Madagascar - Recent economic developments and prospects (Vol. 1 of 2) : Main report

FILE COPY Report No. 2357-MAG Madagascar: Recent Economic Developments and Future Prospects (In Two Volumes) Volume 1: Main Report October 24, 1979 Country Programs Department Eastern Africa Regional Office FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Annual Average 1973 US$ 1.00 FMG 222.70 FMG 1.00 US$ 0.0045 1974 US$ 1.00 FMG 240.50 FMG 1.00 US$ 0.0042 1975 US$ 1.00 FMG 214.32 FMG 1.00 US$ 0.0047 1976 US$ 1.00 FMG 238.98 FMG 1.00 US$ 0.0042 1977 US$ 1.00 FMG 245.67 FMG 1.00 US$ 0.0041 1978 US$ 1.00 FMG 225.64 FMG 1.00 US$ 0.0044 Currency Unit = Malagasy Franc (FMG) FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES Metric  FOR OFFICIAL USE ONLY This report is based on the work of an economic mission which visited Madagascar during June/July 1978. The mission consisted of Messrs. P. C. Joshi (Mission Chief), S. Y. Rahim (Industry), B. Grdjic (Statistics), C. Delvoie (Employment), G. Hosmalin (Agriculture) and I. Christin (Money and Finance). This document has a restricted distribution and may be used by reciplents only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   MADAGASCAR RECENT ECONOMIC DEVELOPMENTS AND FUTURE PROSPECTS TABLE OF CONTENTS VOLUME I - MAIN REPORT Page No. MAP BASIC DATA SUMMARY AND CONCLUSIONS ............................................ i-iii I. INTRODUCTION ................. ..... ...................... 1 II. RECENT ECONOMIC DEVELOPMENTS ............................ 4 Savings and Investment ............................. 4 Output Trends ............ .. . ........................ 5 Agricultural Production and Policies .... ........... 6 Industry ........................................................... 11 Employment and Wages ..... .......................... 14 Basic Needs and Social Policies .. .................. 18 Money, Credit and Prices ..... ...................... 19 Price Policy ....................................... 25 Government Finance ................................. 27 Balance of Payments ..... ........................... 36 III. DEVELOPMENT STRATEGY AND ECONOMIC PROSPECTS ...... ....... 43 The Development Plan 1978-80 .......... .. ........... 45 Economic Prospects within an Alternative Strategic Framework ... ...................... 50 APPENDICES Appendix I - National Accounts and Balance of Payments Projections ............................. 56 Appendix II - Statistical Tables ......... ............. 64 VOLUME II - ANNEXES ANNEX I - Agriculture - Some Problems and Policy Issues ANNEX II - Industrial Development in Madagascar ANNEX III - Employment ANNEX IV - Public Finance - Monetary and Financial Structure  LIST OF TEXT TABLES (Volume I) 1. Gross Domestic Expenditure, Savings and Resource Gap 2. Agricultural Production - Selected Crops 3. Producer Prices of Principal Crops 4. Composition of the Labor Force 1975 5. Monetary Survey 1972-78 6. Money Supply, Production and Prices 7. Distribution of Credit by Maturity 1972-77 8. Distribution of Credit by Sector of Activity 1972-77 9. Financial Transactions of the Government 1974-78 10. Central Government Current Expenditure 1974-78 11. Central Government Capital Expenditure 1975-78 12. Central Government Current Revenue 1974-78 13. Balance of Payments 14. Foreign Trade Indices 1972-77 15. Trends in Selected Exports, 1974-77 16. Trends in Main Imports, 1974-77 17. Value Added 1978-90 18. 1978-80 Plan - Fixed Investment Outlays 19. Resources and Uses  -12' 12 MADAGASCAR ;Antseranano -Paved roads All weather roads Railways NO5Y.8 Abu +. Airports Hell-yille b 4 Vohin,orina Forests ____00 Contours in meters -14' -z~- Rivers ~7 ~ l14' - - - - Prefecture boundaries ~ obou - Provinciol boundaries Aoa ~ ~ ~~0 C ~~~~~~Antaloho 0 50 ]go I 0 ntn MILES Mahajanga 0 50 too IS0 200 250 KILOMEr ERS S -16' ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~16' Mnanonro S no n 0 ron -Iv n N~~~~~~~~~~~~OSY Ia / BO~~~~RAHA -' eoarivoAtsinonano Mo~imniro C~1 Toomasina Chan nel N//0 A I 20' 20' M.rood- a QC EA Nl 22' 272 This -ep h- boo Apreard by thu Vuhiponu ~~~~~~~~~~Wor,d Ba-k' ataff ocailyfur th-onei-nc of the rod-r of terport to whirh it/Sl attached Th. denonistin- -sd and th. Fooogna b-udaries ehoyr an thie step do -ot iaply. Os h part of the World Bank andu iOeffiiaes any jupra nthe 1.9.1etteo .nr t-rstry or eny -od-ret or-ccptance ofsuh b-odhr-n A.pon,hy ~~~~~~~~~~~~~~~~~OCEAN MADAGASCAR 42 44'4   - 7 - Table 2: AGRICULTURAL PRODUCTION - SELECTED CROPS (in '000 tons) 1970-77 1970 1972 1973 1974 1975 1976 1977 (Percent change) FOOD CROPS Paddy 1,946 1,924 1,913 2,013 1,972 2,043 2,154 11 Cassava 1,218 1,213 1,175 1,264 1,309 1,390 1,412 16 Potatoes 94 134 117 116 122 134 148 57 Lima beans 22 28 18 24 24 19 15 -32 (pois du cap) CASH CROPS Groundnuts 41 49 38 40 42 54 47 12 Sugarcane 1,239 849 1,041 1,317 1,377 1,267 1,281 3 Tobacco 5 5 6 4 4 4 3 -37 Cotton 19 25 31 33 30 35 37 98 EXPORT CROPS Coffee (green) 67 69 74 81 84 79 68 3 Vanilla (dry) 1.8 1.9 1.8 1.4 1.8 1.6 1.0 -44 Pepper 2 2 3 3 3 5 3 35 Cloves 13 6 4 18 5 13 14 1 Source: Paddy - Direction Generale du Plan; other crops - Ministry of Rural Development and Agrarian Reform. 17. Among cash crops, production of groundnuts, the main local source of edible oils, has been fluctuating around 40,000 tons for over a decade while yields have remained poor, averaging about one ton per hectare. With rising on-farm consumption availability of groundnuts for the oil milling industry has been affected and imports of edible oils and fats are being relied upon to meet most of the growing requirements of urban areas. Groundnut production went up by nearly a third to 54,000 tons in 1976 owing mainly to extension of the cropped area, but dropped to only 47,000 tons the following year. In spite of the sharp rise in production the marketed surplus in 1976, amounting to 21,000 tons, was about a third smaller than in 1971. And imports of oils and fats increased further during the year to 16,000 tons, or about three times the level in 1970. Sugarcane production has been stagnating over a long period as there has been no addition to the sugar refinery capacity for several years. Since 1975 the sugarcane crop has varied around the level of 1.3-1.4 million tons. Production of cotton, which had been increasing fairly fast until about 1974, dropped in the following year, but has continued to rise thereafter. The rapid growth of cotton farming since the mid 1960s is largely attributable to the operations of CFDT (Compagnie francaise pour le developpement des fibres textiles) which has played a major role in providing  extension, inputs and marketing services to farmers. After having fallen somewhat production rose to 35,000 tons in 1976, and again to about 37,000 tons in 1977. Tobacco production had fallen steeply to 3,600 tons in 1974 owing to the departure of expatriate planters. It recovered somewhat during the subsequent years but showed a substantial decline in 1977, probably because relative producer prices favored cotton production. 18. Coffee, cloves and vanilla are Madagascar's main agricultural ex- ports. Production of coffee had been rising steadily until it fell by about 6 percent to 79,000 tons in 1976; the following year, however, production is estimated to have fallen further to 68,000 tons largely as a result of climatic factors. Coffee is mainly a smallholder crop in Madagascar. But yields though still rather low -- 370 kg/ha as compared to 600-700 kg/ha attained in Kenya and Tanzania -- have been rising owing largely to the efforts of the "operation cafe". In fact close to half of the increase in production taking place since 1970 is accounted for by improving productivity of coffee cultivation. Production of cloves is subject to periodic cyclical fluctuations; but the area under the crop has been increasing and average annual production has risen from about 7,500 tons during 1970-73 to about 12,000 tons in 1974-77. The world market for natural vanilla was seriously hit by the development of synthetic substitute flavouring; and, in order to protect unit prices and earnings in a situation of declining demand supplies to the export market have been regulated since 1964. Production accordingly had not been increasing and averaged around 1,800 tons (dry vanilla) a year until 1975. Since then, however, production has been falling and is estimated to have been only 1,000 tons in 1977. Madagascar is a minor exporter of pepper. Pepper production in recent years has, like exports, been fairly stable except for the marked increase to nearly 5,000 tons in 1976. Produc- tion of lima beans (pois du cap) has been declining since 1975, dropping from 24,000 tons during the year to an estimated 15,000 tons in 1977. Apart from the problems created by the downturn in production, lima bean exports are facing increasing competition from similar commodities. 