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MADAGASCAR ECONOMIC UPDATE BRIDGING THE PRODUCTIVITY DIVIDE February 2025 Document of the World Bank Table of content ABBREVIATIONS AND ACRONYMS ������������������������������������������������������������������������������������������������VII ACKNOWLEDGMENTS�����������������������������������������������������������������������������������������������������������������������VIII EXECUTIVE SUMMARY ������������������������������������������������������������������������������������������������������������������������ X PART 1: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 1 1.1 ECONOMIC GROWTH AND INFLATION �������������������������������������������������������������������������������������������������������1 1.2 POVERTY, EMPLOYMENT, AND THE LABOR MARKET�������������������������������������������������������������������������������� 3 1.3 EXTERNAL SECTOR���������������������������������������������������������������������������������������������������������������������������������� 5 1.4 MONETARY POLICY���������������������������������������������������������������������������������������������������������������������������������� 8 1.5 FISCAL POLICY ���������������������������������������������������������������������������������������������������������������������������������������� 9 1.6 OUTLOOK, RISKS, AND POLICY RECOMMENDATIONS������������������������������������������������������������������������������������ 10 PART 2: PRODUCTIVITY CONSTRAINTS AT THE FIRM LEVEL17 2.1 PRODUCTIVITY MATTERS �����������������������������������������������������������������������������������������������������������������������17 2.2 PRODUCTIVITY IN MADAGASCAR: TRENDS AND FEATURES������������������������������������������������������������������ 18 2.3 DRIVERS OF PRODUCTIVITY GROWTH��������������������������������������������������������������������������������������������������20 2.4 POLICY RECOMMENDATIONS���������������������������������������������������������������������������������������������������������������� 27 PART 3 : BIBLIOGRAPHY31 PART 4: ANNEXES33 BOXES Box 1.1. Vanilla Market �����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������7 Box 1.2. Madagascar’s Economic Challenges���������������������������������������������������������������������������������������������������� 12 FIGURES Figure 1.1. Since the recovery in 2021, services have driven steady growth on the supply side. ���������������������������������1 Figure 1.2. Tourist arrivals have rebounded from the shock of the COVID-19 pandemic.�������������������������������������������1 Figure 1.3. On demand side, growth is mainly driven by investment and private consumption.�������������������������������� 2 Figure 1.4. Investment ratio compares favorably with those of other SSA countries but remains inadequate. ���������� 2 Figure 1.5. Headline inflation has decreased but remains elevated������������������������������������������������������������������������ 3 Figure 1.6. Inflation is below SSA average but above world average���������������������������������������������������������������������� 3 Figure 1.7. Poverty rates remained high and uneven�������������������������������������������������������������������������������������������� 4 Figure 1.8. Non-monetary poverty remains above pre-pandemic level������������������������������������������������������������������ 4 Figure 1.9. The decline in merchandise exports... ������������������������������������������������������������������������������������������������ 5 Figure 1.10. ...was partly offset by falling imports.������������������������������������������������������������������������������������������������ 5 Figure 1.11. The number of port calls has fallen. �������������������������������������������������������������������������������������������������� 6 Figure 1.12. FDI and other investments have financed the CAD.���������������������������������������������������������������������������� 6 Figure 1.13. International reserves increased. ���������������������������������������������������������������������������������������������������� 6 Figure 1.14. After a period of fluctuation, currency depreciation resumed in Q2 2024. �������������������������������������������� 6 Figure 1.15 . Credit growth has accelerated. ������������������������������������������������������������������������������������������������������ 8 Figure 1.16. The banking sector is profitable.������������������������������������������������������������������������������������������������������ 8 Figure 1.17. The tax-to-GDP ratio remains low.���������������������������������������������������������������������������������������������������� 9 Figure 1.18. In the medium term, transfers are expected to gradually decline from the 2024 peak. �������������������������� 9 Figure 1.19. Over 2024–26, the fiscal deficit is projected to stabilize … ���������������������������������������������������������������� 10 Figure 1.20. … and the public debt stock is expected to remain stable.���������������������������������������������������������������� 10 Figure 2.1. Monthly Compensation per Worker Measured by Total Labor Costs (ariary thousands), 2022���������������� 18 Figure 2.2. Shapley Decomposition of per Capita Value-Added Growth �������������������������������������������������������������� 18 vi TABLE OF CONTENTS Figure 2.3. Labor Productivity: Madagascar and Comparators �������������������������������������������������������������������������� 18 Figure 2.4. Labor Productivity by Sector and Firm Size ������������������������������������������������������������������������������������ 19 Figure 2.5. Drivers of Productivity Growth ������������������������������������������������������������������������������������������������������20 Figure 2.6. Share of Skilled Workers and Labor Productivity in the Manufacturing Sector ������������������������������������ 21 Figure 2.7. Workforce Training: Madagascar, SSA, and World ���������������������������������������������������������������������������� 21 Figure 2.8. Firms in Madagascar need to innovate more. ���������������������������������������������������������������������������������� 21 Figure 2.9. Technology Adoption �������������������������������������������������������������������������������������������������������������������� 22 Figure 2.10. Biggest Obstacles and Major Constraints to Doing Business, 2013 and 2022������������������������������������ 22 Figure 2.11. Top and Bottom Scores of the Business-Ready Environment Pillars�������������������������������������������������� 24 Figure 2.12. Firm Productivity: Exporters v. Non-Exporters�������������������������������������������������������������������������������� 24 Figure 2.13. Days to Clear Direct Exports through Customs ������������������������������������������������������������������������������ 24 Figure 2.14. Women-Led Businesses �������������������������������������������������������������������������������������������������������������� 25 Figure 2.15. Features of Firms Owned or Managed by Women �������������������������������������������������������������������������� 26 Abbreviations and Acronyms BFM Central Bank of Madagascar (Banky Foiben’i Madagasikara) CAD Current account deficit IMF International Monetary Fund Kt Thousand metric tons Ppt Percentage point R&D Research and development SEZ Special economic zone SME Small and medium-sized enterprise SOE State-owned enterprise SSA Sub-Saharan Africa WBES World Bank Enterprise Survey Y/y Year-on-year vii Acknowledgments This edition of the Madagascar Economic Update (MEU) was prepared by Xun Yan (Senior Economist), Faniry Razafimanantsoa (Economist), Antsa Raoelijaona (Economist), Sagita Muco (Senior Private Sector Specialist), Prisca Mamitiana Fanjaniaina (Private Sector Specialist), Cristian Quijada Torres (Senior Private Sector Specialist), Francis Muamba Mulangu (Senior Economist), Pedro Martins (Program Leader) and Cristina Savescu (Lead Economist). Mande Isaora Zefania Romalahy (Consultant), Alexis Rivera Ballesteros (Consultant), Felipe Yudi Yamashita Roviello (Consultant), and Nithya Srinivasan (Consultant) provided initial analysis and useful inputs. The team appreciates valuable comments from Jean-Pascal Nguessa Nganou (Program Leader), Besart Avdiu (Senior Economist), Elwyn Davis (Senior Economist) and Smita Kuriakose (Lead Economist). The MEU was prepared under the direction of Hassan Zaman (Regional Director), Idah Z. Pswarayi-Riddihough (Country Director), Atou Seck (Country Manager), Marco Hernandez (Practice Manager), and Consolate Rusagara (Practice Manager). Sean Lothrop (Consultant) and Oscar Parlback (Consultant) edited the report. The team is grateful to Eva Lovaniaina Ramino (Team Assistant), Nani Makonnen (Senior Program Assistant) and Diana Styvanley (External Affairs Officer) for their administrative and communication-related support. viii MADAGASCAR ECONOMIC UPDATE Executive Summary ix Executive Summary Recent Economic Developments and Outlook Madagascar’s economy is recovering but Low revenue collection constrains the remains uneven. Growth is estimated at 4.2 government’s capacity for public investment percent in 2024. Several sectors in the economy and service delivery. Total revenue and grants have yet to return to their pre-2020 output are estimated at 13.6 percent of GDP in 2024, levels. The services sector has driven growth lower than the Sub-Saharan Africa (SSA) average on the supply side, especially tourism-related of 18.9 percent. Despite efforts to boost tax sectors and telecommunications. Following revenue, the tax-to-GDP ratio remained low reforms to improve the business climate, at 10.8 percent. Weak international trade flows private investment has become the key engine weighed on revenue collection, while generous of growth on the demand side. Stubbornly high tax exemptions continued to undermine tax core inflation diminished private consumption’s revenue. Significant spending on transfers and contribution to growth in 2024, and the subsidies has crowded out capital investment contribution of net exports to growth turned in a context where infrastructure gaps negative. Meanwhile, employment-intensive substantially constrain firm-level productivity. sectors such as agriculture, agrobusiness, and Growth is projected to pick up and average 4.7 textiles have struggled to recover, especially in percent over 2025-27, and the outlook hinges terms of value addition per capita. on the implementation of critical structural In addition, growth is insufficient to reforms and is subject to downside risks. significantly improve living standards, and Growth is expected to gradually pick up and the poverty rate far exceeds the levels of should converge with the potential growth rate neighboring countries and international starting in 2025. The fiscal deficit is projected comparators. As of 2022, almost 70 percent to narrow to around 3.8 percent of GDP over of the population lives below the international 2025–27, driven by improvements in spending poverty line of US$2.15 per capita per day. The efficiency and increased revenue collection. number of people living in poverty rose from Key risks to the outlook include frequent power 15.4 million in 2012 to 21.1 million in 2022, an outages and climate change, threats to which increase of 50 percent. Average real income has manufacturing and agriculture are particularly declined over the years, with per capita GDP (in exposed. To boost growth and improve constant 2015 US dollars) falling from US$812 livelihoods, the authorities may consider in 1960 to US$456 in 2024 The economy’s accelerating macro-fiscal and structural vulnerability to climate shocks further deepens reforms. Priority measures include improving household poverty. JIRAMA’s financial performance, increasing The external position remained resilient competition and inclusion in the digital sector, despite mounting pressure on the current updating the Mining Code, improving domestic account. The current account deficit (CAD) revenue mobilization (to finance investment), widened in 2024, due primarily to declining and strengthening fiscal risk management. exports of key commodities. The deterioration of the trade balance was driven by softening global demand and falling prices for major exports, including vanilla, cloves, cobalt, and nickel. The import bill also declined, though to a lesser extent. The CAD was mainly financed by foreign direct investment and other forms of investment, which helped bolster international reserves. x MADAGASCAR ECONOMIC UPDATE Special Topic: Productivity Constraints at the Firm Level In Madagascar, the most productive 25 Between-firm productivity growth percent of firms often pay wages up to seven is hampered by limited access to times higher than those offered by firms in the finance and infrastructure challenges. bottom 25 percent. Higher productivity not only Only 8 percent of Malagasy firms have yields better-paying jobs but also plays a critical access to bank loans, far below the SSA role in economic growth. However, firm-level average of 19.5 and the global average of productivity in Madagascar has been declining 32 percent. Electricity