Madagascar Economic Outlook

Economic performance and outlook

Since the end of the 2009–13 political crisis, Madagascar has experienced a slow economic recovery that is vulnerable to macroeconomic shocks, such as drops in nickel and cobalt prices, and climatic disasters, such as drought, hurricanes, and floods. Due to the slow rate of agricultural modernization, the primary sector regularly suffers from the adverse effects of climate change. In 2014–16, the economy grew a relatively modest 3.5% a year. Since then, economic performance has been encouraging, with real GDP growth of 4.2% in 2016 and 2017. Driven by the secondary and tertiary sectors, real GDP growth is projected to be 5.2% in 2018 and 6% in 2019.

Macroeconomic evolution

Continuing efforts to increase tax revenues and the efficiency of public expenditure will help expand the scope for public investment. Capital expenditure is expected to climb from 8% of GDP in 2017 to 10% in 2018; current expenditure is expected to shrink from 12% of GDP in 2017 to 10% in 2018. The sharp rise in current expenditure in 2016 partly reflects the massive impact on the public finances of the drought and the Enawo hurricane, estimated at $71 million or 0.6% of GDP. The expansionist budgetary policy is expected to produce a high budget deficit of at least 4% of GDP in 2018 and 3.8% in 2019; it could be funded by an increase in public debt, especially as the indebtedness risk remains relatively low. The Central Bank’s May 2017 increase of its key rate from 8.3% to 9% is likely to facilitate price stability, with inflation running at 6.8% or below in 2018 and 2019.

Tailwinds

The conference of partners and investors in Paris in 2016 is expected to begin producing results in the form of public and private investment in infrastructure, which would stimulate growth in 2018 and 2019. The normalization of the political situation opened access for Madagascar’s products to U.S. markets under the African Growth and Opportunity Act (AGOA) and to the European Union, helping stimulate economic growth. Exports are projected to continue to boom in 2018–19, with strong demand for textiles and essential oils produced in the free trade zone, as well as cloves and vanilla. Over the same period, the surge in tourism, especially ecotourism, could drive economic growth.

Headwinds

The country is a net importer of oil products and relies heavily on mining and agricultural exports, which account for more than 70% of physical exports. The main risks to the economic outlook are external shocks in the form of falling commodity prices and rising oil prices. Another risk is the high vulnerability of agriculture to the effects of climate change, which regularly causes severe droughts in the south and floods in the north. The economic outlook also depends on the government’s ability to rapidly implement structural investment projects supported by partners and to maintain a peaceful political environment during the 2018 presidential election. The latter risk could provoke a wait-and-see attitude in the private sector in 2018.

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