MADAGASCAR'S ECONOMY: LOWER REVENUES AND SHIFTING

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