19. Animal husbandry is a major rural occupation with cattle rearing predominating. Estimates of the size of the cattle herd vary considerably; but all of them indicate some decline in the cattle population during 1970-74 and a gradual.reconstitution of herds since 1975. Little definite information is available regarding livestock sector output. The fall in recorded slaugh- terings over the years - from 338,000 heads in 1970 to only 233,000 heads in 1977 - is indicative more of the evasion of sanitary controls and slaughter taxes than of actual production trends. Also, at the official fixed prices the slaughterhouses cannot effectively compete for supplies with the free market. 20. As the foregoing review of production trends reveals, low or even declining productivity might become characteristic of Malagasy agriculture. Although climatic conditions in recent years have often been unfavorable, poor average yields reflect essentially the prevalence of traditional cultivation methods which have not undergone much improvement over time. Indeed over the past few years there might even have been some deterioration in farming techniques and cultural practices due to shortages of inputs and weakening of extension support for important crops like paddy. Fertilizer imports, for  instance, fell from about 30,000 tons in 1970 to only 14,000 tons in 1976. In the absence of any lasting increase in output per hectare, barring such exceptions as coffee cultivation, increasing domestic demand for agricultural commodities has led to continued extension of the area under cultivation. According to official estimates the total area sown to food, cash and export crops, has been increasing at an average annual rate of 3 percent since 1970. 21. In its efforts to raise agricultural production the Government over the past few years depended largely, particularly in the case of food crops, on price incentives supplemented by a few cash production programs like "rattrapage paddy." Much less emphasis has been placed on the diffusion of high yielding techniques, strengthening of extension facilities or the development of irrigation. Moreover, efforts to improve productivity have been impeded by the poor road network and serious marketing problems arising in the process of adaptation to State takeover of private wholesale trade after 1972. 22. The official producer price policy aims at ensuring adequate incen- tive and a fair income to farmers. In the application of this general policy, however, successive increases in producer prices effected since 1972 have followed a definite pattern. Producer prices of food crops and of agricultural products required by food processing industries were raised the most, although sugarcane remained an important exception. The increase in producer prices between 1972 and 1978 was sharpest in the case of paddy, followed by cassava and groundnuts. Smaller price increases were accorded over this period to cash and export crops: Table 3: PRODUCER PRICES OF PRINCIPAL CROPS 1972 = 100 1973 1974 1975 1976 1977 1978 Food Crops Paddy 100 167 200 200 233 233 Cassava 100 118 176 176 176 176 Cash Crops Groundnuts 104 125 146 146 161 171 Sugarcane 100 100 100 100 122 124 Tobacco 98 104 116 116 132 132 Cotton 103 117 134 134 138 138 Export Crops Coffee 100 122 122 122 133 135 Vanilla 100 109 114 114 127 139 Pepper 100 117 117 120 127 130 Cloves 100 114 114 114 121 121 Source: INSRE, Commodity Stabilization Funds and the Central Bank.  - 10 - 23. The relatively heavy reliance on the use of the price policy instru- ment in the case of food crops and groundnuts was prompted by the low levels of producer prices during the early 1970s and the concern.about production shortfalls and rising food import requirements. Price incentives, however, were not very successful as a means of stimulating output growth owing largely to the lack of adequate complementary measures to improve farming techniques and yields. With prevailing traditional cultivation the substantial rise in the relative producer price of paddy could only have helped maintain or raise production, as it probably did, by inducing extension of cultivation to less fertile or unsuitable lands or preventing a switching of cultivated area to other crops. 24. The modest increase in producer prices of export crops appears to have been dictated by two main considerations: to avoid excessive increase in the production of commodities expected to encounter limited export demand and to generate additional public revenues. Producer prices of the main agricultural exports are set by the Ministry of Economy and Commerce in consultation with the commodity stabilization funds. Rising export prices have swelled the surpluses of these funds over the past three years. From 7.5 billion FMG in 1975 their profits more than doubled to 19.5 billion FMG in. 1977, and in September 1978, stood at 33.6 billion FMG. Some of these funds, which are contributed to the FNUP (Fonds national unique de perequation), a de facto entity set up in 1977 under the control of the Ministry of Finance and Planning, have been partly utilized as general financial resources of the Government and have, among other things, financed the consumer subsidy on domestically grown rice. 25. It has become increasingly evident from the experience of recent years that better farm productivity will be the most important means of stepping up the rate of growth of agricultural production. In any case, the growing demand for food is unlikely to be met through the simple expedient of bringing more land into cultivation. Thus even as new lands are developed, policy emphasis should rest on the promotion of intensive cultivation and dissemination of high yielding seed-fertilizer technology backed by adequate extension facilities. Within such a policy framework irrigation becomes a particularly important element as, even with traditional cultivation tech- niqurs, it offers considerable scope for increasing both crop yields and gainful employment of labor. 26. However, action along these lines will be constrained by available resources so that productivity programs will have to be carefully designed and appropriately phased. Priority in the matter of irrigation will thus need to be accorded to the rehabilitation of the existing network whose capacity has been seriously impaired by the neglect of maintenance, while technical and financing aspects of new schemes would require an in-depth review in order to avoid the installation of facilities involving excessive costs. Moreover, efforts to improve farm productivity should, in the initial stages, be directed towards crops, like paddy and oilseeds, where their impact on output and balance of payments is likely to be maximal. Paddy does, and with better yields groundnuts should, provide an opportunity for efficient import substi- tution; but inadequate production and the diminishing market availability of  - 11 - these commodities is necessitating sizeable imports of rice and edible oils. For a similar reason, that is to say, concentration of efforts in areas of greater comparative advantage, priority might also be given to better lands and farms already producing a surplus for the market instead of attempting to reach both subsistence and market farmers. The choice in this respect, how- ever, is less clearcut as selectivity with regard to farmers will tend to make rural income distribution more unequal than selectivity with regard to crops. Ultimately such a choice would depend on the importance to the Government of income distribution and growth objectives, or the possibility of taxing the eventual additions to the income of richer farmers. 