MADAGASCAR AT THE HALFWAY POINT OF MCC COMPACT

C O N F I D E N T I A L SECTION 01 OF 03 ANTANANARIVO 000404 SIPDIS SIPDIS DEPT FOR AF/E, AF/FO PARIS FOR D'ELIA E.O. 12958: DECL: 04/25/2017 TAGS: EAID KMCA ECON PGOV PREL MA SUBJECT: MADAGASCAR AT THE HALFWAY POINT OF MCC COMPACT REF: A. ANTAN 287 ¶B. NAIROBI 1426 ¶C. 06 ANTAN 1372 ¶D. ANTAN 325 ¶E. ANTAN 232 ANTANANARI 00000404 001.2 OF 003 Classified By: AMBASSADOR JAMES D. MCGEE FOR REASONS 1.4 B, D ¶1. (U) SUMMARY AND INTRODUCTION: Two years ago Madagascar became the first country to sign a Compact with the Millennium Challenge Corporation (MCC),recognizing progress in investing in people, economic freedom, and governing justly. Remarkable achievements in the Compact's priority areas of land tenure, financial reform, and business development are routinely reported via MCC channels. This cable examines not the MCC program, but looks more broadly at two years of milestones and challenges in Madagascar, a "Transforming Country" in the Foreign Affairs Framework. END SUMMARY. ¶2. (SBU) Expanding President Ravalomanana's vision, "Madagascar, Naturally," senior government officials have fully incorporated country ownership and thorough consultation into the policy process; ideals first learned and tested while drafting the MCC Compact. The Madagascar Action Plan (MAP),an ambitious five-year strategy for rapid development, was painstakingly vetted and revised with the help of thousands of community, business, and civic leaders. Economic goals, and the political changes which underlie them, represent a path for Madagascar toward becoming an African success story. There are also significant challenges to be overcome to realize Madagascar's potential. END SUMMARY AND INTRODUCTION. Two Years of Modest Economic Triumphs -------------- ¶3. (SBU) With meager GDP growth rates of 4.6 percent in 2005 and 4.9 percent in 2006, Madagascar has yet to realize rapid economic growth. However, inflation was controlled through 2006, and by early 2007 stood at 10.85 percent (February, year-on-year). From a high above 80 percent in 2002, the proportion of Malagasy people living in absolute poverty has declined to 73 percent. Modest improvements in economic management earned Madagascar a new IMF Program in July 2006, ending months of contentious dialogue over reforms. In March 2007, an IMF Mission assessed Madagascar's performance to be satisfactory (REF A). ¶4. (SBU) Fiscal revenue in 2006 was just under 10 percent of GDP; paltry compared to similar economies. Even with Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiative (MDRI) debt forgiveness, the GOM has a substantial debt burden from successive years of budget deficits. Senior officials hope extractive industries such as the Rio Tinto QMM investment in Fort Dauphin and the Dynatech investment in Moramanga, will soon generate revenue for the government. Mining revenue, however, already comes with a hidden cost: of the USD 100 million QMM spent in the second half of 2006, about USD 20 million hit the domestic economy in terms of salaries and procurement. From a 24 month average of about 2200 Ariary / USD, the Ariary has appreciated to 1850 Ar / USD in April, 2007. When Dynatech's USD two billion investment begins in mid-2007, this appreciation will continue unless the Central Bank initiates a monetary intervention. Exporters, notably in shrimping and the AGOA and European apparel factories, already report their slim margins are being eroded away by the exchange rate appreciation. Unlike relatively low employment mining, these sectors are responsible for over 150,000 jobs. ¶5. (SBU) Exogenous shocks like high oil prices and cyclones continue to plague Madagascar's economy. Electricity, transportation, and communications costs are commonly cited as impediments to growth. During heavy flooding during the ANTANANARI 00000404 002.2 OF 003 2006-07 cyclone season, perhaps the worst in history, hundreds of thousands were left homeless, dozens of bridges and roadways were washed out, and substantial rice and cash crops (such as vanilla) were lost (REF B). Politics: More Stability, Limited Reform -------------- ¶6. (SBU) The December 3, 2006 Presidential Election and April 4, 2007 Constitutional Referendum were relatively free and transparent, each generally representing the will of the Malagasy people (REFS C and D). Following the disputed 2001 election, Madagascar descended into a governance crisis in 2002 that brought the country to the brink of civil war. During five years in office, President Ravalomanana's government has brought political stability to Madagascar. Freedoms of expression and political opposition, with a few notable exceptions, have been protected. The President's anti-corruption efforts, led by the Independent Anti-Corruption Bureau (BIANCO) are laudable, even if Madagascar's Transparency International Ranking is 84 out of 163 countries. ¶7. (C) Following Ravalomanana's landslide victory December 3, 2006, opposition leaders have begrudgingly accepted the President's legitimacy and no longer call for a transition government. The President remains reluctant to extend an olive branch to his political adversaries, avoiding opportunities for confidence-building or reconciliation. To the contrary, emboldened by his reelection, the President called for a referendum immediately afterward, making broad changes to the Constitution which some say expand his powers (REF E). ¶8. (SBU) Despite transparent voting organization, the GOM remains reluctant to make fundamental electoral reforms to apply the current norms of the regional and global community of democracies - a single ballot and an independent electoral commission. A Look Forward -------------- ¶9. (SBU) The second half of Madagascar's MCC Compact coincides with the first years implementing the MAP. President Ravalomanana will measure success in economic terms and hold Ministries, the 22 regional chiefs, and his stable of advisors accountable; as he said at his inauguration, he wants, "Results, results, results!" ¶10. (C) Madagascar will continue to diversify trade away from former colonial power France and increase trade with China. Having joined the Southern African Development Community (SADC) Madagascar must quickly take advantage of access to regional markets. In particular, Madagascar must attract investment from neighboring powerhouses Mauritius and South Africa to help fuel its growth. Madagascar's apparel industry is responsible for over 100,000 factory jobs in the export processing zone. AGOA apparel exports will likely expand by 20 percent in 2007, all other factors being equal, after the third-country fabric extension. With substantial focus on agribusiness, Madagascar is also well-positioned to diversify its AGOA exports into myriad other products. ¶11. (C) COMMENT: President Ravalomanana undoubtedly learned important lessons about thorough policy consultation during the MCC Compact process. His steady economic reforms, leading to a new IMF program in 2006, demonstrate a genuine effort to increase living standards. Ravalomanana has sometimes been criticized, including by us, for not separating his private business interests sufficiently from his role of public trust. While the President's public and private motivations are difficult to gauge, it is worth noting that his TIKO empire is predominantly retail. As Madagascar's economy grows and per capita income increases, ANTANANARI 00000404 003.2 OF 003 TIKO will sell more yogurt, build more infrastructure, process more commodities, and earn more in television and radio. ¶12. (C) COMMENT CONTINUED: The calculus on political reforms is very different. Although President Ravalomanana's leadership style evolved somewhat since 2002 when he tried to run the country like he ran TIKO, he remains impatient, impetuous, and skeptical of bureaucracy. The President views political reforms in terms of making government more efficient and achieving the lofty goals in the MAP. Expediency trumps democracy and inclusiveness, with the President willing to do little more than the minimum in terms of political openness. In a recent meeting with the Ambassador he implored, "Trust me, I am not like some African dictator who rules for life." Success in the first MCC Country indeed requires a lot of trust in the President, and verification that he follows through on his economic and political responsibilities. END COMMENT. McGEE