and transport over the past two decades and is now among infrastructure also pose significant constraints, the lowest in the world. The average Malagasy with frequent power outages leading to worker is now three times less productive than substantial financial losses. Female-led the average worker in Sub-Saharan Africa (SSA), businesses face greater constraints than with output per unit of labor declining at an their male-led counterparts, particularly in average rate of 0.2 percent per year. Younger accessing finance and skilled labor. Despite firms and exporting firms, especially those that an increase in female ownership and invest in research and development (R&D), tend management, female-led firms remain less to be more productive. Male-managed and productive on average. Addressing their foreign firms often achieve higher productivity specific constraints is essential to levels, as female-owned and local firms face promote inclusive growth. various challenges—such as limited access Improving productivity will require to finance, quality certifications, and a skilled well-designed reforms to strengthen the workforce—that hinder their productivity business environment coupled with potential. measures to enhance the capabilities Creating the conditions for more productive of firms and promote entrepreneurship. firms to enter the market and grow is critical Adopting reforms to facilitate the entry and to generate more and better jobs. Upgrading operation of startups and promoting management practices can boost within- entrepreneurship training and incubation firm productivity growth (productivity gains programs would facilitate the entry of new within existing firms, reflecting the capacity firms. Designing an acceleration program for innovation, technology sophistication, and for small and medium-sized managerial and worker skills), while creating enterprises and supporting worker an enabling business environment that foster training and technological uptake could competition can enhance between-firm improve the capabilities of existing firms. productivity growth (the reallocation of labor Developing leasing instruments and digital and capital from less to more productive firms), financial services could expand access to and bolstering the capabilities of new entrants finance. Finally, reforming the business can promote selection-based productivity environment, including reviewing, simplifying growth (the exit of less productive firms from as well as digitizing government services, the market and the entry of more productive could create the conditions for greater firms to replace them, also known as “firm competition and innovation and dynamism”). One-third of the firms cite a lack improve access to international markets. of skilled workers as a key constraint, yet only Addressing specific constraints faced by large export-oriented firms are likely to offer women-led firms is essential to promote training to their employees. While firms are inclusive growth. attempting to adopt new technologies to boost productivity, the share of firms investing in R&D or introducing innovative processes remains below the regional average. EXECUTIVE SUMMARY xi xii MADAGASCAR ECONOMIC UPDATE Part 1: Recent Economic Developments and Outlook 1.1 ECONOMIC GROWTH AND INFLATION Economic prospects have improved, but growth remains insufficient and uneven to significantly improve living standards. Despite a steady economic recovery, many (lower than the SSA average of 4 percent), sectors have yet to reach pre-2020 levels current growth remains insufficient to support of output, due in part to the compounding sustained poverty reduction or significant job effects of external shocks. After plunging creation, especially given the high population to -7.1 percent in 2020—the most severe growth rate of about 2.4 percent per year. contraction since the 2002 political crisis— Commodity price volatility, escalating climate growth remained broadly stable at an estimated shocks1, and the prevalence of elite capture2 4.2 percent in 2024, or 1.7 percent in per capita have all hindered a faster recovery and terms (Figure 1.1). Despite an increase since the undermined inclusive growth. 2010s, when annual growth averaged 3 percent IIIIIIIIIIIII IIIIIIIIIIIII Figure 1.1. Since the recovery in 2021, services have Figure 1.2. Tourist arrivals have rebounded from driven steady growth on the supply side. the shock of the COVID-19 pandemic. GDP growth (%) and contribution to GDP growth (pp) Number of tourist arrivals 6 400k 3 308k 300k 274k 0 260k -3 200k -6 132k -9 100k 2018 2019 2020 2021 2022 2023 2024e 2025f 2026f 2027f Agriculture Industry Services Net Taxes on Production 0k GDP 2019 2022 2023 2024 SOURCE: MEF AND WORLD BANK ESTIMATES. SOURCE: MINISTRY OF TOURISM. On the supply side, the services sector has been by the agricultural sector at 1.1 ppts. Tourism- the major driver of growth, especially tourism- related sectors (hotels, restaurants, and related services and telecommunications. The transport) contributed around 1 ppt to the services sector contributed 1.9 percentage 2024 growth. The increased frequency of points (ppts) to total growth in 2024, followed international air traffic and the entry of new 1  Cyclones, droughts, water stress, and rising temperatures exert heavy tolls on the economy and its population. Madagascar has the highest risk of cyclones in Africa, experiencing on average three cyclones per year and severe droughts stress an already inadequate food and energy supply. For instance, Cyclone Gamane, which struck Madagascar in March 2024, caused extensive damage in infrastructure and affected approximately 212,000 people, particularly in the Sava region which is the heart of Madagascar’s vanilla production. 2  In general, elite capture occurs when powerful individuals or groups manipulate political institutions and economic systems to divert resources and opportunities toward themselves. This concentrated control undermines democratic processes and fair resource distribution, allowing elites to extract wealth while limiting broader societal development (Acemoglu and Robinson 2012; World Bank 2017; World Bank 2022; Dugas et al. 2024). PART ONE. RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 1 airlines3 boosted tourism, with the number of playing field, fostering competition and tourist arrivals surpassing pre-pandemic levels stimulating growth.5 Meanwhile, for the first time in 2024 (Figure 1 .2).4Poor employment-intensive sectors such as transport infrastructure and unreliable agriculture, agrobusiness, and textiles have domestic flights, however, could constrain struggled, and value-added per capita of sectoral growth. The introduction of a new these sectors has declined. telecom licensing regime enabled to level the IIIIIIIIIIIII IIIIIIIIIIIII Figure 1.3. On demand side, growth is mainly Figure 1.4. Investment ratio compares favorably driven by investment and private consumption. with those of other SSA countries but remains inadequate. GDP growth (%) and contribution to GDP growth (pp) Investments (in percent of GDP) 25 10 20 0 15 10 -10 5 2018 2019 2020 2021 2022 2023 2024e 2025f 2026f 2027f 0 Public consumption Private consumption 2018 2019 2020 2021 2022 2023 2024e 2025f 2026f 2027f Public investment Private investment Private Public - foreign financed Net Exports Change in inventories Public - domestic financed SSA average GDP SOURCE: MEF AND WORLD BANK ESTIMATES. SOURCE: MEF AND WORLD BANK ESTIMATES. On the demand side, growth has been driven (Figure 1.4),6 an infrastructure gap persists, with by private investment, followed by private poor-quality roads and ongoing deficiencies in consumption, while net exports have not the water and energy supply. Due to persistently contributed (Figure 1.3). Private investment high core inflation, private consumption increased in 2024 after the abovementioned contributed just 1.9 ppts to growth, significantly liberalization of the telecommunications less than in 2023. After contributing 4 ppts to sector and the passage of other reforms to growth in 2023, contribution of net exports improve the business climate (for instance, the to growth turned slightly negative, reducing adoption of the new Investment Code in 2023 growth by -0.1 ppt. Overall export performance and related implementation decrees in 2024). was diminished by lower demand for major Meanwhile, public investment declined as the exports such as nickel, vanilla, and textiles. revised budget approved in July reallocated Reduced export receipts were partly offset resources to transfers and subsidies, notably by lower imports due to a decline in public for the energy sector. Despite the investment investment and rising freight costs. ratio being on par with the regional average 3  The international air traffic resumed gradually since 2022. In 2023, the country hosted the 2023 Indian Ocean Islands Games which was a significant boost. Since September 2024, Emirates started to operate in Madagascar. 4 The latest statistics published by the Ministry of Tourism (Jan 30, 2025) revised the annual total tourist arrivals in 2019 (274 thousand), 2023 (260 thousand) and 2024 (308 thousand), which were 384, 220 and 268 thousands respectively in the previous publication (Jan 8, 2025). 5  Among other things, Orange will now be able to deploy and commercialize its own fiber. Previously, this segment of the market was under de facto monopoly. The new satellite license has the potential to significantly improve rural connectivity and to increase service offerings and competition. 6  The investment-to-GDP ratio is estimated at 22 percent of GDP in 2024, slightly above the SSA average of 21.8 percent (IMF 2024). 2 MADAGASCAR ECONOMIC UPDATE IIIIIIIIIIIII IIIIIIIIIIIII Figure 1.5. Headline inflation has decreased but Figure 1.6. Inflation is below SSA average but above remains elevated world average Inflation (percentage, y/y) Inflation, average consumer prices (percentage, y/y) 20 12 16 8 12 4 8 0 4 -4 0 2018 2019 2020 2021 2022 2023 2024 2018 2019 2020 2021 2022 2023 2024 Headline Inflation Food Madagascar SSA World Energy Core (excl. Food and Energy) SOURCE: SOURCE: MEF AND WORLD BANK ESTIMATES. SOURCE: MEF, WORLD ECONOMIC OUTLOOK 2024 AND WORLD BANK ESTIMATES.. Headline inflation remained high, , but lower and electricity prices unchanged since 2022, than SSA average due to persistently elevated albeit at a high fiscal cost.7 This policy tradeoff core inflation, despite a gradual decline in merits careful examination, as falling oil prices food-price inflation. Inflationary pressures during the second half of 2024 could create an increased in 2022, partly due to the Russian opportunity to reduce or eliminate subsidies. invasion of Ukraine which led to higher food Core inflation, which excludes food and and fuel prices. Headline inflation peaked at energy, has been increasing since 2022 and 12.4 percent year-on-year (y/y) in March 2023 reached 9.1 percent in December 2024, driven and had begun to decline by the end of the by rising housing and apparels costs. As a result, year. In 2024, food inflation (mainly rice) eased average annual inflation remained high at 7.6 as domestic rice production increased. Energy percent in 2024, above the 2013–23 average of inflation was driven by rising wood, coal, and 6.9 percent. (Figure 1.5). butane prices, while subsidies have kept fuel 1.2 POVERTY, EMPLOYMENT, AND THE LABOR MARKET External shocks compound the structural causes of high poverty rates, with limited employment opportunities further entrenching poverty at the household’s level. Poverty rates, measured at the national poverty 79.9 percent in 2022. However, urban poverty line, have fluctuated significantly, and urban increased significantly, rising from 42.2 percent in poverty is on the rise. Average real income has 2012 to 55.5 percent in 2022. Urban poverty is declined over the years, with per capita GDP (in concentrated outside the capital city. While rural constant 2015 US dollars) falling from US$812 in poverty remains a serious challenge, urban areas 1960 to US$456 in 2024.8 The national poverty have experienced a significant deterioration in headcount ratio increased from 72.9 percent living standards over the past decade. in 2012 to 75.2 percent in 2022. The rural In addition, non-monetary poverty, which poverty rate remained alarmingly high, despite considers multiple deprivations beyond a marginal decline from 80.6 percent in 2012 to income, remains exceedingly high across the 7  On January 18, 2025, fuel prices started to change (adjusted downward) as the government implemented the automatic fuel pricing mechanism as one of the prior actions of the IMF ECF/RSF program approved in June 2024. 