Impact of Political Uncertainty on Malagasy Growth

Impact of Political Uncertainty on Malagasy Growth

The December 19, 2001 disputed elections sparked political tensions between President Didier Ratsiraka and Marc Ravalomanana, the then mayor of Antananarivo. Initial results did not result in winner and a run off was necessary. However, Ravalomanana disputed the results and declared himself the winner, igniting violent clashes between supporters of the two candidates. A recount was initiated, which eventually conceded 51.6% of the vote to Ravalomanana, thus adding legitimacy to his presidency1. Ravalomanana was re-elected in 2006 and his government saw some economic progress. However, two factors led to political tensions and later his ousting. First, political elites within the opposition accused him of attempting to dominate the political and economic spheres. Second, Ravalomanana’s rule became more authoritarian and boundaries between private and public interests were increasingly eroded.

 

The Mayor of Antananarivo, Andry Rajoelina, a fierce critic of Ravalomanana, who later led a popular uprising, took up these grievances. The uprising forced Ravalomanana to relinquish power to the military directorate in 2009, which subsequently transferred power to Rajoelina, the leader of the popular uprising. Rajoelina became the president of the High Authority of Transition, while Ravalomanana went into exile in Swaziland and later South Africa.

 

The unconstitutional change of government deepened the political crisis. The crisis led to governance failures, sanctions from the Southern African Development Community (SADC) and international isolation. In September 2011, 11 political parties agreed on a roadmap towards presidential and legislative elections. Due to delays, the elections were held in October 2013 and Hery Rajaonarimampianina won the elections. However, disagreements over the selection of the prime minister became another frontier for political tensions, as several candidates were put forward but there was lack of consensus. Roger Kolo was nominated as prime minister on 11 April 2014 and the president confirmed his appointment.

 

However protests over power cuts and the inadequate provision of public services, soon forced Kolo and his cabinet to resign. This prompted the president to select Jean Ravelonarivo, a military general, as his new prime minister on 15 January 2015. Ravelonarivo later survived sacking in April 2016 but resigned in July of the same year. Madagascar is deeply polarized and, as a result, is struggling to rebuild itself after the 2009 political crisis. The crisis has cost the country in terms of economic performance. Political uncertainty has led to domestic protests, civil disruptions and adversely affected investor confidence – especially as the country nears another round of presidential elections, tabled for May 20182. Prior to the 2009 political crisis, Madagascar’s economic growth averaged 5.8% from 2004-2008; but declined to 1.4% in the period from 2009 to 2013 during the height of political disruptions.

 

Madagascar’s positive growth trajectory and economic reforms introduced during the Ravalomanana era were disrupted in the wake of the crisis. Some of the economic reforms included the 2007 legislation governing investment in special economic zones, aimed at rationalising investment promotion to attract foreign investment3. The election of Rajaonarimampianina brought about a degree of political certainty and the country has since experienced some recovery.

 

With stability restored after the elections, GDP growth from 2013 to 2015 increased slightly to an average of 2.9% from 1.6% for 2010 to 2012 (see Table 1 below). Recent data indicates Madagascar’s economic growth reached 4.2% in 20164 and is expected to reach 4.5% in 2017 (see Table 1 below) 5.

 

Table 1: Madagascar, GDP Growth (Annual %)

Year 2009 2010 2011 2012 2013 2014 2015 2016 2017
Real GDP Growth -4.7 0.3 1.5 3.0 2.3 3.3 3.1 4.1 4.5

 

A number of factors have contributed to the recovery of the economy, including the commitment of the current administration to solve the immediate consequences of the 2009-2013 political crisis and to ensure macroeconomic stability6. Such commitments have resulted in lower inflation, which was contained at 7.0% at the end of 2016 and is expected to peak at 8.0% in 2017, before falling down to about 5.0% in the medium term7. Additionally, macroeconomic stability has led to a steady increase in foreign direct investment, totaling USD 541 million in 2016, a significant rebound compared to 2014 and 2015, which registered USD 351 million and USD 441 million respectively8. Moreover, in 2016, the country was ranked as Africa’s second best destination for oil and gas investments9. Approximately 66 Greenfield investment projects were announced in 201610. It is noteworthy that the administration has embarked on an aggressive investment promotion drive, regionally and internationally, to attract capital. For instance, the country participated in an investor conference hosted by the South African Department of Trade and Industry, Department of International Relations and Cooperation and the Development Bank of Southern Africa.