27. The steps taken to raise crops yields and the marketed surplus will, no doubt, need to be supported by a suitable farm price policy. World market prices could provide the basis for a more rational system of agricultural prices. Considerable flexibility will need to be exercised, however, in shifting to it from the existing price structure. In the first place, parity pricing will have to be introduced gradually, particularly when the disparity between producer price, or say the cost of production, and international parity is rather large, or a sustained improvement in crop yields is necessary to bring the producer price into line with the border price. Second, care should be taken that, in the process of adjusting to parity prices, input prices, particularly the price of fertilizer are not also raised to such an extent as to discourage optimal utilization of improved farm inputs. The present urea-paddy price ratio of about 3:1 is, for instance, significantly higher than the corresponding international price ratio. Third, wherever possible, initial increases in producer prices should be large enough to enable farmers to meet, in addition to operating and maintenance costs, at least some portion of the investment cost of projects from which they benefit. Finally, deviations from parity pricing may be unavoidable in the case of certain agricultural exports (see para. 71). Industry 28. The development of the industrial sector after independence in 1960 was encouraged by promotional measures such as fiscal incentives, pro- tection against competition from imports and provision of institutional term financing. Industrial production now accounts for about 14 percent of GDP. In spite of the significant diversification of capacity that has taken place, manufacturing is still dominated by food processing, textiles and apparel industries. Together they account for close to 70 percent of the manufactur- ing output. Among the other industries the important ones include tobacco manufactures, chemicals (mainly soap and matches), petroleum refining and production of construction materials. 29. Industrial growth since 1972 has been erratic. Following a marked 9.4 percent rise in 1974 the industrial production index declined again in 1975 and 1976; and despite subsequent recovery could only attain the 1974 level by 1978. Within the manufacturing sector itself, however, performance varied between different industry groups. While the output of textiles followed a stagnant trend after 1974, food processing showed a marked improvement in 1978 and some of the comparatively minor industries, such as chemicals, tobacco  - 12 - manufactu'res and paper products maintained a fairly steady growth. The tapering off of industrial expansion in the past few years has resulted from a number of factors: capacity bottlenecks and ageing equipment owing to insufficient investment in the past, uncertain and inadequate availability of agricultural materials for processing industries, shortages of imported inputs and, in some cases, even deficient demand. 30. Manufacturing activity in Madagascar is subject to considerable seasonal variations. Quarterly indices of industrial production, available for the period 1972 to 1975, exhibit strong seasonal fluctuations varying from 28 percent to 47 percent. Output is lowest in the first quarter and in the third. In agro-industries these fluctuations are largely, though not entirely, explained by raw material supply (sugar production is tightly bound to seasonality), but other sub-sectors also show pronounced, though irregular, fluctuations from quarter to quarter. Insofar as such fluctuations can be removed through more efficient supply and inventory policies, capacity can be greatly economized. In some industries, such as paper, chemicals, rubber and clothing, there appears to be a case for closer examination of these possibilities. 31. Among the food and beverage industries, output of edible oils registered some increase after 1974 while beer production went up markedly. Overall output of the food processing group nevertheless remained more or less stable owing to a fall in the production of sugar and processed beef, and picked up only in 1978 as a result largely of a 6,000 ton increase in sugar production to 116,000 tons. The beef canning industry was affected by the decline in the supply of cattle and production fell steeply from nearly 8,000 tons in 1974 to only about 4,000 tons in 1976; and despite a sharp increase in the following year production was still somewhat below the 1974 level. 32. As regards textiles, the other main industry group, production fell by more than 6 percent in 1975 and showed a relatively modest increase thereafter. The near stagnant production trend reflects the failure of demand to match the unusual 22 percent jump in the production of cotton fabrics to 81 million meters during 1974. A similar situation developed in the case of apparel manufacture; production declined, following continued expansion in 1974 and 1975. 33. The production of construction materials has been falling since 1974; the output of corrugated sheets continued to decline until 1976, but the existing very old cement factory has often operated close to its effective capacity of 70,000 tons. Following the loss of some export markets throughput of refined petroleum products dropped from 0.7 to 0.6 million tons in 1976 and declined further in 1977 and 1978. Assembly of transport equipment was affected by scarcity of imported components and has been virtually static. Some other industries, however, have fared much better. Production of cigarettes increased sharply after 1975 owing to the installation of addi- tional manufacturing capacity. Output of paper has been rising briskly because of growing demand for educational material. Increasing soap produc- tion has contributed to the overall growth of the chemical industry.  - 13 - 34. Manufacturing, which accounts for nearly three fourths of the value added in the secondary sector, has suffered from insufficient additions to productive capacity as well as from inadequate replacement of old plant and equipment. Private investment in industry has been declining over the past few years. Comprehensive estimates of investment in manufacturing are not available. But different indicators reveal a continuing slowdown in invest- ment since 1972. Outstanding term credit to industries fell from 7.1 billion FMG in 1972 to 4.9 billion FMG in 1975, and declined marginally to 4.8 billion FMG the'following year. An official survey of investment in fixed assets covering selected industrial enterprises showed a similar trend. Such data about industrial capacity, investment approvals and the pace of project implementation as are available also indicate a slackening of industrial investment. The inflow of equipment imports, however, gives a better idea of the extent of decline in investment in real terms. The mission estimated that imports of industrial machinery, in 1975 prices, dropped from 6.7 billion FMG in 1972 to only 2.8 billion FMG in 1976. 35. As regards other segments of the secondary sector, mineral produc- tion, after recording substantial gains in the preceding two years, fell by more than 10 percent in 1977, and even more steeply the following year. Among the main minerals, production of mica and graphite has not shown any upward trend since 1975. But chromite output went up markedly in 1975 with the commissioning of additional capacity and continued to rise the following year. Production, however, dropped sharply in 1977 and again in 1978 as export demand for chromite and chromite concentrate was affected by unfavourable world market conditions for steel. Construction on the other hand continued to be depressed, its contribution to GDP showing no significant change since 1972. 36. Over the past few years a number of industrial establishments, considered to be of national importance, were taken over by the State. Some unprofitable enterprises facing closure were also nationalized so as to prevent layoff of workers. In some other cases the State assumed majority control. The important foreign-owned industrial enterprises that were national- ized include the oil refinery (January 1976) the power and water supply company (January 1976) and two sugar firms (December 1976). At present, the State owns, or has acquired majority participation in all major industrial units employing a thousand or more workers. 37. The profitability of a number of industries has remained low. Industrial profits have been affected by price controls and rising input costs. More recently the minimum wage for industrial workers was raised and wage differentials reduced as a part of the Government's redistributive incomes policy. Moreover, concerned over the'deteriorating employment situation, the Government no longer allows industrial enterprises to lay off workers without its approval, which is rarely accorded. 