8  GDP per capita (in constant 2015 US dollars) data is from World Development Indicators (WDI) for 1960, and by staff esti- mate for 2024. PART ONE. RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 3 country. As of 2018, over 70 percent of the include education, health, and living conditions, population was considered multidimensionally with significant portions of the population poor, experiencing deprivations in more than lacking these necessities. The prevalence of three dimensions (education, health and living non-monetary poverty is particularly high among conditions). This translates to approximately households with younger heads, larger family 19.04 million people living in multidimensional sizes, and those living in rural areas. poverty. The indicators of non-monetary poverty IIIIIIIIIIIII IIIIIIIIIIIII Figure 1.7. Poverty rates remained high Figure 1.8. Non-monetary poverty remains above and uneven pre-pandemic level 90 Non-Monetary Poverty Rate (percent) 80 78 70 76 76 60 74 50 72 40 70 69 30 68 67 20 66 10 64 0 62 2001 2005 2010 2012 2022 2008 2018 2021 National (percent) Rural (percent) All Urban (percent) SOURCE: MEF AND WORLD BANK ESTIMATES. SOURCE: WORLD BANK ESTIMATES BASED ON DHS FOR 2008 AND 2021, AND RGPH-3 FOR 2018. The causes of poverty are multifaceted 58.8 percent with a wide gender gap: the rate is and deeply rooted both in structural and 66.9 percent for men and just 51.2 percent for external factors. Key causes include the women. Although a larger share of the working- predominance of low-productivity subsistence age population lives in rural areas, the urban agriculture, which suffers from a lack of inputs, labor-force participation rate is slightly higher at infrastructure, and supportive institutions. The 59.8 percent versus 58.5 percent. Employment agricultural sector employs a large share of rates are also low, with only 54.9 percent of the population, and 90 percent of households the working-age population being employed. engaged in agriculture are poor. Moreover, Most employed individuals work in agriculture, the slow accumulation of human capital, high which accounts for 60.7 percent of all jobs. child malnutrition rates, widespread child labor, The secondary and tertiary sectors, including early marriages, and teenage pregnancies commerce, manufacturing, construction, all contribute to intergenerational cycles of and services, represent only 14.7 percent and poverty. Finally, vulnerability to extreme weather 24.6 percent of employment, respectively. events and elite capture limit private investment, Households rely heavily on low-productivity which is vital for capital accumulation. agriculture, and opportunities in higher-paying Significant disparities and challenges that sectors are very limited. Most employment is contribute to the high incidence of poverty. informal and characterized by low wages and An analysis of employment and labor force poor job quality, leaving households trapped in participation rates9 reals that at the national a cycle of poverty. level, the labor force participation rate stands at 9  The labor force participation discussion reflects mainly an analysis of employment and labor force participation rates (IN- STAT, 2024). 4 MADAGASCAR ECONOMIC UPDATE 1.3 EXTERNAL SECTOR The current-account deficit widened as weaker global demand and falling commodity prices undermined export performance. The current-account balance deteriorated imports increased by 3.4 percent (Figure 1.10). in 2024, as exports fell more sharply than The merchandise trade volumes also declined, imports and income flows failed to offset a reflected in a 9.1 percent drop in port calls widening trade deficit. Goods export dropped in 2024 compared with 2023 (Figure  1.11).10 by 4.8 ppts of GDP in 2024, while the import bill Trade in services fared better, mainly owing dropped by 1.7 ppts, primarily due to reduced to higher tourism receipts, while transport exports of vanilla, cloves, cobalt, and nickel services declined due to lower goods exports as a result of a global supply glut (Figure 1.9). and reduced freight costs. Dividend payments Vanilla exports have been further impacted by increased, contributing to higher investment domestic policy uncertainty around pricing income. Finally, current transfers increased due (Box 1.1). The import bill declined across nearly to rising remittances and contributions from all categories of goods, although energy externally funded programs. IIIIIIIIIIIII IIIIIIIIIIIII Figure 1.9. The decline in merchandise exports... Figure 1.10. ...was partly offset by falling imports. Export of goods Mining Import of goods Petroleum products (percent of GDP) Vanilla (percent of GDP) Food Other Intermediate goods and capital Other goods 25 23.0 30 29.5 22.0 20 19.5 25.4 25.6 25.5 18.5 18.9 25 24.5 23.8 21.8 22.7 22.3 22.1 15 15.0 14.7 14.6 14.8 14.8 20 15 10 10 5 5 0 0 2018 2019 2020 2021 2022 2023 2024e 2025f 2026f 2027f 2018 2019 2020 2021 2022 2023 2024e 2025F 2026f 2027f SOURCE: MEF AND WORLD BANK ESTIMATES. SOURCE: MEF AND WORLD BANK ESTIMATES The strong performance of the capital and financial accounts strengthened the external position. The CAD (estimated at 5 percent of GDP in 2024) was mainly financed by a combination of foreign direct investment and other investments (Figure  1.12). Strong capital inflows boosted international reserves (equivalent of around 6.3 months of imports). However, vulnerabilities remain. In the long run, a stronger external position will require an improved current-account balance, which will in turn hinge on structural reforms to enhance competitiveness. 10  The port-call metrics capture the number of vessels that are engaged in the shipment of international trade and make a stop at a port to load or unload vessels. Port calls exclude vessels that stop for bunkering purposes without loading or unloading goods. PART ONE. RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 5 IIIIIIIIIIIII IIIIIIIIIIIII Figure 1.11. The number of port calls has fallen. Figure 1.12. FDI and other investments have financed the CAD. Number of ships entering the port CAD financing (percent of GDP) 8 Cargo Tanker 6 800 700 4 233 600 170 224 232 199 2 208 500 0 400 2017 2018 2019 2020 2021 2022 2023 2024e 2025f 2026f 2027f -2 300 553 521 565 513 200 466 478 -4 100 -6 Capital account FDI 0 Other investment Errors and omissions 2019 2020 2021 2022 2023 2024 Change in net reserves (increase = -) Current account deficit SOURCE: UN GLOBAL PLATFORM; IMF PORTWATCH. SOURCE: BFM AND WORLD BANK. Adequate international reserves have when it fell by 8.2 percent against the US dollar mitigated the depreciation of the currency. and 11 percent against the euro,11 the ariary At end-2024, gross international reserves recorded a softer year-on-year depreciation in equaled an estimated 6.3 months of imports 2024 against the US dollar, declining by just 2.7 (Figure 1.13). Following a slight appreciation percent. It appreciated by around 0.9 percent during the first months of 2024 due to the inflow against the euro. The exchange rate remained of external financing, the ariary depreciated stable in real effective terms (Figure 1.14). against major currencies for the remainder of the year. After a sharp depreciation in 2023, IIIIIIIIIIIII IIIIIIIIIIIII Figure 1.13. International reserves increased. Figure 1.14. After a period of fluctuation, currency depreciation resumed in Q2 2024. Gross international reserves Exchange rate variation (Ariary) 4.5 Stock of Reserves (US$ billion) 7.5 5 100 Gross international reserves (in months of imports) 4.0 6.5 4 900 3.5 4 700 5.5 3.0 3.3 4 500 3.1 3.2 4.5 2.5 2.9 4 300 2.6 3.5 2.0 2.3 4 100 2.1 2.5 1.5 1.9 3 900 USD 1.7 1.6 1.5 1.0 3 700 EUR 0.5 0.5 3 500 févr-21 avr-21 juin-21 août-21 oct-21 déc-21 févr-23 avr-23 juin-23 août-23 oct-23 déc-23 févr-22 avr-22 juin-22 août-22 oct-22 déc-22 févr-24 avr-24 juin-24 août-24 oct-24 déc-24 - -0.5 2018 2019 2020 2021 2022 2023 2024e 2025f 2026f 2027f SOURCE: BFM AND WORLD BANK SOURCE: BFM AND WORLD BANK. 11  The 2023 depreciation against the US dollar, the sharpest since 2020, partly reflected a strong dollar (following the Federal Reserve’s monetary tightening) and heightened investor risk aversion (uncertainties around the presidential elections that concluded in December 2023). 6 MADAGASCAR ECONOMIC UPDATE BOX 1.1. VANILLA MARKET In 2019, the global vanilla market reached in small quantities, which further weakened unprecedented heights, with prices soaring demand and increased price pressures. above US$600 per kilogram. Madagascar, These complications undermined the the world’s largest vanilla producer, held a effectiveness of the government’s policies dominant 80 percent share of the market. while complicating enforcement and This demand surge was driven by a strong intensifying market distortions. In May 2023, preference for natural vanilla, pushing prices the government suspended its price controls to record levels. Agro-industrial companies on vanilla exports. found themselves facing exorbitant costs, which began to strain the market and Vanilla exports also faced external trade- consumer affordability. Before the pandemic, policy changes. In early 2023, the EU the vanilla market was thriving but was also introduced new standards for nicotine highly volatile. content in vanilla, planning to lower the permissible levels from 0.3 percent to 0.02 To prevent a sudden price collapse, percent per kilogram by September 2023. the government introduced stabilizing However, due to the complexity of aligning measures in 2020, though these did international standards with market realities, not achieve the expected results. The the EU postponed the implementation of measures included setting a minimum price stricter nicotine limits until 2030 for certain of US$250 per kilogram to protect vanilla products on February 5, 2024. farmers’ incomes and stabilize the market. In 2024, market prices plummeted following The government also required exporters to the lift of price control and the delay of the repatriate all foreign currency earnings as a EU import ban. The proposed implantation condition for obtaining export licenses, to on stricter nicotine limits in vanilla by the ensure transparency and prevent capital flight. EU has been postponed, importer appetite However, compliance proved challenging. recovered, and exporters began clearing Many exporters circumvented the rules: some stocks accumulated over the past 3-4 years. exported illegally without licenses, while In July 2024 alone, for instance, exports others with licenses used retro-commissions reached 1,200 tons, almost matching the or foreign reserves to reduce the sale price entire export volume of 2023, which stood below the mandated US$250 per kilogram. at 1,398 tons. This sudden influx of supply Meanwhile, importers that held large stocks dampened the market prices to a mere of vanilla chose to wait and purchase only US$50 per kilogram. PART ONE. RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 7 1.4 MONETARY POLICY The central bank has tightened monetary policy in response to high inflation. The banking sector remained profitable and resilient despite economic challenges, but lack of access to finance is a key constraint for businesses. The central bank has tightened its monetary Despite subdued economic activity, the policy stance since 2022 to help curtail banking sector remains profitable, liquid, and inflation. The Central Bank of Madagascar resilient (Figure 1.16). Although the ratio of (Banky Foiben’i Madagasikara, BFM) has regulatory capital to risk-weighted assets fell increased the policy rate by 140 basis points from 12.8 percent in March 2024 to 11 percent (bps) since October 2022 (Figure  1.15). By in June 2024, it remains above the regulatory August 2024, to the deposit facility rate and capital adequacy ratio of 10.5 percent under the marginal lending rate reached 9.5 percent Basel III.12 The banking system remains liquid and 11.5 percent, respectively. The growth despite the increase in the reserve requirement in credit to the private sector is estimated to ratio from 9 to 12 percent in February 2024, as be 9.8 percent in 2024 (compared with 1.2 indicated by the increase in the liquidity asset- percent in 2023) but remained low in real terms to-total asset ratio to 32.9 percent in June (1.2 percent). By end-2024, the ratio of credit 2024. Returns on assets improved marginally to GDP stood at 15.2 percent, lower than the to 4.5 percent by June 2024, exceeding pre- average over 2020-2023 (16.3 percent), and pandemic levels. Meanwhile, the quality far lower than the SSA average of 26.7 percent of assets remained stable, with the non- in 2023. Respondents to the 2022 World Bank performing loans ratio decreasing slightly from Enterprise Survey identified access to credit as 7.9 percent in June 2023 to 7.7 percent by a major constraint to doing business. June 2024. However, the transition to the new interest rate targeting framework contributed to increased volatility in the overnight bank interest rate. IIIIIIIIIIIII IIIIIIIIIIIII Figure 1.15 . Credit growth has accelerated. Figure 1.16. The banking sector is profitable. percent percent percent percent 25 14 Capital adequacy ratio (left axis) 14 Basel 3 - Minimum capital adequacy 5 12 ROA (right axis) 20 10 13 4 15 8 3 6 12 10 2 4 11 5 1 2 0 0 10 0 Q4-22 Q4-23 Q2-24 2021 2022 2023 2024 2025 2026 2027 Q3-22 Q2-23 Q3-23 Q2-22 Q4-21 Q1-24 Q2-21 Q3-21 Q1-22 Q1-23 Q1-21 Corridor-Lending/deposit (right axis) Credit growth (Left axis) SOURCE: BFM AND WORLD BANK. SOURCE: IMF AND WORLD BANK. 12  The regulatory capital adequacy ratio consists of a minimum 8 percent and a 2.5 percent reserve/buffer. 