 

Due to these quick wins, the administration has been in a position to focus on medium to long-term developmental concerns such as infrastructural development (ports and roads), investment in education and health, and reforming the financial sector to enable it to respond to the country’s developmental needs. Growth has been driven by the expansion of the tertiary sector, boosted by investment in public works, recovery of the mining sector, recovery of the agriculture sector, due to favourable climatic conditions and higher vanilla prices, and strength in export processing zones (EPZs) 11. The increase in public works has come through government investment and demand for transport services as the economy rebounds. Since the restoration of stability, the fiscal stance has become increasingly expansionary, reflected by an increase in public expenditure and attempts to clear the payment arrears that accumulated during the crisis period. Investor confidence has responded favourably towards government interventions that include reforms to improve the business climate. For instance the 2017 survey already indicates that there are improvements in relation to opening a business and it’s easier to conduct international trade12. Additionally, the country’s efforts in implementing reforms have been acknowledged by the International Monetary Fund (IMF), which reported that the country’s performance is strong under the economic program supported by the Extended Credit Facility13. This is encouraging, but the country will definitely need to maintain this strong reform momentum to ensure that the economy continues along its growth trajectory. Political stability will be essential in achieving this.

 

The 2015/16 agricultural season witnessed a decline in crop production particularly in the Southern parts of Madagascar14. Output is projected to drop for certain crops due to the El Nino induced drought. For instance, production levels of rice are estimated to be below the 2013 production when 3.6 million MT were produced. That is 10.0% below the 2011 to 2015 average of 4.0 million MT. In 2016 rice production was 3.8 million tons, 2.5% above 2015, but down 5.0% below the five-year average15. In the same season maize production was around 316 thousand tons, a 4.0% slump and 19.0% below the average. As a result cereal import requirements for 2016/2017 is estimated to be about 518,000 tons with rice being the bulk at 272,000 tons while maize and wheat estimated at 97,000 tons and 150,000 tons respectively16. Yet, overall the agricultural sector has increased its contribution to the GDP due to an increase in vanilla prices17. From August to December 2015, the price of vanilla rose about 200.0% and is now between MGA 70,000 (approx. USD 22.7) per kg and MGA 120,000 (approx. USD 39.0) per kg in 201718. This has resulted in the first current account surplus since 2001, providing relatively good incomes to about 200,000 people employed in the vanilla sector. Export revenues in 2016 were boosted by the temporary increase in vanilla prices and strong production in export processing zones, aided by the reinstatement of the AGOA privileges19. Subsequently, this enabled the accumulation of international reserves that reached USD 1.1 billion at the end of 2016 from USD 775 million at the end of 201420 and are projected to increase to USD 1.25 billion in 201721.

 

As a response to the challenges caused by the political crisis, the government adopted the National Development Plan (NDP): 2015 -2019, which also contains the president’s emergency plan for 2015 and 2016. A number of strategic areas are earmarked in the NDP, including governance and rule of law, preservation of macroeconomic stability and support for development, inclusive growth, human capital and enhancement of natural capital. In addition, the NDP forecasted a growth rate of 5.0% in 2015, 7.0% in 2016, 9.0% in 2017 and is projected to rise to more than 10.0% from 2018 to 2019. But this has not been achieved, despite the administration’s efforts to implement reforms that are in line with NDP and having achieved some positive results.