38. Private investment in manufacturing, however, appears to have been discouraged more by the feeling of uncertainty about its future place in the industrial structure, resulting mainly from the manner in which policy has been enunciated, than by considerations of profitability. While some spheres of activity are to be reserved for exclusive State ownership, the Charter of  - 14 - the Socialist Revolution envisages state ownership of the principal means of production. The law on Socialist Planning provides for complete socialization of strategic sectors by the year 2000. The Charter of Socialist Enterprises of May 1978 is the latest amended version of the one promulgated in 1976; it provides the legal framework for socialist enterprises referred to as those determining the development of the country or having a strategic character for national independence or the building of socialism. The term strategic, however, has not been clearly specified and it is not obvious whether State control is to be delimited by sector, activity, or enterprise. As a con- sequence, apprehensions have arisen about further nationalization as also about the conditions under which private industry might be required to operate, particularly with regard to management. Apart from inhibiting investment, concern about the future has also led to the neglect of replacement and maintenance. 39. The Charter of Socialist Enterprises envisages the setting up of policy councils (Conseils d'orientation) for State-owned or controlled enter- prises in different sub-sectors of industry viz. food processing, textiles and leather, wood and wood products, engineering and chemicals. Composed of repre- sentatives from the Government, the National Assembly, management and labour, they are expected to determine sub-sector policies in conformity with national planning priorities and objectives. It is still too early to judge about the eventual scope of these councils or the manner in which they will function. 40. Fiscal and other incentives accorded to industrial investors under the Investment Code are being reviewed. The Government is considering, among other things, modification of the Code to provide permissible incentives, which are at present negotiable, on an automatic basis. While such a step would be welcome as it will no doubt reduce procedural and administrative delays, it is unlikely by itself to stimulate private investment. Nor would it necessarily foster investment in more efficient industries. Private in- vestment has been affected primarily by the investors' misgivings about the development strategy and the policy environment; and, as such, only a clear and definitive policy concerning the relative roles of the State and private enterprise will help revive the investment climate. As far as the direction of industrial investment is concerned, it is more likely to be influenced by indu,try-specific incentive levels than by automaticity of incentives. In this respect a more uniform structure of incentives is preferable as it would systematically discourage investment in high cost industries and accord maxi- mum benefits to investment in the most efficient ones. Apart from being extended automatically fiscal and other advantages provided under the Invest- ment Code should, thus, as a rule not vary from industry to industry; and exceptionally higher scales of benefits should be limited to industries having a significant direct and indirect impact on employment. A study, involving quantification of existing incentives and an analysis of their impact, would, however, be necessary for the formulation of a specific policy along these lines. Employment and Wages 41. With population growing by 2.5 percent annually and a much slower pace of economic expansion the employment situation has deteriorated in recent years. Agriculture and allied activities in rural areas have absorbed most  - 15 - of the annual additions to the labor force of about 100,000 workers. These occupations, however, provide gainful employment for only about six months in the year. Moreover, output per worker has been falling. In urban areas increasing population and slow growth of modern industrial and service sectors have led workers to seek employment in the intermediate sector activities and new entrants to the labor force to establish small retail businesses. Yet, overt unemployment in towns and cities is increasing. 42. The labor force, estimated to be about 3.9 million people in 1975, included slightly over half of the total population of 7.6 million. About 84 percent of the labor force was employed in agriculture, mainly in tradi- tional farming. Employment in modern manufacturing and construction, or- ganized services and public administration accounted for another 6 percent of the labour force. The rest of it, or nearly 400,000 workers, was employed in the intermediate sector, or engaged in casual occupations, or else was unemployed. 1/ Table 4: COMPOSITION OF THE LABOUR FORCE, 1975 ('000) Percent Urban 390 10.1 Modern Sectors 190 4.9 (of which Administration a!) (80) (2.1) Intermediate and casual employment 150 3.9 Unemployed 50 1.3 Rural 3,490 89.9 Traditional agriculture 3,220 83.0 Modern farms and plantations 40 1.0 Other modern sectors 50 1.3 (of which Administration a!) (25) (0.7) Intermediate and casual employment 180 4.6 Total 3,880 100.0 a/ Excluding parastatals. Source: Mission estimates based on (a) General Population and Agricultural Census of 1975 and (b) sector studies pre- pared by Government teams in cooperation with ILO experts. 1/ The modern sector is distinguished from the intermediate sector by higher barriers to entry (due to size, investment requirements and technology), corporate or bureaucratic form of management, predominance of wage employment and the direct impact on it of fiscal, credit or other poli- cies. On the other hand, the casual sector is characterized by virtual free entry, minimal capital or skill requirements and prevalence of self- employment (for instance, petty trade).  - 16 - 43. Modern sector employment in areas outside the Government has not increased significantly, or has even declined. Fresh entrants to the civil service and public administration numbered about 8,000 per year during 1972- 1976. Far fewer new jobs, only about a fourth as many, were provided during the same period by modern manufacturing industries. Employment in industry rose from about 45,000 in 1972 to 53,000 in 1976, about half of this increase taking place in 1974. Further growth of employment, moreover, is not likely to be significant in the near future: there is excess labour in many indus- trial units as regulations have made layoffs difficult, while some others, like cement and sugar factories, are already working to capacity. Reflecting output trends and increasing restrictions on imports employment in organized services -- transportation and wholesale trade in particular -- did not, on the whole, show much change. Since road transport is largely handled by self- employed operators, the organized transportation sector consists essentially of parastatals running rail, port, shipping and air services. The number of employees in the sector varied around 11,000, while in wholesale firms (in- cluding nationalized concerns) it appears to have remained at or about 38,000. Employment in the modern construction establishments was affected by the level and composition of investment in buildings and public works. As investment stagnated, the shift towards relatively capital-intensive public works led to a drop in employment from 15,000 in 1968 to 14,000 in 1976. Finally, the number of wage earners in modern plantations continued to fluctuate between 40 and 50,000, accounting for less than 2 percent of agricultural employment. 44. The levelling off of the growth of modern manufacturing output and scarcity of imports in recent years led to the widening of the market for the artisan sector. The demand for less sophisticated low cost substitutes for modern industrial products increased substantially in response to the growing demand; and the number of urban artisans is estimated to have doubled to about 20,000 in recent years. 1/ Also skilled workers displaced from the modern sector as a result of the decline in construction activity have been setting themselves up as small scale builders. Increasing output and employment in the intermediate sector, however, failed to provide sufficient productive employment opportunities in urban centers. Consequently, increasing numbers have been absorbed into casual, marginally productive activities, and petty retailing in particular has mushroomed providing, as it often did, an open- ing to those unable to obtain wage employment. Even so, 51,000 people were recorded as unemployed in towns and cities by the 1975 census. With about 16,000 workers being added annually to the urban labor force the unemployment problem would before long become quite acute unless a substantial number of new jobs are created over a relatively short period. 