8 MADAGASCAR ECONOMIC UPDATE 1.5 FISCAL POLICY Revenue performance remained weak in 2024, undermining the government’s capacity to meet essential investment needs. Total revenue and grants are estimated products accumulated in 2022, equivalent of at 13.6 percent of GDP in 2024, reflecting 1.8 percent of GDP. Administrative measures to low domestic resource mobilization boost tax revenues focused on tax audits and (Figure 1.17). It is lower than the SSA average the expansion of the electronic tax payment of 18.9 percent.13 Government revenue relies system to all taxpayers, including mobile money primarily on tax collection. The tax-to-GDP platforms and online payments. 15 However, ratio fell from 11.2 percent in 2023 to 10.8 weak international trade weighed on revenue percent in 2024, far below the threshold of 15 collection, while generous tax exemptions percent considered critical for financing basic continued to undermine tax revenue. Other public services in support of economic growth. revenue sources include non-tax revenues 14 The higher revenue level in 2023 reflected the and grants, both of which are low by historical one-off recovery of tax arrears on petroleum standards.. IIIIIIIIIIIII IIIIIIIIIIIII Figure 1.17. The tax-to-GDP ratio remains low. Figure 1.18. In the medium term, transfers are expected to gradually decline from the 2024 peak. Tax revenue (percent of GDP) Government expenditure (percent of GDP) 18 18 17.9 15 16.4 16.2 16.9 16.5 17.0 15 15.4 15.8 12.6 14.4 13.9 12 11.1 11.7 12 10.1 10.3 10.2 10.8 10.8 9.1 9.2 9 9 6 6 3 3 0- 0 2018 2019 2020 2021 2022 2023 2024e 2025f 2026f 2027f 2018 2019 2020 2021 2022 2023 2024e 2025f 2026f 2027f Taxes on goods and services Direct taxes Wages and Compensation Current Transfers Taxes on internationl trade 15 percent threshold Other current expenditures Capital Expenditures Total Expenditures SOURCE: MEF AND WORLD BANK ESTIMATES SOURCE: MEF AND WORLD BANK ESTIMATES. Total expenditure declined and the spending (2.9 percent of GDP) than on domestically composition shifted towards transfers financed investments (1.6 percent of GDP).17 18 and subsidies. Total expenditure and net Capital investment fell to 6.3 percent of GDP, lending dropped to 16.9 percent of GDP in down from 6.9 percent in 2023. Transfers to 2024, compared with 17.9 percent in 2023 JIRAMA amounted to 1.1 percent of GDP, lower (Figure 1.18). Overall expenditure was cut in than in 2022 (1.4 percent of GDP) and 2023 the revised 2024 budget law, while transfers (1.3 percent of GDP), but remained high as a to the energy sector were increased (including share of total government spending. Delays to JIRAMA and fuel price subsidies),16 thus in implementing JIRAMA’s recovery plan and crowding out other necessary spending. renewable energy projects will continue to Notwithstanding the infrastructure gap, the weigh on the budget and crowd out necessary country spent more on transfer and subsidies capital spending. 13  IMF 2024. 14  Research underscores the importance of a 15 percent tax-to-GDP threshold for economic growth. Studies show that real GDP per capita increases sharply and sustainably once this level is reached. It is also noted that tax revenues below 15 per- cent limit funding for essential services like health, education, and infrastructure (Gaspar, Jaramillo and Wingender 2016; Gaspar, Amaglobeli, Garcia-Escribano, Prady and Soto 2019). 15  The electronic payment option was extended from covering only large taxpayers to also ‘small’ taxpayers. 16  Transfers to the energy sector amount to 1.3 percent of GDP (MGA 1,032 billion) in the revised budget. 17  Madagascar ranks 133 out of 133 countries on Infrastructure in the 2024 Global Innovation Index (https://www.wipo.int/ gii-ranking/en/madagascar/section/economy-profile) and the Human Capital Index is at 0.39. 18  The local governments face more limited fiscal space and therefore more constraints for decentralized infrastructure and service provision. PART ONE. RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 9 While the overall fiscal balance improved The risk of debt distress remains moderate. The in 2024, further improvements in budget latest joint World Bank-IMF Debt Sustainability allocation and execution are needed Analysis (July 2024), classified Madagascar as (Figure 1.19). The overall fiscal deficit narrowed having medium debt-carrying capacity and from 5.5 percent of GDP in 2022 to 4.2 percent assessed the country to be at moderate risk in 2023 and reached 3.3 percent in 2024. The of external debt distress and moderate risk of improvement in the fiscal position was achieved overall debt distress. The debt-to-GDP ratio is mainly by cutting public investment, rather estimated to slightly decline from 52.7 percent than through increased revenue mobilization at end-2023 to 51.3 in 2024. Around two-thirds or spending efficiency. This approach is likely of Madagascar’s debt is external, with nearly 60 to undermine future growth, and further efforts percent of external debt owed to multilateral are needed to ensure a steadier, higher-quality creditors on a concessional basis (Figure 1.20). fiscal consolidation. IIIIIIIIIIIII IIIIIIIIIIIII Figure 1.19. Over 2024–26, the fiscal deficit is Figure 1.20. … and the public debt stock is projected to stabilize … expected to remain stable. Fiscal balance (percent of GDP) Public debt (percent of GDP) 20 0 60 52.7 51.3 52.8 53.3 53.5 49.5 50.0 -2 40 12 -4 20 4 0 -6 0 2018 2019 2020 2021 2022 2023 2024e 2025f 2026f 2027f 2021 2022 2023 2024e 2025f 2026f 2027f Total Revenues and Grants Total Expenditures Overall Fiscal Balance (Right) Primary Balance (Right) External Debt Domestic Debt SOURCE: MEF AND WORLD BANK ESTIMATES. SOURCE: MEF AND WORLD BANK ESTIMATES. 1.6 OUTLOOK, RISKS, AND POLICY RECOMMENDATIONS Growth is expected to recover, but multiple downside risks cloud the outlook. Growth is expected to gradually pick up, and efforts to position Madagascar as a key and output should reach its potential level tourism destination (WTTC 2024).19 Inflation is starting in 2025. Growth is projected to expected to ease gradually, from 7.2 percent in average 4.7 percent over 2025–27, driven by 2025 to around 6.6 percent over 2026-27. industry (textiles, mining) and services. This projection assumes a continuation of recent Over the medium term, a sound external structural reforms, including those aimed position is expected to support a stable at strengthening market contestability in exchange rate. The CAD is projected narrow key sectors (such as mining and digital) and gradually to around 4.6 percent of GDP by improving the investment climate. The tourism 2027, largely reflecting a narrower trade deficit sector is projected to continue its growth thanks of improved terms of trade (lower momentum, fueled by rising international travel crude oil prices and rising mining exports) and 19  Including by major international travel guides such as Brandt Travel, National Geographic, and Condé Nast Traveler. 10 MADAGASCAR ECONOMIC UPDATE rising tourism exports, which should be further Recent structural reforms in key sectors strengthened by favorable trade agreements.20 are expected to boost private Gross reserves are expected to remain at investment. Telecom reforms initiated in adequate levels (around US$3.2 billion, 2023 are expected to attract investment equivalent to roughly 6.3 months of imports) along the digital value chain.22 This, in turn, is during 2025–27, bolstered by foreign direct anticipated to drive the expansion of mobile investment, grants, and concessional financing. and internet coverage and increase access to These levels are assessed as adequate to several digital services, including mobile support a stable exchange rate. banking and business processing outsourcing services, and boost employment in the The central bank’s monetary policy stance is digital sector. Investment in the mining sector expected to remain restrictive in the short term is also expected to recover with the amid persistent inflation. The new monetary revamping of the mining code in 2023. policy framework targeting overnight interest rates is not yet a fully developed inflation- Key risks to the economic outlook targeting framework.21 Instead, it adopts a more include frequent power outages and forward-looking approach, which is expected to challenges posed by climate change, improve the effectiveness of monetary policy. both of which impact manufacturing The monetary authority continues to monitor costs and agriculture sector growth. The the economic environment and has signaled its power generation partly depends on willingness to increase reference interest rates precipitation and river basin flows, and results further should inflationary pressures persist. in frequent power outages. The insufficient and unstable power supply weighs on The fiscal deficit is projected to reduce to output, especially in the manufacturing around 3.8 percent of GDP over 2025–27, sector, and pushes up production costs as driven by greater spending efficiency and firms rely on more expensive generator- increased revenue collection. The primary powered electricity. While agricultural deficit is forecasted to narrow to below output growth is expected to average 2.3 3 percent of GDP over the same period percent per year during 2024–26, higher (Figure 1.17). Revenue collection is anticipated than the average of 0.9 percent over the to benefit from the rationalization of tax past decade, this growth is vulnerable to expenditures, renewed momentum in private climate change.23 In a context of scarce sector activities, and increased revenues from water resources, the government plans to the mineral sector – as mining projects ramp invest in improved water management and up investments and production following the irrigation, alongside measures to support enactment of the new mining code. Spending agriculture and rice production. is projected to be contained, notably through a gradual decline in transfers and subsidies over the medium term, reflecting the government’s commitment to implement sustained reforms for the operational and financial recovery of JIRAMA. Public debt stock is expected to be maintained at below 55 percent of GDP over the medium term (Figure 1.18). 20 Favorable trade agreements include the ratification of the African Continental Free Trade Area, and a potential renewal of the African Growth and Opportunity Act. 21 The mechanism consists in guiding overnight interest rates on the interbank market towards the middle of the corridor. 22 After the reforms, there are five types of telecommunications licenses: fixed (wireline), mobile (mobile radiotelephony), radio data transfer (radio local loop), satellite (satellite telecommunication), and unified (all telecommunication services). The 2023 telecom reforms introduced a “unified licensing approach”. Under the new framework, operators could obtain a single comprehensive license that allows them to provide multiple telecommunications service. This approach simplified regulatory compliance and enabled operators to quickly adapt their service offerings based on market demands. 23  The increase in temperature and changes in rain patterns are expected to negatively affect yields. PART ONE. RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 11 BOX 1.2. MADAGASCAR’S ECONOMIC CHALLENGES The economy has been growing at a modest of exports, the most dynamic component of pace, held back by deteriorating infrastructure aggregate demand over that period. From 2013 and declining productivity. A return to political to 2019, the sectors with the highest revealed stability helped spur a modest economic revival comparative advantage included mining, during 2013–19, as was the case following apparel and textiles, agribusiness, and fisheries, previous crises. Growth peaked at 4.4 percent collectively accounting for about three-quarters in 2019, supported by the reopening of key of the country’s total merchandise exports. export markets, resumption of concessional Information technology-related services, financing flows, and meaningful fiscal and including call centers, business processing monetary policy reforms. However, growth operations, and software development, also remained subdued—averaging only 3.5 percent grew quickly in the years leading up to the (0.5 percent in per capita terms) over 2013–19— pandemic, supported by strong demand and insufficient to turn the tide of high poverty. and a relatively robust stream of information technology students. Governance and institutional challenges hindered socioeconomic development. The development prospects are State capture in key sectors reduced market continually hindered by frequent shocks contestability and vested interests impeded and limited resilience. These shocks, reforms, including for the state-owned utility ranging from challenging political company JIRAMA. Low levels of human capital, environment to climate and health slow economic transformation, and high crises, disproportionately affect the poor, vulnerability to climate and external shocks with few mechanisms in place to mitigate undermine growth. Labor market participation their impact. Political crises, such as the remains low and uneven between male and 2009–12 conflict, have disrupted the benefits female, and between rural and urban areas. of modest growth, while extreme weather events, including cyclones, The economy consists primarily of low- floods, and droughts, threaten vulnerable productivity agriculture and services, with rural populations reliant on agriculture. The growth largely concentrated in a few sectors pandemic, prolonged droughts in the South, such as mining and construction. The industrial and recent cyclones have further exposed sector is fast-growing but small, while the systemic weaknesses such as poor agriculture sector is large but stagnant. Between infrastructure, limited public services, 2013 and 2019, the services sector contributed and insecurity, all of which compound the 55 percent to GDP growth, consistent with long-term damage to the economy. its dominant share in the economy. Industry, including manufacturing and mining, grew Pathways to rapid, inclusive, and sustainable by 8.6 percent and accounted for about growth. Reducing extreme poverty half of GDP growth during the same period, requires higher, inclusive growth mainly driven by two major mining projects through broad economic and sector- launched in 2009 and 2012. By contrast, specific reforms. Key policy measures subsistence agriculture has stagnated due to include improving the business climate; recurrent natural disasters and deteriorating enhancing access to land, finance, and infrastructure, severely limiting economic digital services; and scaling up opportunities for the rural population. infrastructure, education, health, and nutrition efforts. Strengthening public The country has yet to fully leverage its investment management and making comparative advantage in commodity exports agriculture more resilient are also essential to accelerate structural transformation. The for the recovery. Moreover, addressing economic recovery following the political crisis governance challenges is critical to ensuring (2009–13) was supported by a resumption the success of reforms and sustainable development. 