 

Public finances have benefited from increased tax revenues arising from customs reforms and a reduction in subsidies to non-priority areas22. Crucial reforms within state owned companies are still required. The struggling state owned companies such as the state-owned electricity and water company (Jiro sy Rano Malagasy), JIRAMA and Air Madagascar continue to weigh on the budget and the economy. For instance, the supplementary budget submitted to parliament on 9 June 2017 estimates that JIRAMA requires an increase in additional transfers of about MGA 200 billion (approx. USD 64.9 million ), representing 1.3% of GDP in 201723. Improving JIRAMA will increase the availability of resources for other priority areas, boost the investment climate and contribute to the economic recovery24.

 

The potential source of political instability is the lack of institutionalisation of political parties25. In other words, ruling elites govern based on weak coalitions or alliances. As a result, these alliances can easily change during election times or after elections. For instance, President Rajaonarimampianina did not have a political party before elections. His Platform for a Presidential Majority (PMP) is an amalgamation of numerous political parties26. The lack of the institutionalisation of political parties produced a polarised National Assembly and the nomination of the prime minister was disputed. There are possibilities that the next elections are going to produce similar tensions. These tensions could ignite another wave of political instability that will have a negative impact on the economy.

 

The current relative political stability has resulted in economic recovery that has enabled the country to gain some quick-wins. Essential structural reforms are being implemented and some government interventions are already producing results although more needs to be done in the medium to long-term. However, the economic recovery remains fragile and the business environment remains weak. This is exemplified by the government’s failure to attract adequate investment towards other key sectors of the economy such as manufacturing and diversify the economy. The situation is compounded by uncertainty ahead of the presidential elections27. Investors are still reluctant to make long-term investments due to the uncertainties caused by domestic politics28. As the country prepares for the elections, elites are likely to focus more on political survival than economic growth, and this will delay the implementation of crucial structural reforms. These reforms are essential to improving the business environment and will also determine whether international financial institutions continue to extend loans to the country.

 

As a result, the outlook in the short-term and long-term is not positive. Without a smooth election and transition of power, the current political challenges will be heightened and this will adversely affect the economy in a number of ways – fundamental reforms will be delayed and the business environment will continue to be weak for long-term investment29. This will undermine the investment potential of the export processing zones that have contributed to the recovery of the economy. The country needs to diversify its economy and investment is going to be key. Therefore, the country needs to maintain political stability in the short-term and long-term for this to occur.

 

Current Affairs Update

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Madagascar Embarks on a Regional Investment Drive

Madagascar is emerging from a political crisis that crippled the economy and led to capital flight. As a result the country is attempting to attract foreign investment as part of reconstructing the economy. The current administration recently embarked on an investment drive in the region. In collaboration with the South African Department of Trade and Industry and the Development Bank of Southern Africa the country was hosted at investment conference in Pretoria from the 14th to the 15th of June. The conference aimed to promote Madagascar as a viable investment destination and more importantly the Presidential Priority Projects, which South African investors and Development Finance Institutions can participate in30 This includes areas such as infrastructure projects in mining and textile that require ports, roads and railways where South Africa has the expertise. Such investments will to a large extent put Madagascar’s economy on a sustainable growth path in the long-term and allow it to be well integrated in regional markets. Additionally, South Africa is Madagascar’s biggest African export market and South African goods accounted for about 5.7% of its international import basket31. More economic interaction between the two countries will reinforce the current trade interactions, which will contribute to Madagascar’s development plans. Additionally, Madagascar can learn from South Africa in relation to creating a conducive environment for investment, particularly on issues relating to political certainty, policies and strong institutional arrangements Noteworthy is that investments of this nature might result in spillovers into other countries. These spillovers can lead to development of regional value chains in various sectors that are currently underdeveloped in the Southern African Development Community region. Furthermore, this will definitely contributed to regional trade and integration.