45. As the area under cultivation went up more or less in step with the growth of rural population and labour force there was no increase in unemployment as such in traditional agriculture. But output per head has been declining because of extension of cultivation to less fertile lands and lack of improvement in farming techniques. Not much is known about employment 1/ Mission estimate based on official figures and more recent (1976) ILO data relating to artisan sector employment in Antananarivo, the capital city.  - 17 - trends in the informal sector in rural areas; but artisan production as also the off-season work it provides have probably been increasing. However, the employment problem in the country-side presents itself essentially as one of extending the scope for labor input use and raising output per worker in agriculture through appropriate technological improvements in crop farming. 46. Full employment, just remuneration of labor and worker participa- tion in management figure prominently among the stated development policy objectives of the Government. Worker participation in management is stressed in the Charter of Socialist Enterprises, and the labor code, civil service structure and the social security scheme are being reviewed. 47. Salary scales in the Government and the public sector have been frequently revised, larger pay increases having been accorded to low paid employees in conformity with the policy of reducing income disparities. The latest such revision in 1978 raised the lowest salaries by 25 percent while at the top salaries were virtually frozen. Recent wage regulations affecting the private sector also significantly reduced the spread between the wages of unskilled and skilled labor. The legal minimum wage for non-agricultural workers was increased by 13 percent in 1976, the corresponding increase in the case of plantation labor being of the order of 60 percent. 48. Few specifically employment oriented measures are envisaged in the 1978-80 Plan; and, the full employment objective is expected to be attained in the long run as a by-product of the process of industrial and agricultural development. The Plan program of industrial development focuses essentially on the establishment of large scale manufacturing capacity involving long gestation lags and a very high investment cost of US$100,000 per worker. Its impact on employment, particularly in the short run, is thus not likely to be significant. 49. In the absence of detailed information about its composition, it is difficult to assess the employment content of the Plan investment program for agriculture. But the proposed introduction of mechanized farming could be expected to partly offset employment that would otherwise be created. The Government has also been seeking to generate productive farm employment by settling migrants in the better endowed western region. But these efforts have had little success: costs of the operation are rather high so that only a few hundred families could be settled. 50. In view of the existing employment situation and the projected doubling of the labor force by the year 2000, there is clearly an urgent need for effective employment generation measures. A number of steps can be under- taken to increase employment in the immediate future that will involve, among others, selective modification of the import mix. First, the existing idle capacity in building construction could be utilized through public investment in low cost housing for the poorer segments of the population. This may, however, require some easing of import restrictions on building materials, like cement, which are in short supply. Second, in some branches of modern manufacturing sector output and employment can be significantly raised in the short run through better availability of imported components and spares.  - 18 - Finally, intermediate sector employment would be greatly helped by measures such as Government purchases of artisan or small-scale industrial products for meeting some of its own requirements. 51. The longer run employment policy should, as far as modern manufac- turing is concerned, facilitate channelling into investment the sizeable idle private funds and encourage labor-intensive projects through special incentives and benefits. As regards the intermediate industrial sector, it would be necessary to broaden its product range as well as to improve product quality and technology. As a further step to widen the market, linkages with the modern industrial establishments could be fostered through the promotion of sub-contracting. It would, however, be necessary to ensure that otherwise viable small-scale production is not displaced by larger enterprises. Modern manufacturing, however, could at best be expected to absorb only a fraction of the annual additions to the labor force, given the existing narrow industrial base and the rapid population growth. According to the Planning Ministry long-term projections, for instance, the proposed expansion of industrial, mineral and energy production at an annual rate of about 9 percent would provide employment to only 5 percent of the fresh entrants to the labor force, which implies an elasticity of employment with respect to output of less than 0.5. The employment potential of the intermediate industrial sector may be much larger; but the bulk of productive employment opportunities in the longer run would still need to be generated within agriculture, by developing more accessible fertile land and, over the longer run, essentially through the extension of irrigation and intensive farming. Basic Needs and Social Policies 52. Progress towards meeting the basic needs of the population has generally been obstructed by the slow growth of the economy, declining output per head of staple foods and increasing unemployment. The most noticeable achievement has been in the field of education; following five years of vir- tual stagnation school enrollment has increased rapidly since 1975. Post- primary education facilities, however, are still unevenly distributed and continue to be concentrated in the Central plateau. Progress in areas other than education has been less remarkable. The water supply situation in Madagascar is slightly better than in African countries generally. About 80 percent of urban inhabitants have access to public water supply; but no piped water is as yet available to more than four fifths of the rural population. Sewerage facilities, minimal even in the cities, are almost totally lacking in the countryside. Following a period of restricted spending on water supply and sanitation, the Government has of late initiated a more active policy and established national objectives. 53. In pursuance of its distributive aims the Government has sought to reduce the gap between urban and rural incomes and protect living standards of low-income urban population groups. Poll and cattle taxes affecting the rural population had already been abolished in 1972. Since then producer prices of main crops have risen substantially. No information is available about the prices actually paid by farmers for their purchases. However,  - 19 - producer prices in some cases, notably paddy, have risen far more than prices of non-food consumption goods in urban areas. The terms of trade thus might have improved somewhat in favour of the farmer. However, the redistribution effect of higher producer prices is likely to have been partly offset by the declining marketed surplus of major crops, like paddy or groundnuts. Wage or salary differentials in the Government and elsewhere have been significantly reduced; but these measures have touched only a small proportion of the labor force consisting of public employees, workers in modern sector enterprises and plantation hands. Subsidization of rice as a redistributive measure was relatively more effective; it did help restrain the rise in the consumer price index for low income urban groups, particularly in 1977 when the retail price of rice was reduced further. It is difficult to ascertain the impact of Gov- ernment's policies on income distribution because of lack of relevant data. The only comprehensive family budget enquiry covering both rural and urban areas dates back to 1962, and showed that consumption expenditure per head in main cities was about twice as high as in the rural areas. Another such family budget enquiry is now underway, and its coverage of rural areas will have been completed by 1980. However, rural-urban income disparities have narrowed since 1972, owing to relatively faster increases in agricultural production and farm prices. Money, Credit and Prices 54. Monetary expansion in recent years has been excessive and has lately tended to accelerate. Following a comparatively moderate growth in earlier years, money supply increased by nearly 19 percent in 1974. Monetary expansion slowed down considerably the following year, but since then money supply has been rising at a sharply increasing rate. In 1976 money supply increased by 15 percent and by as much as 26 percent the following year. 55. Domestic credit is the major factor underlying recent monetary trends. Over the three years ending in 1977, outstanding domestic credit went up by 50 percent to 124.4 billion FMG. Monetary developments were not influenced significantly by the external payments situation except in 1975 when the impact of domestic credit expansion on money supply was largely offset by a substantial decline in the foreign assets of the banking system. 