12 MADAGASCAR ECONOMIC UPDATE The outlook faces significant downside risks, § Mining: Implement the updated Mining including natural disasters, weak global Code and resume the issuance of mining growth, commodity price fluctuations, cadaster permits and gold exports to and financial instability of state-owned rehabilitate the mining sector and support enterprises (SOEs). World Bank climate models local community development. predict continued warming, variable rainfall, § Domestic resource mobilization: and less frequent but more intense cyclones Enhance fiscal space through greater in Madagascar, impacting all sectors. Increased domestic revenue mobilization to climatic events could disrupt agriculture and finance investments and crowd-in the infrastructure, hindering economic growth private sector, including improving the and macroeconomic stability. Conflicts in tax administration and rationalizing costly the Middle East and Ukraine, combined with tax exemptions in the short term. Efforts a global economic slowdown, could disrupt for domestic revenue mobilization are import channels, contribute to inflationary needed at both the central and local pressures, and negatively affect key drivers levels.24 of growth such as exports and tourism. § Fiscal risk management: Strengthen Domestically, SOEs’ financial losses could fiscal risk management through effective strain public finances. A major shift toward monitoring and contingent liabilities less concessional debt and limited progress in managing and ensuring transparency domestic revenue mobilization pose significant in potential financial exposures. These risks to debt sustainability. Poorly selected measures can reduce unexpected public investments and delays in implementing budgetary pressure, improve fiscal reforms add further risks. sustainability and improve long-term planning for fiscal health. To fuel economic growth and improve livelihoods, the authorities need to adopt In the long run, reforms should focus further structural reforms and secure sufficient on boosting the productivity that has long financing to promote inclusive and resilient stagnated. Productivity matters especially growth. Over the past decade, recurrent for developing countries because of a more shocks—including volatile commodity prices, efficient growth and faster catch up. Over the COVID-19 pandemic, and extreme the past few decades, declining productivity weather events—have constrained growth and has counteracted Madagascar’s GDP growth. productivity. To achieve high and sustained Despite a modest economic growth averaging growth, the authorities need to accelerate 2.9 percent annually (2010-2019), GDP per critical structural reforms in the energy, digital, worker actually decreased. The country’s and mining sectors while strengthening workforce is only about one-third as productive governance and macro-fiscal resilience. Key as the SSA average, ranking among the lowest measures include: in the region. This productivity crisis reflects not just insufficient labor and capital inputs, § Energy: Implement reforms to enhance but declining efficiency in how these resources JIRAMA’s financial performance, with generate output - creating a fundamental the aim to provide more reliable and barrier to the country’s development. Chapter affordable electricity access to the 2 discusses the challenge in more details with broader population, including women. proposed policy recommendations. Digital: Adopt digital reforms to enhance competition and inclusion, with the aim to expand economic opportunities and mobile money access for vulnerable groups, including women in remote rural areas. 24  The Madagascar Urbanization Report (World Bank 2024a) provides detailed actions for resource mobilization at the local level. PART ONE. RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 13 14 IIIIIIIIIIIII Table 1.1. Selected Policy Options for Faster and More Inclusive Growth TIME FRAME POTENTIAL OBJECTIVE POLICY OPTION ST/MT1 CHAMPION Improve the reliability of electricity supply by: Ministry in § Restoring the operational and financial viability of JIRAMA through the elimination of technical and charge of financial losses, investments in renewable power generation and transmission lines, tariff reforms, ST energy/ reinforcing management, and the restructuring of the company’s debts. JIRAMA § Supporting private initiatives for renewable energy generation. Promote competition, market predictability, and transparency in the telecom sector by: MADAGASCAR ECONOMIC UPDATE Supporting § Enforcing obligations to combat abuses in cases of anti-competitive practices through the effective and Ministry structural reforms independent regulation of the sector by the Communication Technologies Regulatory Authority (ARTEC). in charge in key sectors ST/MT of digital/ § Assuring fair allocation and valuation of rare resources such as the telecom spectrum (4G, 5G). telecom § Ensuring universal internet access through the ICT Fund (FDTIC). regulator § Updating the telecommunications legal framework to comply with best practices. Promote responsible and transparent investment, and improved social contributions in the mining sector by : Ministry in § Promoting formalization of activities through the elimination of all barriers on mining exports. ST/MT charge of § Aligning the Law on Large Mining Projects (LGIM) with the mining code and the General Tax Code. mining Broaden the tax base by: § Improving the effectiveness, efficiency, and equity of existing tax policies. Ministry in ST/MT charge of § Rationalizing tax expenditures through the elimination of inefficient tax incentives. finance Strengthening § Strengthening the institutional capacity of the tax and customs administration. governance and Enhance fiscal risk management by: macro-fiscal resilience § Improving fiscal risk transparency through improved reporting and disclosure of fiscal risks, including Ministry in contingent liabilities and exposures from SOEs and local governments. ST charge of § Effectively managing SOE credit risks through regular assessments of SOEs’ financial stability, including finance debt obligations, liquidity, and operational performance, to identify and mitigate risks that could impact the government’s fiscal position and creditworthiness. NOTE: 1) ST = SHORT-TERM MEASURES TO BE COMPLETED WITHIN 1-2 YEARS; MT = MEDIUM-TERM MEASURES THAT REQUIRE 3-5 YEARS TO COMPLETE. PART ONE. RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 15 16 MADAGASCAR ECONOMIC UPDATE Part 2: Productivity Constraints at the Firm Level Declining productivity has undermined per capita GDP growth in Madagascar. An average worker in Madagascar is only one-third as productive as the average worker in SSA. Boosting growth will require: (i) improving the productive capabilities of firms; (ii) facilitating the reallocation of resources to more productive firms; and (iii) supporting the entry of new firms and the exit of less productive firms. External factors—such as limited access to finance, inadequate workforce skills, deep infrastructure gaps and unreliable public services—have the greatest negative impact on firm productivity. Alleviating these constraints could unlock rapid productivity growth, with positive implications for employment, poverty, and household welfare. 2.1 PRODUCTIVITY MATTERS Productivity growth is a key driver of job prospects to Malagasy workers. economic growth and enables the creation This section of the Madagascar Economic of more and better-paying jobs. Increasing Update examines firm-level productivity firm and labor productivity25 has been a driving challenges based on insights from recent force for the development of many countries surveys and proposes options to boost the around the world (Cusolito and Maloney 2018). productivity of Malagasy firms. Increasing More productive firms add greater value to the firm productivity is critical to economic economy through their products and services development, and the private sector is often the and are better able to increase their revenue— main driver of both productivity growth and job and thereby wages—than their less productive creation. The productivity-related challenges counterparts. In Madagascar, a manufacturing facing the authorities in Madagascar include firm in the top quartile of the labor productivity making the average firm more productive. This distribution (i.e., a more productive firm) pays chapter uses data from the 2022 World Bank about seven times as much as a firm in the Enterprise Survey (WBES)27 to analyze recent bottom quartile. A service-sector firm in the top firm productivity performance, the main drivers quartile pays about five times as much as a firm of productivity growth, and implications for in the bottom quartile (Figure 2.1) and six times policymaking. above the minimum wage for a semi-skilled non-agricultural worker.26 The relationship between productivity and wages in Madagascar shows that increasing productivity is not only needed to boost growth but also to offer better 25  Firm productivity refers to how efficient firms are in turning inputs into outputs (i.e., how much production of goods or delivery of services a firm can do with a given amount of labor and capital), which is also referred to as total factor pro- ductivity. Labor productivity only refers to labor inputs (i.e., how many employees contributed to the production of a given amount of goods or services). Labor productivity is also calculated as output per worker, and this note uses both measures of productivity based on the available data. 26  Labor productivity is calculated as log of sales per worker. Compensation is measured by total labor costs and includes wages, benefits, and social security payments, and it is reported on a monthly basis. This note divides sales by the number of full-time employees adjusted for temporary workers. In Madagascar, more productive firms offer better jobs in terms of labor compensation (wages and other benefits) (Figure 2.1). According to the International Labour Organization, the gross monthly minimum wage in Madagascar was US$45 in 2022 (ILO 2024); however, the minimum wage varies depending on sector and seniority of the worker (Wage Indicator 2024). 27  The WBES is a nationally representative firm-level survey that includes interviews with top managers and owners of busi- nesses using a globally comparable questionnaire that covers a broad range of business environment topics as well as firms’ characteristics and performance measures. In Madagascar, the latest survey was conducted in 2022-23, and it covered 402 formal firms with more than 5 employees in the food, garments, other manufacturing, wholesale, retail, or other services sectors located in the Analamanga, Anosy, Atsimo Andrefana, Atsinanana, Boeni, Diana, Sava, or Vakinakara- tra regions. All data reported in this section of the Madagascar Economic Update correspond to WBES 2022 data unless otherwise stated. PART TWO. PRODUCTIVITY CONSTRAINTS AT THE FIRM LEVEL 17 IIIIIIIIIIIII Figure 2.1. Monthly Compensation per Worker Measured by Total Labor Costs (ariary thousands), 2022 A—Manufacturing B—Services 400.0 Monthly compensation per worker 400 Monthly compensation per worker 400 340.6 337.5 300 300 200 190.5 200 160.0 120.0 100 100 75.0 52.7 0 0 3 1 2 3 4 1 2 4 Labour productivity quantiles in manufacturing Labour productivity quantiles in manufacturing SOURCE: STAFF CALCULATIONS BASED ON WBES 2022. 