Economic Analysis
Madagascar

Madagascar

Population 28.2 million
GDP per capita 507 US$
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Synthesis

major macro economic indicators

  2020 2021 2022 (e) 2023 (p)
GDP growth (%) -7.1 3.5 2.5 4.0
Inflation (yearly average, %) 4.2 6.2 9.0 6.0
Budget balance (% GDP) -4.0 -6.3 -6.3 -5.8
Current account balance (% GDP) -5.4 -4.9 -5.4 -5.1
Public debt (% GDP) 50.8 53.1 53.8 53.9

(e): Estimate (f): Forecast

STRENGTHS

  • Large mineral reserves (nickel, gold, titanium, cobalt and precious stones)
  • Agricultural potential: world's largest producer of vanilla
  • Positive development of tourism before the pandemic (tourism share: 16.1% of GDP in 2019)
  • External public debt mainly in the form of concessional loans (93% of total in 2021)

WEAKNESSES

  • Dependence on agriculture/livestock (25% of GDP in 2020); vulnerable to terms of trade fluctuations.
  • Vulnerable to climatic hazards and natural disasters
  • High poverty, with 79% of the population living below the extreme poverty line of USD 1.90 per day
  • High dependence on foreign aid
  • Inadequate road, water and electricity networks (only 27% of people had access to electricity in 2019)
  • High corruption, Madagascar is ranked 147 out of 180 countries with a score of 26/100 in Transparency International's Corruption Perceptions Index 2021
  • Chronic political instability (crises in 1972, 1991, 2002 and 2009)

RISK ASSESSMENT 

Investment momentum tempered by sluggish external demand

Plunged in 2020 into one of the worst recessions in history by the Covid-19 pandemic, the economy recovered slowly in 2021-22. It remains dependent on developments in the virus, with a vaccination rate of less than 6% in September 2022 (a third wave was observed at the beginning of 2022) and has been affected by several violent climate-related disasters (five tropical storms in just one month at the beginning of 2022, and strong and persistent drought in the south of the island), as well as by the inflationary shock linked to the war in Ukraine. Growth is expected to accelerate in 2023, 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 events. 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 stakeholders, which are 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 weighing on household purchasing power. 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, which will weigh on private investment. Moreover, a second-round effect linked to the rise in real wages in the public sector (which is expected to have averaged 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 developments in Covid-19 as the vaccination rate is still very low, and on the occurrence of fresh climate-related events.

 

Persistently 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. Although it is expected to recede, the deficit will remain elevated given durably high import prices, sluggish external demand, expatriate remittances squeezed by the economic situation in host countries, as well as lower-than-expected tourist inflows. 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, is likely to narrow slightly owing to the revenues generated by stronger growth, but will nonetheless 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 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. The budget allocated to the Ministry of Youth and Sports will increase significantly due to Madagascar’s role as host country of the 2023 Island Games. 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 amid social tensions

The presidential election is scheduled to take place in November 2023 at which time the position currently held by Andry Rajoelina will be contested. Rajoelina was elected in 2018 and his presidency has been strongly contested by part of the population, particularly owing to his management of the Covid-19 pandemic and the lack of fundamental reforms to improve the country's governance and development prospects. The presidential election, which should see Andry Rajoelina hold onto power thanks to his mastery over the workings of government, could exacerbate tensions and the fragility of the country in a complicated social context, combined 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 history. Food insecurity could increase in the coming years due to the island's vulnerability to more frequent violent climate-related events and the economy's heavy dependence on the agricultural sector. Moreover, despite the creation of anti-corruption measures, enforcement of these policies remains limited.

 

Last updated: April 2023

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