii) vulnerability and resilience, and iii) employment and competitiveness. The ISN will work on the basis of four instruments; first, a portfolio restructuring to maximize its impact and reallocate funds to priority projects in the health sector and urgent rehabilitation of infrastructure. Second, the continued focus on an analytical effort to refine the knowledge necessary to facilitate re-engagement and to raise public awareness of the cost of the crisis and the risk of fragility. Third, building stronger partnerships with other development assistance agencies, civil society and the private sector to improve coordination and the impact of existing interventions, and fourth, the provision of new financing  in the health/nutrition and education sectors, to reduce the risk of  an interruption in basic services, as well as in the response to potential crises and natural disasters, in terms of the rehabilitation of infrastructure and provision of safety nets for those affected.

The ISN capitalizes on lessons learned from the World Development Report 2011, whose theme was "Conflict, Security and Development," and recommends both great attention to preventing fragility and the need to remain engaged even in situations of political instability and poor governance. In line with the entire international community, the World Bank faces the dilemma of preventing Madagascar from falling into fragility, while working in the context of an unrecognized government. The ISN is trying to balance the importance of supporting international mediation efforts, while keeping in mind the cost of inaction on the poor, in an environment of degraded public services and poor governance.

The World Bank portfolio currently consists of 13 projects with total commitments of approximately US$900 million and a net non-disbursed amount of US$226 million. After an initial suspension, portfolio disbursements gradually resumed in several waves in late 2009, mid-2010 and April 2011 to (i) alleviate the plight of the most vulnerable people (ii) deal with the most pressing fiduciary, social and environmental, safeguards and reputational risks, and (iii) maintain the integrity of human and physical infrastructure of projects. In addition in June 2011, the Board agreed to an exceptional additional financing in the amount of $ 52 million to support the third Environmental Program due to its global public good nature, and the substantial risks associated to social safeguards linked to the end of the current funding. Despite these measures, Madagascar remains under OP7.30 and the World Bank does not intend to resume normal relations with the government at this point.

The Bank has taken advantage of the reduced operational burden to develop an outstanding program of analytical work and reaching out for new partnerships. The flagship of our renewed knowledge program has been the completion of a collection of Policy Notes covering all sectors and putting together a wealth of knowledge accumulated by the Bank over the last decade of engagement in Madagascar. Each of these Notes has been widely discussed during Development Dialogue events with all stakeholders including private sector, civil society, academia, media, and Ministerial technical level. The Notes collection has been formally subscribed by all donor partners and it is now the point of reference in terms of diagnosis, assessment of key issues, and as a platform for the formulation of possible sectoral strategies and policies, thus facilitating re-engagement when conditions permit. In addition the Bank has completed selected pieces of major sector work in areas such as: (a) political economy of governance and aid effectiveness; (b) health and nutrition; (c) urbanization; and (d) agriculture marketing.

 

Prior to the onset of the political crisis, the Bank’s assistance strategy, aligned with the government’s Madagascar Action Plan was producing real results on the ground in terms of increased investments and growth as well as improving social indicators. For example, Madagascar was one of the few African countries that had been on the way to achieve the Millennium Development Goal on nutrition. Countrywide, 5,550 community nutrition sites were established where over one million children under five, which accounts for about one-third of all children under five-years-old in the country, are regularly weighed and mothers are counseled on the progress of their children. However, the ongoing political crisis and the resulting freeze of the Bank’s program are undoing this progress.

Since 1990, the World Bank has worked with a large number of development partners to support Madagascar in implementing the National Environmental Action Plan (NEAP). This Plan was implemented in the form of a three-phase, US$400 million Environment Program (EP). The engagement has yielded substantive results, including among others:

  • 75 percent reduction in the rate of deforestation over the past 20 years;
  • Creation of 2.4 million hectares of national parks;
  • Sustainable management of 4.5 million hectares of landscapes, primarily by NGOs

Regarding knowledge services, the Development Dialogue series organized by the World Bank office became an appreciated platform of consultation with a broad range of actors including development partners, civil society, academic institutions, private sector, the media, and technical staff in the ministries. The gatherings of the “Development Dialogue” have become one of the main events in Antananarivo as an opportunity to discuss the substance of sectoral policies with a broad range of actors. It has received positive feedback from stakeholders, including the media. 

Before the current political crisis, external aid represented 50 percent of the government’s budget and 75 percent of public investments.

Madagascar’s four biggest donors (World Bank, European Commission, the United States, and African Development Bank) accounted for about 80 percent of official aid to the island.

During the political crisis most donors have put on hold new commitments while continuing existing humanitarian programs that are being channeled through specialized agencies or non-governmental organizations (NGOs).

 

Last updated April 2012




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