 

Madagascar Joins Asian Infrastructure Investment Bank

Madagascar is emerging out of the crisis and is in dire need of investment in infrastructure that will underpin self-sustaining economic development in the long-term. As part of its investment drive the current administration has joined the Asian Infrastructure Investment Bank (AIIB) initiated by China and supported by numerous countries and regional organisation that will fund infrastructure improvement in Asia and other regions of the world32. At the second annual meeting that took place on June 16 2016 in South Korea, AIIB’s board of governors approved Madagascar’s application to join the bank Madagascar will become a full member of the AIIB after completing the domestic process and depositing the first instalment of capital with the bank33. This is definitely a step in the right direction for a country that is attempting to build infrastructure for long-term development, initiate a developmental project that will diversify the economy away from agriculture and mining and increase its trade links through quality infrastructure. Membership to the bank might allow the country to have access to cheap capital for its infrastructure development plans. Located in a region that faces infrastructure deficit due to lack of capital, more countries in the region will definitely consider becoming members of the bank. The possibility of Madagascar and countries like South Africa in accessing cheap capital for infrastructural development might be a catalyst for other countries in the region to join the bank. Accordingly, this will allow the region to have access to other alternatives for capital without facing too many conditions for the loans. The AIIB might be an attractive option considering that the World Bank and the International Monetary Fund are dominated by the United States of America and Europe, and selective in their approach, which includes stringent conditions when providing development loans. In the long-term a relationship between AIIB and the Southern African Development Community region might initiate closer trading ties between the countries in the region and Asia, and access to competitive markets for goods from the region.

 

Malagasy Finance Minister Resigns

Tensions within Madagascar’s current administration led to the Minister of Finance and Budget Gervais Rakotoarimanana resigning from his post on 17 July 2017. This follows reports that the minister had a disagreement with the president and there was lack of support. During a press conference Rakotoarimanana said that conditions to successfully conduct his mission were not being met and this prompted him to resign34. On 18 July 2017 the presidency released a statement that confirmed Vonintsalama Andriambololona as the new minister35. Andriambololona served as the general secretary of finance when the current president Hery Rajaonarimampianina was the finance minister36. She remained in the post until 2015, and was a board member of the Central Bank of Madagascar37. Cognisant of the fact that the country is coming out of a crisis that crippled the economy, the resignation of the finance minister has numerous negative effects. Chief among them is policy and institutional consistency. This is important for a country that is attempting to attract huge investment into its economy for both immediate challenges and long-term development. On one hand this might signal simmering political tensions within the current administration especially considering that previous cabinets have been forced to resign. On the other hand, it illustrates that the country’s political elites are struggling to build cohesion within the government and this is going to negatively affect the economy. With such a high ranking official resigning when the country is preparing for another round of elections, it sends negative signal to investors who are watching the political developments and are concerned about political certainty in the long-term. It might not be surprising if the current administration witnesses more resignation due to possible political tensions within the administration. This will definitely negatively affect the on-going economic reconstruction process. Restoring certainty in such an important state organ will be key in the short-term.

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1 Electoral Institute for Sustainable Democracy in Africa
2 Electoral Institute for Sustainable Democracy in Africa
3 Bertelsmann Stiftung
4 International Monetry Fund
5 International Monetary Fund
6 World Bank Group
7 International Monetary Fund
8 United Nations Conference on Trade and Development
9 Prisma Report
10 United Nations Conference on Trade and Development, ibid.
11 International Monetary Fund, ibid.
12 International Monetary Fund, ibid.
13 International Monetary Fund, ibid.
14-16 Food and Agriculture Organisation of the United Nations & World Food Programme
17 International Monetary Fund, ibid.
18 Famine Early Warning Systems Network
19-20 International Monetary Fund, ibid.
21 International Monetary Fund, ibid.
22 World Bank Group, ibid.
23 International Monetary Fund, ibid.
24 World Bank Group, ibid.
25-27 International Monetary Fund, ibid.
28-29 International Monetary Fund, ibid.
30-31 South African Government
32-33 China Daily
34 Reuters
35-37 Reuters


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