VZCZCXYZ0002
RR RUEHWEB

DE RUEHAN #0346/01 1340413
ZNR UUUUU ZZH
R 140413Z MAY 09
FM AMEMBASSY ANTANANARIVO
TO RUEHC/SECSTATE WASHDC 2421
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS ANTANANARIVO 000346 
 
DEPARTMENT FOR AF/E - MBEYZEROV 
DOC FOR DESK OFFICER - BERKUL 
TREASURY FOR FBOYE 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: BEXP KTDB MA
SUBJECT: MADAGASCAR'S ECONOMY: LOWER REVENUES AND SHIFTING 
PRIORITIES 
 
¶1. (SBU) SUMMARY: Madagascar's ongoing political crisis continues to 
negatively impact key macroeconomic indicators and the business 
sector.  Customs duties collected during the first quarter were 
lower than predicted, and the plummet in tourism is pushing national 
airline Air Madagascar towards bankruptcy.  The ariary continues to 
depreciate, but the impact on inflation is temporarily offset by a 
current decrease in rice prices during the harvest season.  The 
government's first quarter spending habits (mostly under former 
President Ravalomanana) have led the World Bank to call for a focus 
on social and infrastructure spending over "political spending", but 
there is little indication so far that the High Transitional 
Authority (HAT) is listening. END SUMMARY. 
 
¶2. (SBU) MARCH HARVEST LEADS TO LOW INFLATION 
Prices remained stable in March, with monthly inflation estimated at 
0.4 percent (compared to 1.83 percent in February).  This stability 
is due to the decrease in the price of rice since the beginning of 
the current harvest period, which began in March.  From March 2 to 
March 30, the price of locally produced rice fell by 5 percent. 
Inflation for the first quarter of 2009 is estimated at 3.2 percent, 
compared to 2.7 percent during the same period in 2008. 
 
¶3. (SBU) ARIARY CONTINUES ITS FALL 
During April, the ariary depreciated by 6.33 percent against the 
dollar and 4.29 percent against the euro; depreciation in March was 
respectively 2.25 percent and 7 percent against the dollar and the 
euro.  Purchasing of euros on the foreign exchange market dropped 
from EUR 64.7 million in March to 63.8 millions (a 1.4 percent 
decline), and USD 110.13 million to 107.8 million (a 2.3 per cent 
decline) for dollars. 
 
¶4. (SBU) Q1 CUSTOMS DUTIES LOWER THAN EXPECTED 
Customs duties collected during the first quarter of 2009 were only 
64 percent of budget predictions: USD 88.4 million of the USD 137.8 
million target was collected.  The decrease in imports and the fall 
in oil prices were key factors in the lower revenue. 
 
¶5. (SBU) FALL IN TOURISM IMPACTS AIR MADAGASCAR 
During the first quarter of 2009, Air Madagascar earned only half of 
predicted revenue, due to the fall in tourism.  As a result, the 
company is likely to be incapable of paying current expenditures, 
particularly salaries.  In addition to the crisis, the HAT Minister 
of Transportation accused the former (foreign) managers of Air 
Madagascar, as well as the "open sky policy" (permitting foreign 
competition on international routes to/from Madagascar), of having 
caused the company's bankruptcy.  Note that in July 2008, the GOM 
budgeted USD 10.2 million for transfer directly to Air Madagascar as 
a means of "increasing the state's participation in the equity of 
the company". 
 
¶6. (SBU) QMM CONTRACT UNDER REVIEW 
The HAT government has announced that French company Drake and Bart 
(which is largely unknown) will carry out an assessment of the 
contract between the GOM and Rio Tinto's QMM mining operation in 
Fort Dauphin.  The objective is the eventual revision of the 
contract, given that "QMM has no development impact on the 
population on the ground" according to the HAT Prime Minister 
Roindefo Monja.  (NOTE: Sources close to the Sherritt mining project 
near Tamatave, which faces a similar review, assert that the HAT 
lacks the legal authority to do so, since a revision would require 
changes to the law governing such investments.  With parliament 
currently suspended, any changes would rely on a 
legally-questionable presidential decree. END NOTE.)  Separately, 
local media report that due to the global financial crisis and tough 
situation on the international commodities market, QMM is planning 
to cut costs this year.  As a result, QMM's purchases from local 
suppliers (mainly expendable supplies) will be reduced, but no job 
cuts are planned for full-time employees. 
 
¶7. (SBU) COMMENT: Madagascar's embattled transition government will 
be faced with tough choices in the coming months as their revenues 
wither from reduced trade, declining investment and foreign 
assistance, and the dying tourist industry.  A recent World Bank 
analysis found that overall GOM spending in the first quarter of 
2009 (mostly under former President Ravalomanana) was down by 1/3 
compared to 2008, due to the "quasi-paralysis" of public 
administration and growing budget constraints.  Within that reduced 
overall spending, there was also a sizable shift away from 
infrastructure and social spending towards "political spending" (led 
by the Presidency, the Prime Minister's Office, and the Ministry of 
Finance, but also including Parliament and the High Constitutional 
Court), with the former down by over 50 percent and the latter up by 
almost 100 percent.  The World Bank recommends reversing this trend, 
but the HAT's anxiety to shore up popular support makes it unlikely 
they will heed this advice in the short term. END COMMENT. 
 
Marquardt