Identifier
Created
Classification
Origin
09ANTANANARIVO366
2009-05-26 06:58:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Antananarivo
Cable title:  

MADAGASCAR: DOWNWARD ECONOMIC SPIRAL

Tags:  ECON PGOV MA 
pdf how-to read a cable
VZCZCXRO2403
PP RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHAN #0366/01 1460658
ZNR UUUUU ZZH
P 260658Z MAY 09
FM AMEMBASSY ANTANANARIVO
TO RUEHC/SECSTATE WASHDC PRIORITY 2451
INFO RUEHZO/AFRICAN UNION COLLECTIVE PRIORITY
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEHRC/DEPT OF AGRICULTURE WASHDC PRIORITY
RUEHLMC/MILLENNIUM CHALLENGE CORP PRIORITY
UNCLAS SECTION 01 OF 02 ANTANANARIVO 000366 

SENSITIVE
SIPDIS

STATE FOR AF/EPS AND AF/E - MBEYZEROV
USDOC FOR BECKY ERKUL - DESK OFFICER
TREASURY FOR FBOYE

E.O. 12958: N/A
TAGS: ECON PGOV MA
SUBJECT: MADAGASCAR: DOWNWARD ECONOMIC SPIRAL

ANTANANARI 00000366 001.2 OF 002


UNCLAS SECTION 01 OF 02 ANTANANARIVO 000366

SENSITIVE
SIPDIS

STATE FOR AF/EPS AND AF/E - MBEYZEROV
USDOC FOR BECKY ERKUL - DESK OFFICER
TREASURY FOR FBOYE

E.O. 12958: N/A
TAGS: ECON PGOV MA
SUBJECT: MADAGASCAR: DOWNWARD ECONOMIC SPIRAL

ANTANANARI 00000366 001.2 OF 002



1. (SBU) Summary: Madagascar appears to be headed towards a
serious recession, as diminished government spending, loss of
investor confidence, flagging exports, and suspension of
donor funds translate into a loss of jobs and a slowdown of
GDP growth. In addition to increased poverty, the transition
authority (HAT) could, over time, face serious problems in
its ability to pay civil service and military salaries if tax
revenues continue to fall, and donor funds remain suspended.
End summary.

Budget Shortfalls Met By Slashing Spending
--------------

2. (SBU) Due to diminished tax and customs revenue (29
percent below target) and the suspension of donor funds, the
Malagasy government is facing a serious budget crunch. In
response, the government has cut virtually all spending
except salaries and debt payments, but will still need to
finance a deficit. As external funding from the IMF is no
longer available, the government plans to increase domestic
borrowing specifically for financing the budget deficit by 14
percent over initial projections during the latter half of

2009. (Note: This 14 percent estimate, along with the
government's revised annual revenue projections detailed
below (down only 18.8 percent) seems overly optimistic, given
the actual figures for the first four months and the
likelihood of continued political uncertainty through
year-end. End note.)

- Domestic Tax and Customs Revenue for Jan - Apr: Target: 351
million USD; Actual: 248.7 million USD
- Domestic Tax and Customs Revenue projected for 2009:
Original: 1.206 billion USD; Revised: 1.069 billion USD
(Note: The downward revision is due mainly to a fall in
customs revenue because of declining international trade and
to the poor performance of the fiscal administration. End
note.)
- Government Revenue from Foreign Aid projected for 2009:
Original: 405 million USD; Revised: 232 million
- Government Expenditure projected for 2009: Original: 2.089
billion USD; Revised: 1.595 billion USD
- Projected domestic borrowing to finance 2009 budget
deficit: Original: 103 million USD; Revised: 120 million USD
(Note: Overall treasury bond issuance by the GOM is
projected to increase by 34 percent compared to 2008 (from

USD 657 million to 880 million) however most of this increase
will be used to repay prior T-bonds, rather than finance the
budget gap. End note.)

Source: GOM and World Bank data; USD calculations based on
exchange rate of 1 USD per 1950 Ariary

GDP Growth Languishes as Job Losses Multiply
--------------

3. (SBU) Because of the compounded impact of the global
financial and Malagasy political crises, the tourism,
textile, shrimp, and construction sectors have reported
thousands of job losses. Customs data indicate a 25 percent
decline in the value of textile exports during the first
quarter of 2009. Operators predict further declines due to
falling global demand and the possible loss of eligibility
for African Growth and Opportunity Act trade preferences for
the U.S. market. The suspension of donor funds and
government public investment (of which donor funds
represented 75 percent) has produced a slowdown in
construction and public works activities. The construction
union has estimated that the crisis will cause a 40 percent
loss of company turnover during the remainder of 2009.

Balance of Payments Concerns
--------------

4. (SBU) In early 2008, the local currency, ariary, was
facing pressure to appreciate due to large capital inflows
from the mining sector, donor funds, and booming exports.
That trend began to reverse in the third quarter of 2008, as
mining construction projects were completed and global export
demand diminished, and it intensified in the first quarter of
2009 as foreign aid flows were cut. During the first
quarter, Madagascar's main export staples -- textiles,
shrimp, and vanilla -- were down 40 percent in value terms
compared with the same period in 2008. Since the beginning
of October 2008 to date, the ariary has lost almost twenty
percent of its value vis-a-vis the U.S. dollar. This

ANTANANARI 00000366 002.2 OF 002


depreciation has made Malagasy exports more competitive,
however it has also increased inflationary pressure and
raised the risk that the currency will excessively depreciate
due a loss of confidence in the ariary. The Central Bank
lacks sufficient foreign exchange to defend against this
potential overshooting which could produce a balance of
payments crisis.

Bright Spots, For Now: Banking, Inflation, and Agriculture
--------------

5. (SBU) Despite the economic turmoil, the banking system
remains sound, with deposits holding steady. Inflation has
been controlled, up by only 10.4 percent at the end of April
year-on-year. The Central Bank has maintained prudent
monetary policies and has even reduced its lending to the
government by one percent since year-end 2008. The
agricultural sector, which employs three-quarters of the
population mainly in subsistence rice farming, is performing
well this year due to fair weather conditions. (Note: The
weather likely has more of an impact on island-wide poverty
than the macroeconomic and governance conditions, which
disproportionately impact urban dwellers. It is these urban
dwellers, however, that are politically-active and may react
negatively toward the transition government. End note.)

Comment
--------------

6. (SBU) While the calm of last two months may lead to an
upswing for the tourism sector, exports and foreign
investment are likely to continue their decline for the
foreseeable future. As a result, customs revenues will
remain low. If Madagascar enters into recession, tax
revenues will further diminish due to the slowdown in the
productive sectors. If the transition government does not
move toward reinstituting democracy to regain donor funds,
the GOM could eventually lack the capacity to pay civil
servant and or security forces salaries. Most estimates here
indicate that such a fiscal train wreck is many months away,
and other factors could delay it further still. End comment.
STROMAYER