2.2 PRODUCTIVITY IN MADAGASCAR: TRENDS AND FEATURES Madagascar has long suffered from low and Demographic change and employment have declining productivity, which has weighed been the main drivers of per capita value-added on its socioeconomic development. Low growth, but negative labor productivity has productivity is one of the key development undermined growth (Figure 2.2). The economy challenges facing the country. Over the past has not only absorbed fewer workers and three decades, negative total factor productivity capital, but the efficiency by which they have has undermined GDP growth. Between 2010 contributed to output has also declined. 29 As and 2019, Madagascar’s economy grew at an a result, the average Malagasy worker is only annual average rate of 2.9 percent, but GDP one-third as productive as the average worker per worker declined by 0.2 percent per year.28 in SSA. IIIIIIIIIIIII IIIIIIIIIIIII Figure 2.2. Shapley Decomposition of per Capita Figure 2.3. Labor Productivity: Madagascar and Value-Added Growth Comparators 30 -1.0 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 5 000 4 500 Constant 2017 international $ at PPP 4 000 2000-2009 -0.7 0.2 0.4 3 500 3 000 2 500 2 000 1 500 2010-2019 -0.1 -0.2 0.3 0.5 1 000 500 - 2000 2004 2008 2012 2016 2020 2024 Productivity Employment rate Madagascar Bangladesh Tanzania Participation rate Demographic change Rwanda Cameroon Uganda 28  The stated numbers are annual averages. The country’s cumulative annual growth rate fell from 3.5 percent in 2010 to 1.1 percent in 2019. GDP per worker is computed as total real GDP divided by the total employed population aged 15 and older. 29  For instance, in 2022, there was no employment growth, while real annual sales plummeted by 9 percent 30  Throughout this analysis, Bangladesh, Cameroon, Rwanda, Tanzania, and Uganda are used as comparators to benchmark Madagascar’s performance. 18 MADAGASCAR ECONOMIC UPDATE SOURCES: STAFF CALCULATIONS BASED ON DATA FROM ILO AND WDI (2024); IFPRI 2013. Low productivity, especially in the private Firms’ size, age, and level of foreign ownership, sector, remains a key development challenge. the gender of the manager, and export activity Compared to Uganda, Cameroon, Tanzania, are correlated with differences in productivity and Rwanda, Madagascar has the lowest labor performance. Although the level of sales per productivity (Figure 2.3). Labor productivity worker is similar in all firms, regardless of their in Madagascar has declined over the past type of products and size, medium-sized firms two decades and is now the second lowest achieve higher levels of labor productivity than in SSA, just above Burundi and half the SSA their small and large counterparts (Figure 2.4, average. Low labor productivity coincides Panel b). Meanwhile, services firms have higher with the negative contribution of total factor labor productivity levels than manufacturing productivity to growth, indicating that as the firms (Figure 2.4, Panel a). Foreign companies economy expands with more labor and capital, also tend to be more productive than locally the efficiency by which these inputs contribute owned firms, while female-managed firms tend to output has been declining. to be less productive than male-managed firms, likely due to greater challenges faced by female managers, such as limited access to credit. IIIIIIIIIIIII Figure 2.4. Labor Productivity by Sector and Firm Size A—By Sector B—By Size 0.25 manufacturing 0.25 small retail medium services large 0.2 0.2 0.15 0.15 0.1 0.1 0.05 0.05 0 0 5 10 15 5 10 15 Log of sales per worker Log of sales per worker SOURCE: STAFF CALCULATIONS BASED ON WBES (2022). NOTE: LABOR PRODUCTIVITY IS CALCULATED AS LOG OF SALES PER WORKER. RESULTS ARE BASED ON ORDINARY LEAST SQUARES REGRESSIONS, WITH HETEROSKEDASTIC STANDARD ERRORS. PART ONE. RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 19 2.3 DRIVERS OF PRODUCTIVITY GROWTH There are three main sources of productivity promote better competition, and that affect growth: within-firm, between-firm, and the reallocation of resources from less to more selection productivity growth (Cusolito productive firms. Finally, selection growth and Maloney 2018). Within-firm productivity relies on both the extent of the entry and exit growth involves increasing a firm’s capabilities of firms (enabling ‘creative destruction’) and (e.g., through technological advancements, the capabilities of new entrants. This source of organizational practices, and innovation) productivity emphasizes the impact of market and can be controlled by its management forces on productivity, as less efficient firms exit (Figure 2.5). Between-firm growth comes from the market while more productive firms enter, factors outside of the firm’s control, such increasing aggregate productivity. as equal access to productivity inputs that IIIIIIIIIIIII Figure 2.5. Drivers of Productivity Growth Operating environment : resolving market failures and removing distortions Human capital and innovative Infrastructure: basic skills; entrepreneurial, managerialn and technological capabilities Innovation shocks Reallication toward Within-firm Entry of high-productivity more productive firms performance upgrading exit of low productivity firms Dynamic effects Total factor productivity growth SOURCE: CUSOLITO AND MALONEY 2018. 2.3.1 Within-Firm Growth Although skills are a major constraint, firms (UNDP 2024). According to UNESCO Institute are not filling the gap through training. Only for Statistics (2024), in 2021, only 18.4 percent 10 percent of the country’s firms offer formal of the Malagasy population aged 25 and older training to their employees, much lower than have completed lower secondary education. the SSA average of 27 percent (Figure  2.7). Furthermore, existing training programs often Large and export-oriented firms are more fail to align with employee needs, and 23 likely to offer training than their smaller and percent of the country’s firms identify labor non-exporting counterparts. High employee regulations—such as rules governing contracts turnover disincentivizes firms to provide formal or working conditions—are a major barrier to training (WBG 2021b). While Malagasy firms growth. have increased the share of skilled workers Innovation encompasses the introduction over the past 15 years, skilled labor remains of new or significantly improved processes. scarce, and the lack of inputs needed to boost These processes include methods related to productivity persists (Figure 2.6). manufacturing products, offering services, or In 2022, roughly one-third of firms (30 improving logistics, delivery, or distribution for percent) identified an inadequately educated inputs, products, or services. Among Malagasy workforce as a major constraint to their firms, the most common form of innovation is operations and growth—almost double the introduction of new products or services the SSA average of 17 percent (Figure  2.7). that are also new to their primary market. The lack of a skilled workforce is linked to deficiencies in the education system, as reflected in its low Human Capital Index of 0.39 20 MADAGASCAR ECONOMIC UPDATE IIIIIIIIIIIII IIIIIIIIIIIII Figure 2.6. Share of Skilled Workers and Labor Figure 2.7. Workforce Training: Madagascar, SSA, Productivity in the Manufacturing Sector and World Workforce training Real annual labor productivity growth (%) 35 Percent 32.3 30.1 10 RWA_2023 CMR_2009 30 26.8 TZA_2006 RWA_2019 25 23.4 TZA_2023 21.0 CMR_2016 20 MDG_2009 BDG_2022 16.7 15 0 10.5 11.0 10.9 BDG_2013 10 RWA_2006 5 MDG_2022 MDG_2013 0 -10 Percent of firms Percent of firms Percent of firms offering formal identifying labor identifying an training regulations as a inadequately major constraint educated workforce as a major constraint -20 50 60 70 80 90 100 Proportion of skilled workers (%) Word Sub-Saharan Africa Madagascar SOURCE: STAFF CALCULATIONS BASED ON WBES 2022. Despite efforts to expand technology The slow pace of investment in inputs to adoption, the current expenditure in drivers boost innovation has negatively impacted of innovation is insufficient. In 2022, only technology adoption in Madagascar. For 10 percent of firms introduced a process example, since 2013, there are fewer Malagasy innovation, far below the SSA average of 29.4 firms that have their own website, license percent. Malagasy firms also lag behind their foreign technology to produce goods or deliver counterparts in comparator countries in terms services, and have an internationally recognized of introducing new products or services, with quality certification (Figure 2.9). Innovation is only 26 percent of them doing so in 2022, correlated with firm size, with larger firms more lower than an average of 39 percent in SSA likely to have the resources and economies of (Figure 2.8, Panel a). Although a larger share of scale to spend on R&D. Wadho and Chaudhry Malagasy firms reported R&D expenditures than (2022) argue that smaller firm size is also some comparator countries, R&D spending associated with financing constraints, lack of remains below the regional average and far competition and/or exposure to international behind that of other faster-growing economies markets, and the low level of education of (Figure 2.8, Panel b). managers and workers. IIIIIIIIIIIII Figure 2.8. Firms in Madagascar need to innovate more. A—Process Innovation B—R&D Spending 60 proccess innovation over last 3 years (%) Share of firm that introduced a 52.7 50 30 Share of firm that spend on R&D in the last fiscal years (%) 26.7 40 20.4 20.7 32.6 20 30 29.4 24.1 13.7 20 9.8 10.3 15.6 10 7.3 9.5 10.1 10 3.1 2.6 1.8 0 0 Bangladesh Cambodgia Tanzania africa Ethiopia Rwanda Mozambique Mauritius Madagascar Bangladesh Tanzania Ethiopia Madagascar Rwanda Mozambique Sub-saharan africa Mauritius Sub-saharan SOURCE: STAFF CALCULATIONS BASED ON WBES 2022. PART TWO. PRODUCTIVITY CONSTRAINTS AT THE FIRM LEVEL 21 IIIIIIIIIIIII Figure 2.9. Technology Adoption % 2013 2009 29.5 30 2022 25.3 24.0 20 17.7 15.4 14.0 10.2 10 8.7 6.7 0 Percent of firms Percent of firms Percent of firms with internationally using technology having its own recognized quality licensed from website cetification foreign companies SOURCE: STAFF CALCULATIONS BASED ON WBES 2022. 2.3.2 Between-Firm Growth Surveyed firms perceived that limited access Meanwhile, corruption remains as a top to finance, prolonged periods of political obstacle, with 7 percent of firms uncertainty, and lack of access to public identifying this factor as their biggest services (e.g., electricity) are the long- impediments, and nearly 40 percent standing bottlenecks to doing business in of firms identifying it as one of the Madagascar. In 2022, 26 percent of major constraints. In addition, 7 surveyed firms indicated that access to percent of firms cited tax rates as the finance was a major or very severe constraint, biggest obstacle, while another 6 percent compared to only 5 percent in the 2013 survey. pointed to poor infrastructure (Figure 2.10, This constraint, along with unreliable electricity Panel a). Around one-fourth of all firms have supply, represents one of the biggest concerns expressed that both tax rates and poor for nearly half of the firms in the country. Fewer infrastructure are severe constraint to their firms cite political instability as a biggest obstacle growth—a negative perception that has to doing business, with the share of firms citing it increased since 2013, when only 15 as a major business barrier falling from 48 percent of firms considered them severe percent in 2013 to 17.3 percent in 2022.31 constraints (Figure 2.10, Panel b). IIIIIIIIIIIII Figure 2.10. Biggest Obstacles and Major Constraints to Doing Business, 2013 and 2022 A—Biggest Obstacle (% of firms) B— Major or Very Severe Constraint (% of firms) Courts 2013 Courts 2013 Business licensing and permits 2022 Accessto land 2022 Inadequately educated workforce Business licensing and permits Tax administration Customsand trade regulation Labor regulations Crime, theft and disorder Accessto finance Practices of the informal sector Labor regulations Access to land Transportation Trade regulations Informal sector Transportation Tax rates Tax rates Inadequately educated workforce Corruption Tax administration Electricity Electricity Political instability Accessto finance Corruption 0 10 20 30 40 50 0 10 20 30 40 SOURCE: STAFF CALCULATIONS BASED ON WBES 2022. 31 This trend is closely linked to the evolution of the political environment in Madagascar, as the 2013 survey was conducted during the political transition period that started in 2010. 