The economy of Madagascar is dominated by agriculture, which employs three-fourths of the population. Entrepreneurial activities generally site areas such as agriculture, livestock and forestry industry, contributing 32 percent of GDP, more than 70% of export earnings, and 13 percent (with food industry, energy, and beverages industry as main sub-sectors), and services about 55 percent. Over the last three decades, growth rates have averaged only 0.4 percent each year. With population growth rates of about 3 percent, per capita incomes have declined sharply.
Since the late 1980s, the country has adopted more pragmatic economic policies: price distortions have been removed; the exchange rate has been floated; energy prices have been increased; and commodity subsidies have been eliminated. In recent years, the financial sector has been strengthened through bank restructuring and privatization. Key sectors such as air transport and telecommunications have been exposed to increased competition. The economy has responded positively to these reforms. External accounts remain highly dependent on foreign aid, and on the foreign direct investment front, the country is long way to go compared with several African countries – FDI has been still less than one percent of GDP’.
Madagascar faces problems of chronic malnutrition, under-funded health and education facilities, a roughly 3% annual population growth rate, and severe loss of forest cover, accompanied by erosion. Industry features textile manufacturing and the processing of agricultural products. Growth has been held back by antigovernment strikes and demonstrations, a decline in world coffee demand, and the erratic commitment of the government to economic reform. Formidable obstacles stand in the way of Madagascar’s realizing its considerable growth potential; the extent of government reforms, outside financial aid, and foreign investment will be key determinants. Growth should be in the 5% range in the beginning of the 21st century.
In 2000, Madagascar embarked on the preparation of a Poverty Reduction Strategy Paper (PRSP) under the Heavily Indebted Countries Campaign (HIPC) Initiative. The boards of the IMF and of the World Bank concurred that the country is eligible under the HIPC Initiative, and Madagascar has reached the decision point for debt relief. The IMF Board granted the country $103 million for 2001-03 under the Poverty Reduction and Growth Facility (PRGR). Resources freed up from HIPC will be directed toward improving access to health, education, rural roads, water, and direct support to communities.
Partly as a result of these credits but also as a result of previous reforms, average GDP growth exceeded the population growth rate of 2.8% in 1997 (3.5%), 1998 (3.9%),1999 (4.7%) and 2000 (4.8%). Madagascar’s appeal to investors stems from its competitive, trainable work force. More than 200 investors, particularly garment manufacturers, have organized under the country’s Export Processing Zone (EPZ) system since it was established in 1989. The absence of quota limits on textile imports to the European market under the Lome Convention has helped stimulate this growth. In addition, there is evidence that Madagascar’s recent eligibility for AGOA is significantly increasing Malagasy exports and foreign investment. With the FDI in recent years, entrepreneurial activities are more realistic than in past decades. With the high poverty rate and lower education levels, entrepreneurial activity has been minimal.
In the short and medium terms, considerable economic growth can arise from greater efficiency in the allocation and use of resources. Since the mid-1980s, Madagascar has run sizeable balance¬of-payment deficits. The current account deficit as a percentage of GDP averaged in excess of 6% during the last 6 years and registered nearly 4% in 1999. Madagascar’s debt ratio, which had reached 46% in 1996, is estimated at 15.4% in 2000.