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Madagascar Economic Outlook

Macroeconomic performance

Real GDP growth reached an estimated 5.0% in 2018, up from 4.2% in 2017. The agricultural sector expanded by 4.5% in 2018 (down from 6.6% in 2017). The industrial sector expanded by 6.7%, driven mainly by textiles and the manufacture of essential oils. Despite the plague epidemic in early 2018, the service sector expanded by 5.4%. Growth in aggregate demand in 2018 was driven largely by public and private investments in infrastructure (roads, airports, energy, and the port of Toamasina). External demand for textiles, vanilla, and essential oils also contributed to growth.

The budget deficit was contained at an estimated 2.3% of GDP in 2018, compared with 2.4% in 2017, thanks to measures targeting some low-priority expenditures. Total public debt, 70% of which is from multilateral creditors, fell from 38.4% of GDP in 2016 to 35.1% in 2018. According to the International Monetary Fund, public debt remains sustainable, with a moderate risk of external debt overhang. Inflation declined slightly from 8.3% in 2017 to an estimated 7.7% in 2018. Gross official reserves reached 4.1 months of imports in 2018. The current account deficit deteriorated to an estimated 2.0% of GDP in 2018, due to a 19% rise in the value of oil imports and a 13% rise in the value of capital goods. Exports are dominated by products with little added value, including cloves, vanilla, and mining products.

Tailwinds and headwinds

Real GDP growth is projected to be 5.4% in 2019 and 5.2% in 2020. The main drivers remain transport, energy, public works, extractive industries, and businesses in the export processing zone. Inflation is projected to level off at 7.1% in 2019 and 6.1% in 2020.

Madagascar has a comparative advantage in some niche products (such as cloves, lychee, vanilla, cocoa beans, green coffee, and essential oils) that can be easily processed locally with high value added. Effectively implementing industrial policy and the special economic zone regime could turn this potential into jobs and economic growth.

Political instability that could result from the 2018 presidential election is the greatest risk to economic prospects. In addition, Madagascar has benefited little from membership in the Indian Ocean Commission, the Southern African Development Community, and the Common Market for Eastern and Southern Africa and from being a signatory to the African Continental Free Trade Agreement. Like other island states, it faces high transportation costs. The infrastructure deficit makes commercial transactions expensive, hindering private sector competitiveness. To better integrate with the rest of Africa, the country should improve logistics at the main ports and airports and along the main corridors. Applying international norms and standards and eliminating nontariff barriers could boost trade with regional partners.

Madagascar faces a high incidence of poverty and inequality. The electricity access rate, 15.2%, is one of the lowest in Africa. Agriculture is still traditional and highly vulnerable to climatic shocks, such as cyclones and drought. Other shocks, such as the 2018 plague epidemic, reduced prices for raw materials, or increased oil prices, could also compromise the country’s prospects.