56. The rapid growth of domestic credit was brought about, for the most part, by the steep and continued rise in net claims on Government. Until 1974, when it turned into a net borrower, the Government used to be a net lender to the banking system. Moving away from fiscal conservatism thereafter, it has relied increasingly, particularly since 1975, on borrowing from the Central Bank to finance the widening Treasury deficits. As a consequence, net claims on Government nearly quintupled to 29 billion FMG between 1974 and 1977. On the other hand, net credit to the private sector and public enterprises over this period increased by only about 25 percent to 95.9 billion FMG, partly because of the slow growth of the economy. Much the same trend was in evidence in 1978 as well. Available data show that over the twelve months ending in August 1978 net claims on Government increased at about the same rate as in 1977, but outstanding credit to the rest of the economy remained virtually unchanged. Money supply increased over this period  - 20 - by about 22 percent, but due to the much larger deficit financing needs of the Government in 1978, monetary and credit expansion during the year is likely to have been even more rapid than in 1977. These developments should be a cause for concern as they may lead to monetary instability and excessive price inflation in the not too distant future. Table 5: MONETARY SURVEY 1972-78 1972 1973 1974 1975 1976 1977 1977 1978 (Billion FMG, end of year) (August) Foreign Assets of the banking system (Net) 21.6 24.2 21.3 15.5 14.8 15.8 10.8 19.1 Domestic credit (Net) 62.3 61.6 82.8 90.8 101.6 124.4 118.5 131.2 - Claims on government -2.9 -3.5 5.0 12.4 19.4 28.5 27.3 38.0 - Claims on private and parapublic sectors 65.2 65.1 76.8 78.4 82.2 95.9 91.2 93.0 Money Supply 53.3 57.3 68.0 69.4 79.5 100.0 84.9 103.6 - Currency outside banks 25.4 27.0 31.9 34.0 35.3 42.1 36.6 42.4 - Demand deposits 27.9 30.3 36.1 35.4 44.2 57.9 48.3 61.2 - Quasi-Money 14.9 14.2 17.3 17.6 20.5 21.6 23.8 27.4 Long term foreign borrowing 4.7 4.4 4.0 3.4 2.8 2.3 3.5 2.1 Other items (Net) 11.0 9.9 14.8 15.9 13.6 16.3 17.1 18.0 Source: Central Bank. 57. The growth of money supply since 1975 has far outpaced the expan- sion of economic activity. While money supply went up by 44 percent between 1975 and 1977, GDP increased in real terms, by just 0.9 percent. The actual impact of such disproportionate monetary expansion on prices is difficult to gauge because of the lack of reliable indicators of price movements. The two price indices that are compiled relate to the cost of living of low and high income households in Antananarivo, the capital city, and are based on offi- cially controlled prices of foodstuffs and other consumer goods. Both show  - 21 - a slowdown in the increase of prices, the rise in the composite cost of living index falling from 9.4 percent in 1975 to only 4.2 percent in 1977. However, these indices do not fully reflect the extent of price inflation because of the existence of black markets for commodities in short supply. The GDP deflator also tends to underestimate the actual rise in prices for much the same reason. Judging by the market price information that was available, the average annual inflation rate during 1975-77, although much higher than would appear from the price indices or the GDP deflator, did not in all probability exceed 9-10 percent. Inflation since 1975 has thus been relatively moderate despite sharply rising money supply and little growth in the output of goods and services. Prices have risen much less than could have been expected due, in effect, to the increase in the demand for cash balances that has taken place for a number of reasons. Idle funds have been accumulating with poten- tial investors due to misgivings about policies towards the private sector. Restrictive allocation programs since 1976 have limited the possible use of available funds for imports. Low institutional interest rates to savers, which are probably negative in real terms, did not provide much incentive for investment of spare cash in time deposits. Idle cash balances, however, appear to have become less effective as a safety valve in 1978. The increased pressure on prices made them go up, according to the composite cost of living index by 6.8 percent. However, market prices of many essential commodities -- meat, vegetables, clothing, soap, edible oils, sugar, etc. -- are reported to have risen at rates increasing to 15-20 percent or more. Although standard rice was readily available at the officially controlled price, the annual inflation rate was probably much higher than the estimated 9-10 percent in the two preceding years. Table 6: MONEY SUPPLY, PRODUCTION AND PRICES (Percent Rates of Growth) 1973 1974 1975 1976 1977 1978 GDP in 1975 market prices -2.6 0.4 1.1 -2.9 3.9 Money supply 7.5 18.7 1.9 14.7 25.0 GDP deflator 11.9 19.2 3.2 8.2 6.6 Cost of living index in Antananarivo 5.1 19.3 9.4 6.7 4.2 6.8 58. Besides the disproportionately large increase in net claims on the Government in recent years, the structure of credit to the rest of the economy has remained unbalanced both with regard to its maturity pattern and its dis- tribution between different sectors of activity. Banks are the principal source of institutional finance to the economy; to a very limited extent short-term accommodation is also provided by the Treasury through acceptance of customs duty bills. The preponderance of short-term credit has always been charac- teristic of institutional finance in Madagascar, and since 1975 its share in  - 22 - total credit to the economy has even been rising. From 48.8 billion FMG in 1975, outstanding short-term credit went up to 69.7 billion FMG at the end of 1977; its share in the total rose from 82 to 88 percent. The volume of medium and long-term credit, on the other hand, declined from 10.4 billion FMG in 1975 to 9.7 billion FMG in 1977. These trends show that the banking system has not been able to finance fixed investment to the extent that would normally have been expected. In fact, at present, short-term lending opera- tions are being partially financed out of medium or longer-term resources. Table 7: DISTRIBUTION OF CREDIT BY MATURITY 1972-77 (Billion FMG - outstanding end of the year) 1972 1973 1974 1975 1976 1977 Short-term 39.0 38.6 50.1 48.8 52.2 69.7 Medium-term 8.8 8.1 7.6 6.8 5.9 6.1 of which: Agriculture 1.0 1.0 1.1 1.1 1.0 Manufacturing 5.7 4.5 4.0 3.4 3.0 Long-term 5.0 4.7 4.5 3.6 3.6 3.6 of which: Agriculture 0.8 0.8 0.8 0.6 0.6 Manufacturing 2.4 2.2 2.1 1.5 1.8 Total 52.8 51.4 62.2 59.2 61.7 79.4 Source: Central Bank. 59. The sectoral distribution of credit continues to be heavily weighted in favor of manufacturing and commerce. According to the data compiled by the Central Bank, the secondary sector in 1976 accounted for 47 percent of total credit, industry alone obtaining more than nine-tenths of the credit to the sector. Commerce claimed 26 percent, the second largest share. Credit to the agricultural sector, despite its size and importance to the economy, represented only 22 percent of the total. Moreover, the share of agriculture in total credit has not shown any sustained increase; after having risen significantly in 1974, it declined again in the subsequent years. With regard to the allocation of credit for agriculture, the Government expects the situation to improve partly as a result of the recent reorganization of the banking sector. And, as a matter of fact, the share of agriculture in total credit did register some increase between August 1976 and August 1977.  - 23 - Table 8: DISTRIBUTION OF CREDIT BY SECTOR OF ACTIVITY 1972-77 (Billion FMG - outstanding end of the year) 1972 1973 1974 1975 1976 1976 1977 (August) Agriculture 10.2 10.2 15.4 13.3 13.7 12.3 13.2 Secondary-sector 25.6 22.9 25.8 27.8 29.3 26.9 27.6 of which: Manufacturing 23.5 20.6 23.1 25.2 27.4 24.5 25.5 Commerce 13.9 15.0 18.0 15.5 16.0 12.1 12.0 Other 3.1 3.3 3.0 2.6 2.7 2.4 1.3 Total 52.8 51.4 62.2 59.2 61.7 53.7 54.1 Source: Central Bank. 60. Banks were nationalized in 1975; but except for ownership and management there was little change in the structure and operations of the banking system. The pattern of bank lending continued to be ill-adapted to the requirements of the economy. The Government accordingly proceeded to reorganize the banking system and in 1977 merged the four commercial banks and the development bank into three specialized institutions: BTM, the rural development bank; BNI, the bank for industrial development; and BFV, the national bank for commerce. This restructuring was intended, among other things, to ensure better coordination between credit policies and planning objectives as well as to promote the diversification and expansion of the banking system. Despite the creation of the new banks, the process of sectoral specialization, as might have been expected, is far from complete. Their lending operations still largely reflect the situation inherited from the past. Short-term loans, nearly half of them financing foreign trade, made up more than 80 percent of credit extended by the BNI outstanding at the end of 1977. As regards its participation in industrial enterprises, it amounted to only 2.3 billion FMG, or less than 5 percent of total assets. Likewise about 82 percent of BTM's outstanding credit consisted of short- term loans. Of the total volume of lending by BTM during 1977, nearly two- thirds was accounted for by commerce and industry, while about 25 percent of it represented agricultural marketing credit and loans to large-scale farms. Despite some success of efforts made by it to reach smallholders, agricultural credit to them remains relatively unimportant in BTM's lending operations. Smallholders obtained only 2.4 billion FMG (about half of it in the form of credit for the purchase of livestock and equipment) from BTM in 1977, which amounted to just 5 percent of all its loans during the year.  - 24 - 61. Control over credit creation and allocation is exercised by the Central Bank in close consultation with planning authorities. The process is rather complex, involving as it does the simultaneous utilization of a number of credit control instruments and procedures. The overall credit expansion objective and distribution of the additional volume of credit among different sectors of activity are determined broadly in accordance with the Plan production programs. Also, the overall regulation of lending determines the rediscount ceilings, upper limits on specific types of credit and minimum ratios regarding the use of resources for term credit and loans to nationals. Loans to large borrowers, whose credit requirements amount to 100 million FMG or more, still require prior Central Bank authorization. Such loans usually account for 90 percent of credit to different sectors which, in effect, facilitates centralized allocation of the bulk of bank credit to the economy. As regards the remaining 10 percent, banks have greater flexibility of operation and prior authorization is not required. 62. Interest rates are not being used as an instrument for regulating the demand for bank credit or as an effective means for the mobilization of savings. There has been no change in the interest rate structure since 1974, and most rates have remained at the same level as in 1969. The re- discount rate of the Central Bank for short-term paper is 5.5 percent. Banks lending rates range from 6.75 to 9.25 percent while interest rates on time deposits vary from 4.9 to 5.8 percent, higher rates of up to 7.50 percent being paid on deposit certificates of longer maturity. In view of the annual rise in prices, most of the banks' lending rates in real terms are rather low, and borrowing rates probably negative. Because of very much higher informal interest rates as well as other factors, it is doubtful whether branch expan- sion alone will enable the banks to attract savings on an adequate scale. 63. In spite of the elaborate credit control mechanism, increasing financing by the Central Bank of the Government's deficit interfered with its regulation of the volume of bank credit. Owing to the excess liquidity resulting from the Government's growing recourse to Central Bank accommoda- tion, bank deposit resources, went up sharply. Demand deposits increased from 31.5 billion FMG in 1975 to 55.9 billion FMG in 1977. In view of the rapid growth of their deposits, the Central Bank reduced its credit to banks from 18.9 billion FMG in 1975 to only 12.0 billion in 1976, increasing it marginally to 12.4 billion FMG in 1977. It had furthermore to suspend the rediscount ceilings for BNI and BFV in 1977, two of the specialized banks which were still in a position of excess liquidity. 64. The substantial growth of claims on the Government since 1975 has upset the asset structure of the Central Bank. And the continuance of the trend towards increasing recourse to Central Bank by the Government carries the risk of creating serious monetary instability. As such, it is suggested that Central Bank financing of Government's investment and current expendi- tures should be limited to the extent that the resulting creation of reserve money and expansion of credit is not excessive in relation to the overall growth of the economy.  - 25 - 65. The existing credit control system is unwieldly and very likely overdetermines the composition of bank credit. Rationing, enterprise by enterprise, of most of the credit to the economy, on the other hand, probably interferes with the efficient allocation, and hence overall productivity, of bank credit. A more flexible and simpler credit control mechanism, such as the one requiring banks to maintain obligatory reserves with the Central Bank, and effective use of interest rates for the allocation of credit as well as to promote the mobilization of savings, deserve to be seriously considered. 66. The successful transition of BTM and BNI to specialized banking and investment financing will depend on a number of factors. First, they will initially require adequate stable resources for term lending. Second, they will have to undertake branch expansion along with a sustained effort to replace traditional financial intermediaries, such as money lenders. In an attempt to move closer to the rural areas, BTM has already increased the number of branches from 16 to 40 resulting in some increase in deposit mobi- lization. Third, both BTM and BNI will have to exhibit flexibility and dynamism in the matter of assuming risks. Too rigid an insistence on certain types of guarantee, for example, can slow down the growth of agricultural credit to smallholders that has taken place. Finally, project preparation will need to be strengthened so that there are sufficient investment proposals for these banks to consider. Price Policy 67. The Government has been relying on extensive price and distribution controls to restrain inflation and the rise in the cost of living. Almost all essential commodities are subject to some form of price regulation. While prices are fixed for foodstuffs and local manufactures, profit margins (taux de marque) are specified in the case of imported products. Price con- trol regulations are, in fact, often violated; black markets develop whenever shortages emerge while traders also evade controls through short weights and other sharp practices. Rice consumption is subsidized; while control over prices of a number of designated essential commodities is centralized, meat prices are fixed by regional authorities. The responsibility for the dis- tribution of these essential commodities is shared by the Ministry of Trans- port and Supply and the Ministry of Economy and Commerce. Attempts are being made by the Government to decentralize the enforcement of price controls. The Ministry of Economy and Commerce is currently training some 4,000 subordinate officials (agents techniques) to strengthen price surveillance at the regional level. A much greater number of price control personnel - about 30,000 - will eventually be deployed at the local or village level. 