VZCZCXRO5594
PP RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHAN #0653/01 2580632
ZNR UUUUU ZZH
P 150632Z SEP 09
FM AMEMBASSY ANTANANARIVO
TO RUEHC/SECSTATE WASHDC PRIORITY 2837
INFO RUEHZO/AFRICAN UNION COLLECTIVE PRIORITY
RHMFISS/CDR USAFRICOM STUTTGART GE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEHRC/DEPT OF AGRICULTURE WASHDC PRIORITY

UNCLAS SECTION 01 OF 03 ANTANANARIVO 000653 
 
SIPDIS 
 
STATE FOR AF/EPS AND AF/E - MBEYZEROV 
TREASURY FOR FBOYE 
COMMERCE FOR RTELCHIN 
PARIS FOR WBAIN 
LONDON FOR PLORD 
 
E.O. 12958: N/A 
TAGS: ECON MA
SUBJECT: IMF ON MADAGASCAR: ECONOMIC OUTLOOK BLEAK, BUT 
GOVERNMENT CAN SUSTAIN ITSELF 
 
¶1. (SBU) Summary: According to the IMF resident 
representative in Madagascar, GDP growth for 2009 is likely 
to fall between negative 0.5 and negative 1 percent.  Because 
of the transition government's prudent fiscal policy and 
declining world prices, inflation remains under control.  The 
exchange rate also has remained fairly stable during the past 
six months, and the banking sector remains sound.  For the 
first eight months of 2009, total fiscal revenues reached 74 
percent of target levels.  The government has continued to 
pay wages and debt service, but has drastically cut 
investment spending.  As a result of this fiscal austerity, 
the overall deficit is low.  Although pressure will mount on 
public finances due to the global recession and the need to 
increase social spending, the government can continue to 
sustain its basic operations for the foreseeable future. 
However, the compounded effects of poor agricultural 
policies, a negative investment climate, the potential loss 
of AGOA trade benefits, and limited public investment paint a 
far bleaker economic picture for 2010.  End summary. 
 
GDP Growth Projections Slightly Negative 
---------------------------------------- 
¶2. (SBU) The American Chamber of Commerce in Madagascar 
(Amcham) featured guest speaker Pierre van den Boogaerde, the 
resident representative of the International Monetary Fund 
(IMF), at its monthly member breakfast Sept 10.  He explained 
that Madagascar's poverty reduction and growth facility 
(PRGF) with the IMF had expired in July 2007, without being 
completed.  Although the IMF has ceased all formal engagement 
with the transition authorities, it continues to provide 
advice at the working level to contacts at the central bank 
and finance ministry.  According to van den Boogaerde, GDP 
growth for 2009 is likely to range from negative 0.5 to 
negative 1 percent.  Although the industrial sector has been 
hard hit by the combined international financial and local 
political crises, it makes up a fairly small portion of the 
overall Malagasy economy, approximately 12 percent.  Large 
negatives in the secondary sector have been offset by strong 
growth in the primary sector (especially mining), which makes 
up 30 percent of GDP.  The agricultural sector performed well 
this year due to benign weather conditions and incentives 
provided by the former government last year in the form of 
price guarantees, fertilizer, and seeds to plant 
counter-season rice.  Furthermore, although the secondary 
sector overall has performed poorly this year, certain 
segments, particularly telecommunications, pharmaceuticals, 
and the brewery, have done well.  The services sector has 
been impacted mainly by a move of workers from the formal to 
the informal sector, evinced by a growth in second hand 
clothing imports and street vendors.  Before the political 
crisis, Madagascar was poised to be among the eight 
fastest-growing economies of the world in 2009, with 7 
percent growth.  Van den Boogaerde suggested that substantial 
growth was possible in the rice, cotton, cacao, vanilla, and 
lima beans (pois du cap) sectors if the proper policies were 
applied. 
 
Low Inflation 
------------- 
¶3. (SBU) Because of the transition government's prudent 
fiscal policy and declining world prices, inflation has been 
contained.  Year on year, inflation was 8.2 percent in July 
and could be lower in August.  Since March, prices have 
fallen month to month, but are expected to rise toward the 
end of 2009.  This trend is partially due to tight fiscal 
policy, but also to a worldwide trend of lower fuel and food 
prices this year, compared with the same period in 2008. 
 
Exchange Rate Stabilized, but Overvalued 
---------------------------------------- 
¶4. (SBU) The exchange rate has remained fairly stable during 
the past six months, despite the crisis, although according 
to van den Boogaerde, it remains overvalued by around 30 
percent, reducing the competitiveness of Malagasy exports. 
He asserted that a competitive rate was in place from 2004 - 
2005, which was driven up by a huge shock of foreign direct 
investment in mining in 2006 - 2008.  Although the value of 
the real exchange rate has fallen somewhat since the last 
quarter of 2008, it has not reached its 2005 level. 
 