22 MADAGASCAR ECONOMIC UPDATE Insufficient access to finance limits ranked 136th out of 138 countries in investment opportunities, constraining firm the Infrastructure Score of the 2023 growth and productivity. Only 8 percent of World Bank’s Logistics Performance Index. Malagasy firms report having access to a Madagascar’s infrastructure shortcomings bank loan/line of credit, much lower than the have an impact on both the productivity SSA and worldwide averages of 19.5 and 32 and competitiveness of its firms. percent, respectively. Access to bank financing is concentrated in large firms (37 The business climate has benefited percent have bank loans) and is critically low from simplified business and tax for small firms (5 percent). While 61.8 percent registration processes but remains of firms report having checking/savings hampered by poor utility services, low- accounts, only 12.5 percent of firms use quality public services related to business banks to finance working capital, with 14.2 insolvency proceedings and business percent of them relying on supplier/customer entry, and unclear market competition. credit to finance working capital. Furthermore, A sound regulatory framework and only 1.1 percent of firms’ investments and 5.1 improved operational efficiency for percent of their working capital are financed easy business registration have fostered by banks in Madagascar, lower than the SSA an environment conducive to starting a average of 8.9 and 8.0 percent, respectively. business. However, subpar public The country’s performance on various services—such as limited digital services access to finance indicators points to serious and low transparency of online information constraints for firms to access the capital —hinder the start-up ecosystem. needed to grow their business and increase Additionally, deficiencies in productivity Moreover, the top reasons for transport infrastructure, people in Madagascar not having an account unreliable electricity access, and inefficient at a financial institution are the remoteness of public utility services (e.g., water or financial institutions, cost of financial services, internet) place Madagascar among the and lack of funds (Global Findex Database lowest- scoring countries for utility services 2021). in the region (World Bank 2024b). Weak Limited access to electricity and transport institutional and operational infrastructure remains a constraint for firms frameworks for judicial insolvency in Madagascar. More than half (52 percent) proceedings further undermine confidence of firms experience electrical outages, with in debt resolution processes and creditor- 6.3 outages in a typical month lasting an debtor relations. Moreover, limited public average of 3.9 hours each. Firms’ losses due services that promote fair market to electrical outages average 24 percent of competition reflect an annual sales, which is much higher than the underdeveloped innovation-oriented SSA and worldwide average of 8.3 percent and ecosystem that facilitates incubators and 4.0 percent, respectively. Firms report that it accelerators, as well as insufficient takes 73 days, on average, to install an electrical digitalization of e-procurement procedures connection, higher than the SSA average of 40 that could streamline key days. About 20.5 percent of the country’s firms procurement processes (Figure 2.11).32 report experiencing an average of two water insufficiencies in a typical month. Madagascar has one of the lowest road densities in the world, with 70 percent of existing roads being in poor condition and only 11 percent of the rural population having access to an all- season road. As a result of the poor quality of transport-related infrastructure, the country 32  A detailed description and methodology of the pillar and category scores can be found in the World Bank Business Ready Report (World Bank Group, 2024b). PART TWO. PRODUCTIVITY CONSTRAINTS AT THE FIRM LEVEL 23 IIIIIIIIIIIII Figure 2.11. Top and Bottom Scores of the Business-Ready Environment Pillars 100 90 80 78 80 67 65 60 60 50 52 48 49 49 Score 46 Score 44 38 42 40 40 33 33 19 22 20 20 13 0 0 Regulatory framework Public services Operational eficiency Regulatory framework Public services Operational eficiency Regulatory framework Public services Operational eficiency Regulatory framework Public services Operational eficiency Regulatory framework Public services Operational eficiency Regulatory framework Public services Operational eficiency Business entry International trade Taxation Utility services Market competition Business insolvency SOURCE: STAFF CALCULATIONS BASED ON B-READY REPORT 2024. NOTE: A SCORE OF 100 INDICATES A HIGH SCORE. ONLY 14 SUB-SAHARAN COUNTRIES ARE COVERED IN THIS REPORT. MADAGASCAR’S CLOSEST NEIGHBORS, MAURITIUS AND SEYCHELLES, EXCEEDED MADAGASCAR’S SCORES, ESPECIALLY THOSE IN THE PUBLIC SERVICES PILLAR. 2.3.3 Selection Growth Cumbersome government regulations and business licensing and permits an important procedures exacerbate the difficulties faced constraint (Figure  2.10, Panel b). These by new firms in Madagascar. Firms in the challenges have contributed to the country’s country report that it takes an average of 12 low business density rate. Between 2006 and days to obtain an operating license, 36 days 2022, Madagascar registered an average of 0.1 to obtain a construction-related permit, and 17 newly registered firms with limited liability per days to obtain an import license. Many firms 1,000 working-age people per year—one of the see the business environment as a deterrent lowest new business density rates in SSA and to growth: 30.3 percent of firms identified globally—compared to 2.1 and 0.9 per 1,000 tax administration as a major constraint; working-age people in Rwanda and Uganda, 27.6 percent identified tax rates as a severe respectively (Entrepreneurship Database 2024). constraint; and 16.8 percent considered IIIIIIIIIIIII IIIIIIIIIIIII Figure 2.12. Firm Productivity: Exporters v. Non- Figure 2.13. Days to Clear Direct Exports through Exporters Customs 0.25 25 Krenel density Days Exporters Non-Exporters 0.20 20 0.15 15 0.10 10 0.05 5 0.00 0 5 10 15 Bangladesh Cameroon Tanzania Uganda Rwanda Madagascar Total annual sales by number of permanent full time employees (thousand ariary) SOURCE: STAFF CALCULATIONS BASED ON WBES 2022. 24 MADAGASCAR ECONOMIC UPDATE Firms that export are, on average, more firms. For example, it takes an average of 19 productive than their non-exporting days to clear direct exports through customs, counterparts (Figure 2.12). This highlights the compared to an average of less than 8 days importance of access to international markets in comparator countries and 11.3 days in SSA in driving productivity dynamics. However, only (Figure 2.13). To improve the productivity of a small number of Malagasy firms are exporters, Malagasy firms, the authorities need to support partly due to constraints faced by exporting an increased access to international markets.33 2.3.4 Women-Led Businesses in Madagascar Constraints are often more severe for women- in Madagascar than the average in SSA and led firms. Women-owned and managed firms the rest of the world (Figure  2.14, Panel a). are more likely to face barriers to doing business According to the 2022 WBES, A total of 21.6 and accessing support than their male-owned percent of firms in the country recorded female and managed counterparts. Research shows majority ownership in 2022, an increase from that the performance of women-led businesses 10.5 percent in 2009. More than one-third (37.3 is often constrained by the size or sector they percent) of firms reported having a female operate in and hampered by differential use and top manager in the same year, up from 28.2 access to support and innovation.34 Addressing percent in 2013. Female business owners tend these specific constraints is essential for to hire more women as managers than their fostering the growth of women-led businesses male counterparts, and female management and promoting inclusive growth. seems to correlate with higher participation of Madagascar performs well in terms of female women in a company’s workforce: 50 percent management and ownership in the private when the company is managed by a woman sector. The share of small and medium- (Figure 2.14, Panel b) compared to 33 percent sized enterprises (SMEs) and large firms with in an overall sample of companies.35 female top managers and owners is higher IIIIIIIIIIIII Figure 2.14. Women-Led Businesses A— Female Ownership, Management, and Workforce B— Female Ownership, Management, and Workforce among Female-Managed Firms 60 40 52.8 52.0 37.0 50.0 50 31.9 34.0 30 40.8 26.9 40 36.0 Percent Percent 22.0 30 28.3 20 17.9 16.6 14.3 13.4 20 10 10 0 0 Percent of firms Percent of firms Proportion of Percent of firms with Proportion of permanent with majority with a female top permanent full-time majority female ownership full-time workers that female manager worker that are female (%) ownership are female (%) Sub-Sahran Africa All Sub-Sahran Africa Madagascar All Madagascar SOURCE: STAFF CALCULATIONS BASED ON WBES 2022. 33  Access to markets is also a challenge in Madagascar. Many regions, such as Taolagnaro (Fort Dauphin) in the southern region of Anosy, are effectively economic ‘enclaves,’ with very poor connectivity to other regions, especially those pro- ducing or commercializing inputs. Poor connectivity includes inadequate road, air, and port infrastructure, which is likely to negatively impact the ability of firms in the regions outside the capital of Antananarivo to operate and be competitive. 34  Several studies have also found that female-owned or run firms struggle more than their male-owned or run counterparts in terms of performance. For instance, in a comprehensive study of 126 countries, Islam et al. (2020) find that the labor productivity of women-owned firms is 11 percent lower than that of men-owned firms. Other studies include World Bank (2019), Allison et al. (2023), Fang et al. (2022), and Atiyas and Dutz (2023). 35  This could indicate that women employ more women when they are managers, or that women tend to manage firms in sectors where more women participate in the workforce. PART TWO. PRODUCTIVITY CONSTRAINTS AT THE FIRM LEVEL 25 The share of female ownership and highest among firms in the garments, retail, and management is higher among small firms and wholesale sector, while female ownership was in the garments and wholesale sector.36 In the highest among firms in the garments sector, 2022, 45.4 percent of small firms had a female followed by services and the wholesale sector. top manager, much higher than 12.2 percent However, female majority ownership was low of medium-sized firms and 10.6 percent of among firms in the retail sector despite a high large firms. Small firms also have a higher share share of female management—only 8.5 percent of female-majority ownership and a greater of retail firms were female-owned, while 43.4 proportion of female workers than medium- percent of them were managed by women. sized and large firms. Female management was IIIIIIIIIIIII Figure 2.15. Features of Firms Owned or Managed by Women A— By Size B—By Sector 50 Percent 60 Percent 45.4 55.5 40 50 47.7 36.4 46.7 32.8 43.4 30 40 34.9 23.4 22.7 20 18.3 30 26.9 26.0 15.3 24.1 23.3 12.2 10.6 18.6 20 10 13.6 10 8.5 0 Percent of firms Percent of firms Proportion of with majority female with a female top permanent full-time 0 ownership manager workers that are Percent of firms Percent of firms female (%) with majority with a female female ownership top manager Small (5-19) Medium (20-99) Large (100+) Food Garments Other Manufacturing Wholesale Retail Other Services SOURCE: STAFF CALCULATIONS BASED ON WBES 2022. Women-led firms face more constraints Improving the performance of women- in access to finance, quality certification, owned and managed firms could significantly and qualified workforce than their men- increase productivity growth. While the share led counterparts, which hampers their of women-owned and managed firms has productivity. The share of female-managed increased, they continue to face a myriad of firms reporting access to finance as a major challenges that would need to be addressed or severe constraint to doing business is to improve the overall productivity of Malagasy almost double that of male-managed firms firms. Women-led firms face constraints that (30.3 percent compared to 16.6 percent, keep them from achieving similar levels of respectively). A total of 15.7 percent of firms performance of men-led firms. Specific areas managed by women reported having a where the implementation of both public and recent loan application rejected, higher than private initiatives could promote the growth of 1.5 percent of firms managed by men. Fewer women-owned firms include improving access female-managed firms have checking or to finance, increasing childhood care needs, saving accounts than their male counterparts, and facilitating training programs for them. and more male-led firms have internationally recognized quality certifications (8.8 percent) than female-led firms (2.9 percent). Given that international quality certification frequently is a precondition to export in many sectors, male-led firms are more likely to be engaged in exports. Only 76.9 percent of workers in these firms were skilled, lower than 99.2 percent in male-managed firms. 36  The WBES 2022 only covers firms in the food, garments, other manufacturing, wholesale, retail, and other services sec- tors, excluding firms in the agricultural sector. 