ANTANANARI 00000653  002 OF 003 
 
 
 
Banking Sector Stable 
--------------------- 
¶5. (SBU) Van den Boogaerde lauded the performance of the 
central bank during the political crisis, noting that the 
interbank currency market did not break down even one day and 
the normal flow of currency circulation (60 billion ariary, 
equivalent to USD 31 million) was never interrupted. 
Although the central bank did intervene slightly during the 
second and third quarters by selling foreign currency and 
buying ariary to maintain its value, overall, the bank has 
applied a prudent monetary policy (and is now purchasing 
foreign currency) he said.  The level of official foreign 
reserves remains adequate, according to van den Boogaerde. 
The main problem with the banking sector now is that 
commercial banks are reluctant to lend and thus have excess 
liquidity.  The rate of credit expansion, particularly for 
trade credits, is low.  Some banks that lent heavily to the 
ousted president's company, Tiko group, have been impacted by 
non-performing loans, as the company has been looted, 
including of the rice and oil that guaranteed those loans. 
 
Low Government Deficit 
---------------------- 
¶6. (SBU) For the first eight months of 2009, total fiscal 
revenues reached 74 percent of target levels, with tax 
revenues at 84 percent and customs revenues at 62 percent of 
target levels.  Customs revenues are down because imports 
have declined by around 30 percent compared with the previous 
year.  Although exports are also down by 18 percent, the 
current account balance is improving due to the larger 
reduction in imports.  The government has continued to pay 
wages, debt service, and some value added tax reimbursements, 
but has drastically cut investment spending.  Public 
expenditures had reached only 30 percent of the original 
budgeted amount as of September 4, with 56 percent spent on 
administrative costs (including buying 4-by-4 vehicles for 
mutinous military officers, joked van den Boogaerde), 26 
percent on infrastructure, and only 17 percent on social 
costs, leaving hospitals without proper support such as 
access to HIV drugs.  As a result of this fiscal austerity, 
the overall deficit is low.  The government has not increased 
borrowing; as a result treasury bill rates had declined to an 
average of 5.05 percent as of September 4. 
 
The Government Can Sustain Itself 
--------------------------------- 
¶7. (SBU) Van den Boogaerde explained that, although pressure 
will mount on the public finances due to the recession and 
the need to increase social spending, including to support 
the reopening of schools in late September int he face of 
reduced donor funding, the government can continue to sustain 
its basic operations indefinitely.  Average monthly fiscal 
revenue reached 143 billion ariary (USD 74.4 million) during 
the first eight months of 2009.  According to van den 
Boogaerde, the government needs approximately 40 billion 
ariary (USD 20.8 million) to cover wages and 20 billion 
ariary (USD 10.4 million) to pay foreign debt per month. 
Even accounting for the fact that the government typically 
takes in two-thirds of its revenue during the first half of 
the year and only one-third during the latter half, it should 
still be able to sustain basic operations for the foreseeable 
future. 
 
Negative Outlook 
---------------- 
¶8. (SBU)  Although the government can continue limping along, 
the compounded effects of poor agricultural policies under 
the new government, a negative investment climate, the 
potential loss of AGOA trade benefits, and limited public 
investment are likely to make 2010 a much more difficult year 
than 2009.  The low price of rice set by the government to 
benefit urban consumers, equivalent to the price in 1984, 
along with the lack of incentives such as improved seeds and 
fertilizer, have deterred farmers from planting for the next 
harvest.  Many will produce for their families but not much 
more.  This phenomenon could cause rice shortages by 
September 2010.  The government's intervention in the vanilla 
market also threatens to harm one of the country's main 
 
ANTANANARI 00000653  003 OF 003 
 
 
export sectors.  The political crisis, combined with an 
increase in lawlessness, corruption, and a stifling of 
competition by wealthy private interests, have tarnished the 
investment climate.  The potential loss of AGOA benefits 
threatens the livelihood of some 100,000 people employed in 
the garment sector (whose wages feed at least 500,000 urban 
Malagasy).  Although contributing only marginally to GDP, 
this activity adds significantly to social stability and is 
of high political import.  Fiscal revenues are likely to be 
about one-third lower in 2010 than in 2009, due to the freeze 
of donor funding and the lack of new investment projects in 
the pipeline; thus, the government will be forced to maintain 
fiscal austerity (or follow the Zimbabwe hyperinflation 
model). 
MARQUARDT