26 MADAGASCAR ECONOMIC UPDATE 2.4 POLICY RECOMMENDATIONS Firms’ capabilities to innovate, train their Specific interventions should target women- employees, and adopt new technologies led small firms to improve the training of are limited and lower in Madagascar than in employees, facilitate adoption of and access comparator countries in the region. Firms face to technologies, and improve financing challenges in accessing finance to expand their options. The entrepreneurship support system businesses or invest in productivity-enhancing needs to be strengthened so that more and equipment, limiting their ability to increase better start-ups transform their ideas into production and productivity and develop commercially viable businesses. More SMEs new products. Barriers to accessing markets need to be supported to export products (e.g., within the country include infrastructure and agrobusiness) and services (e.g., tourism and connectivity constraints that make operating business outsourcing services). This will likely in one of the regions outside the capital of need to include both financial and technical Antananarivo costly and complex. Accessing support to increase their productivity and the foreign markets is also difficult, as local quality of products and services to levels that companies are isolated from global markets meet international buyers’ demands, as well as and have little knowledge about international support to enhance market access. technology trends. Furthermore, the conditions In addition to energy and transport under which Malagasy companies operate infrastructure reforms, the adoption make them less competitive internationally. For of legislative reforms could help spur example, the country’s cumbersome regulatory investments. The recent passing of the 2023 framework and poor intra-city and national road Investment Law shows that the country can make them spend more time and resources on modernize and update its laws and regulations regulatory procedures and transportation than to create a more conducive business their counterparts in the region. environment. The authorities need to enhance Implementing a comprehensive reform the 2023 law and implement reforms to program that addresses the main constraints facilitate business operations, make it easier to faced by businesses is critical to improve start a new business, and attract investments productivity and economic growth. Reforms to make the country more competitive and include adopting legislation (such as a start- productive. up act) and procedures to facilitate the entry There are ten potential policy reforms targeting and operation of start-ups, and promoting five goals that address the constraints faced entrepreneurship training to encourage the by businesses in Madagascar: creation of new businesses; establishing an § Promoting the entry of new firms: SME acceleration program, coupled with adopt reforms to facilitate the entry and worker training and technology adoption operation of start-ups and promote basic initiatives to strengthen existing firms; entrepreneurship training. developing leasing options and digital financial § Improving the productivity of existing services to expand access to finance; and firms: introduce acceleration programs advancing business environment reforms, such for SMEs, expand access to market as digitizing government services. The design information, increase training programs, of these reforms should consider international and support technology adoption. best practices to ensure efficient use of limited § Expand access to finance: Implement resources. The sustainability of reforms across the new National Strategy for Financial political cycles is critical, since these initiatives Inclusion, promote digital financial often require sustained efforts over several years services, scale up schemes to benefit to produce the productive and competitive women-led firms, and develop leasing transformation needed in the country. instruments to facilitate access to finance. § Improving infrastructure: improve critical infrastructure especially in transport. . § Improving business environment: simplify existing export procedures and streamline government-to-business services, including customs clearance. PART TWO. PRODUCTIVITY CONSTRAINTS AT THE FIRM LEVEL 27 IIIIIIIIIIIII 28 Table 2.1. Policy Options for Boosting Firm Productivity TIME FRAME POTENTIAL OBJECTIVE POLICY OPTION ST/MT1 CHAMPION Adopt reforms to facilitate the entry and operation of start-ups during their first years of growth (though a Ministry in charge of Promoting the start-up act or similar legislation for example). ST/MT industry entry of new firms Promote basic entrepreneurship training and the incubation of start-ups, including separate and focused Ministry in charge of ST/MT programs targeting female entrepreneurs. industry Implement acceleration programs and improve access to market information for SMEs, including by Ministry in charge of ST/MT Improving the leveraging the adoption of digital tools and technologies. industry capabilities of Ministries in charge of existing firms Expand and support training programs for workers, leveraging the participation of the private sector in the ST/MT industry, agriculture, design and implementation of programs and their content. MADAGASCAR ECONOMIC UPDATE and tourism Ministry in charge of Implement the new National Strategy for Financial Inclusion (NSFI) 2024–2028. ST finances Telecommunication Implement the decree on liberalization of USSD to promote digital financial services. ST Increasing regulator access to finance Scale up the Partial Portfolio Credit Guarantee (PPCG) scheme to benefit more micro, small, and medium- Ministry in charge of sized enterprises led by women and operating in strategic sectors such as agribusiness, tourism, information ST/MT finances and communication technologies, and energy. Ministry in charge of Develop leasing instruments to help SMEs increase their access to finance. ST/MT finances Restore transport infrastructure by: Improving § Accelerating the rehabilitation of national roads in the pipeline. Ministry in charge of infrastructure ST/MT § Reforming the governance of the Road Fund to enable regular road maintenance. public works § Adopting and implementing the decree on load axle control to preserve roads. EDBM, municipalities, Improving and ministries in business Review, simplify, and digitize government-to-business services, including customs clearances. MT charge of industry environment and other relevant ministries NOTE: 1) ST = SHORT-TERM MEASURES TO BE COMPLETED WITHIN 1-2 YEARS; MT = MEDIUM-TERM MEASURES THAT REQUIRE 3–5 YEARS TO COMPLETE. PART TWO. PRODUCTIVITY CONSTRAINTS AT THE FIRM LEVEL 29 30 MADAGASCAR ECONOMIC UPDATE Part 3 : Bibliography Acemoglu, D. and Robinson, J.A. 2012. Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Crown Publishers, New York. Allison, L., Liu, Y., Murtinu, S. and Wei, Z., 2023. Gender and firm performance around the world: The roles of finance, technology and labor. Journal of Business Research, 154, p.113322. Atiyas, I. and Dutz, M.A. 2023. “Digital Technology Uses among Microenterprises”,Policy Research Working Paper, 10280, pp. 1-43. Cusolito, Ana Paula, and William F. Maloney. 2018. Productivity Revisited: Shifting Paradigms in Analysis and Policy. Washington, DC: World Bank. Dugas, M., Lim, J. R., Mulangu, F., Oviedo, A. M., and Pinzon, D. 2024. Reducing elite capture through prosocial behaviors: Evidence from a large-scale field experiment among elites in Madagascar. Mimeo. Fang, S., Goh, C., Roberts, M., Xu, L.C. and Zeufack, A., 2022. Female entrepreneurs and productivity around the world: Rule of law, network, culture, and gender equality. World Development, 154, p.105846.International Food Policy Research Institute (IFPRI). 2013. “Total and Partial Factor Productivity in Developing Countries.” https://doi.org/10.7910/DVN/2S8BZ6. Gaspar, V., Jaramillo, L. and Wingender, P. 2016. “Tax Capacity and Growth: Is There a Tipping Point?”, IMF Working Paper WP/16/234, Washington, DC: International Monetary Fund. Gaspar, V., Amaglobeli, D., Garcia-Escribano, M., Prady, D. and Soto, M. 2019. “Fiscal Policy and Development: Human, Social, and Physical Investments for the SDGs”, IMF Staff Discussion Note SDN/19/03, Washington, DC: International Monetary Fund. Institut National de la Statistique (INSTAT). 2018. Troisième Recensement Général de la Population et de l’Habitation (RGPH-3): Résultats Provisoires. Antananarivo, Madagascar: INSTAT. Institut National de la Statistique. 2024. Enquête permanente auprès des ménages 2021-2022. Antananarivo, Madagascar: INSTAT. Institut National de la Statistique & ICF Macro. 2010. Enquête Démographique et de Santé de Madagascar 2008-2009. Antananarivo, Madagascar & Calverton, Maryland, USA: INSTAT & ICF Macro. Institut National de la Statistique & ICF. 2022. Enquête Démographique et de Santé à Madagascar 2021. Antananarivo, Madagascar & Rockville, Maryland, USA: INSTAT & ICF Macro. International Monetary Fund (IMF). 2023. World Economic Outlook: Navigating Global Divergences. Washington, DC: International Monetary Fund. International Monetary Fund. 2024. World Economic Outlook: Policy Pivot, Rising Threats. Washington, DC: International Monetary Fund. Islam, A.M., Gaddis, I., Palacios López, A. and Amin, M., 2020. The labor productivity gap between formal businesses run by women and men. Feminist Economics, 26(4), pp.228-258. Wadho and Chaudhry. 2022. “Innovation strategies and productivity growth in developing countries: Firm-level evidence from Pakistani manufacturers.” Journal of Asian Economics Volume 81, August 2022, 101484. Wage Indicator. 2024. “Minimum Wage – Madagascar.” https://wageindicator.org/salary/minimum-wage/madagascar. World Bank Enterprise Survey (WBES). 2022. World Bank. 2017. World Development Report 2017: Governance and the Law. World Bank, Washington, DC. World Bank. 2019. Profiting from Parity: Unlocking the Potential of Women’s Business in Africa. World Bank, Washington, DC. http://hdl.handle.net/10986/31421 World Bank. 2021a. The Global Findex Database 2021. Washington, DC: World Bank. World Bank. 2022. Madagascar - Systematic Country Diagnostic: The Urgency of Reforms - Structural Transformation and Better Governance at the Heart of the Strategy to Reduce Poverty. Washington, D.C.: World Bank Group. World Bank. 2023a. Commodity Markets Outlook: Under the Shadow of Geopolitical Risks. October 2023. Washington, DC: World Bank. World Bank. 2023b. Public Expenditure and Institutional Review. World Bank. 2024a. Madagascar Urbanization Review: Leveraging Cities as Drivers of Growth and Structural Transformation. Washington, DC: World Bank. World Bank Group (WBG). 2021b. “Country Private Sector Diagnostic: Creating markets in Madagascar for Inclusive Growth.” World Bank Group. 2024. “Business Ready Report 2024”. https://www.worldbank.org/en/businessready. World Development Indicators (WDI). 2024. World Travel & Tourism Council (WTTC). 2024. “Travel & Tourism set to Break All Records in 2024, reveals WTTC.” April 4, 2024. https://wttc.org/news-article/travel-and-tourism-set-to-break-all-records-in-2024-reveals-wttc. PART THREE. BIBLIOGRAPHY 31 32 MADAGASCAR ECONOMIC UPDATE Part 4: Annexes IIIIIIIIIIIII Annex 1. Madagascar: Selected Economic Indicators, 2021-2027   2021 2022 2023 2024 2025 2026 2027 Est. Projections NATIONAL INCOME AND PRICES annual percent change, unless indicated otherwise Real GDP 4.7 4.2 4.2 4.2 4.6 4.7 4.8 GDP Deflator 6.3 9.6 7.5 7.6 7.2 6.8 6.4 Agriculture -2.5 2.0 5.3 4.8 4.8 3.9 3.9 Industry 20.3 9.3 1.8 3.2 4.2 4.6 4.8 Services 7.1 3.4 4.4 4.2 4.6 5.1 5.2 Private Consumption 2.9 0.1 4.5 2.6 2.6 2.6 2.6 Government Consumption -2.6 5.7 -1.1 -4.1 -0.7 5.0 5.0 Gross Fixed Investment 8.3 4.4 3.3 17.5 18.9 11.3 7.4 Gross Fixed Investment - Private 27.3 2.2 -11.0 24.7 27.9 8.8 5.3 Gross Fixed Investment - Public -27.7 11.5 46.8 4.2 -1.0 18.2 12.9 Net export -15.0 8.6 -24.4 1.0 28.9 11.7 1.8 CPI (year-average) 5.8 8.2 9.9 7.6 7.2 6.8 6.4 MONEY AND CREDIT annual percent change unless otherwise indicated Exchange Rate (to US$, average) 3830.0 4096.1 4429.6 4525.4 … … … REER -1.1 3.1 -1.2 3.3 … … … Broad money 13.3 12.0 10.2 11.8 14.9 13.1 13.2 Credit to economy 19.9 17.0 1.1 9.8 12.4 14.3 14.6 PUBLIC FINANCE AND DEBT percent of GDP unless otherwise indicated Total expenditure 13.9 16.2 17.9 16.9 15.8 16.5 17.0 Total revenue and grants 11.1 10.8 13.7 13.6 12.1 12.5 13.3 Overall balance (incl. grants) -2.8 -5.5 -4.2 -3.3 -3.8 -4.0 -3.7 Primary Fiscal Balance -2.2 -4.9 -3.5 -2.6 -2.9 -3.0 -2.9 Total public debt 49.5 50.0 52.7 51.3 52.8 53.3 53.5 External public debt 34.8 36.1 37.8 37.3 40.1 41.5 42.2 Domestic public debt 14.8 13.9 14.9 13.9 12.7 11.9 11.3 EXTERNAL ACCOUNTS percent of GDP unless otherwise indicated Exports, Goods and Services 23.4 30.3 26.6 23.3 21.8 22.2 22.1 Imports, Goods and Services 33.4 39.5 34.8 32.0 30.7 30.7 30.1 CAD (incl. current transfer) -4.9 -5.4 -4.7 -5.0 -5.5 -5.1 -4.6 Foreign Direct Investment 1.7 2.1 2.2 2.8 1.9 2.2 2.3 Terms of Trade (% change) -13.8 -4.1 -13.4 -4.7 3.3 2.6 0.2 OTHER MEMO ITEMS   GDP nominal (MGA billions) 54,978 62,775 70,297 78,837 88,422 98,887 110,270 GDP nominal (US$ billions) 14,355 15,326 15,870 17,421 … … … SOURCES: MALAGASY AUTHORITIES, IMF AND WORLD BANK STAFF ESTIMATES AND PROJECTIONS. PART THREE. BIBLIOGRAPHY 33 34 MADAGASCAR ECONOMIC UPDATE