68. The price control policy has affected availability in the official market; it has also reduced supplies for export of commodities such as quality rice and meat inasmuch as prices have been set at levels well below the export price. The policy, moreover, has impaired the profitability of manufacturing; the imposition of price controls with wages and other input costs continuing to rise has kept profits depressed in a number of industries. Finally, it imposes a heavy financial cost. The subsidy on rice imports, estimated to cost about 3.6 billion FMG in 1978, is adding considerably to the growing fiscal pressures. The cost of subsidizing local rice, which is met from export profits, would be quite as substantial, amounting to some 3.5 billion FMG.  - 26 - 69. In view of the somewhat arbitrary manner in which prices are gen- erally set, the pricing of agricultural commodities becomes an issue of strategic importance. In principle, the pricing policy should be based on world market prices. Prices which approximate the corresponding border price equivalent provide, other things being equal, adequate incentives for replacing imports, or expanding export production, to the extent advantageous to the economy. The adjustment of prices to international parities, however, raises some operational and other issues in Madagascar which were briefly considered earlier. The producer price of paddy is still well below the import price equivalent. As such, parity pricing, unless introduced by gradual steps, could well create serious problems for the Government, which has kept paddy and rice prices low in order to limit the increase in the cost of living of the urban poor. At the existing paddy producer price of 35 FMG/kg, the cost of local rice works out to about 75 FMG/kg. The uniform retail price of rice set at 55 FIMG/kg thus involves subsidization of local rice to the extent of about 20 FMG/kg. It necessitates, moreover, a subsidy of about 40 FMG/kg in the case of rice imported at a cif price of 90-95 FMG/kg. Accordingly, the adjustment of paddy price to the international parity would result in an increase of about 70 percent in the existing retail price of rice. In fact, the parity pricing principle, if followed strictly, would lead to an even higher increase in the price to consumers for the reason that world rice prices (in constant dollars) are projected to rise signifi- cantly to reach what is considered their "normal" level. 70. In the case of groundnuts, the producer price exceeds the existing import parity. There is, however, considerable scope for raising yields, and parity pricing would become feasible as comparative advantage is established through efforts to raise productivity. The situation with regard to sugarcane is similar. Despite having remained relatively stable, the producer price exceeds the corresponding international price. But, as world sugar prices rise to more normal levels by the mid-1980s and optimal sized sugar refineries are established and sugarcane yields improved, the producer price could become internationally competitive. 71. As regards some important agricultural exports--coffee, vanilla, cloves, pepper--the fob price normally exceeds production costs because of Madao,ascar's significant comparative advantage in these commodities. Even so, producer prices may have to be kept below the export parity level. Because of uncertain prospects for cloves, securing markets for a growing volume of exports is likely to be problematic. As for coffee, vanilla and pepper, better price incentives to producers will be needed to increase export production. However, raising the producer price right up to the export parity level might encourage production to such an extent that marketing could become a serious problem. Exports of natural vanilla had been seriously hit by synthetic substitutes. Of late there has been a revival of demand for natural vanilla; but Madagascar being the world's largest exporter (80 percent of the market) cannot conceivably expand the volume of its exports faster than the expected growth of world consumption. As for coffee and pepper, Madagascar's share of the world market is still quite small. But in view of the current excess supply, quotas may be imposed on coffee exports under the International  - 27 - Coffee Agreement, while in the longer run the world market is projected to expand rather slowly. In the case of pepper, too rapid a growth of exports might provoke retaliatory action by other exporting countries. Clearly, the operational aspects of parity pricing are complex enough to merit a more detailed investigation. 72. The policy of price controls and subsidies needs to be viewed in the light of its efficacy, that is to say, the consonance between its actual impact and the objectives intended to be attained. The Government has sought to help the poorer segments of the population for whom rice constitutes the major element of basic consumption. At present all sections of the population benefit from the rice subsidy. In keeping with the Government's social objec- tives the subsidy ought to be limited to purchases by low income households. The well-to-do could, moreover, be made to bear, partly or wholly, the cost of subsidizing the poor in one of two ways: through additional taxation of personal incomes and luxury goods or by means of a dual price system, backed by partial rationing, within which rice is made available at a preferential price to low income groups. Although the first of these solutions appears to be administratively more feasible, the subsidy itself might have to be reduced because of the limits to taxable capacity and the exceptional character of the present high profits of FNUP which finance, among other things, the subsidy on local rice. 73. In general, price stability could be better ensured through appro- priate fiscal and monetary policies, with selective liberalization of imports to relieve specific shortages, rather than by attempts to insulate the price level against the possible fallout from excessive credit expansion. Much greater attention than in the recent past thus needs to be paid to proper financial planning and credit management; and price controls should be con- fined to a very few wage goods, such as rice and edible oils supplemented by effective arrangements to maintain an adequate flow of supplies. Government Finance 74. With the sudden rise in current budget expenditure and government spending on capital development, the fiscal situation deteriorated consid- erably after 1975. In spite of substantial increases, revenues failed to keep pace with the growth of current expenditure; and budgetary savings, which in earlier years had financed from a third to three-fourths of the capital budget, dwindled. Current expenditure rose steeply as the Government's wage bill went up and larger outlays were incurred on maintenance. In 1978, sizeable unclassified current expenditure was incurred as well. At the same time, the Government intensified its efforts to raise investment levels and to stimulate the economy by greatly increasing the size of the capital budget. The outlay on the subsidization of rice imports, which does not figure in the budget, after having fallen in 1976, rose again to a fairly high level in the subsequent year. Even though its other extrabudgetary operations yielded surpluses, the overall deficit of the Treasury nearly doubled to 20.0 billion FMG between 1975 and 1977; and as of September 1978 it was estimated to have risen further to 26.4 billion FMG.  - 28 - 75. The Treasury deficit, however, does not always correspond to the Government's financial deficit for the reason that some of the payments arising out of transactions in any particular year might be deferred-mainly because of delays in authorizations of disbursements by concerned ministries. In 1977, for instance, only 11.90 billion FMG and 63.7 billion FMG were recorded by the Treasury as capital and current expenditures as against 20.5 billion FMG and 78.0 billion FMG that were actually incurred. 1/ The overall financial deficit of the Government during the year was thus much larger than appears from Treasury accounts, in spite of substantial clearing of past overdue payments. And if payment deferrals increase over time, as has happened since 1977, this could help ease the Treasury's cash flow position, which, in effect, amounts to additional financial accommodation extended to the Government by its suppliers. 1/ Treasury-records may also diverge (though to much a smaller extent) from budget actuals owing to the suspense account.  - 29 - Table 9: FINANCIAL TRANSACTIONS OF THE GOVERNMENT 1974-78 1/ (Billion FMG) Budget 1974 1975 1976 1977 1978 1978 1979 (Sept. 30) Current Revenue 52.4 55.1 63.5 66.3 56.7 101.1 119.1 Current Expenditure -41.8 -45.3 -62.9 -63.7 -56.5 -88.0 -107.0 Current Budgetary Balance 10.6 9.8 0.6 2.6 0.2 13.1 12.1 Capital Expenditure -13.6 -13.1 -19.3 -11.9 -15.6 -36.4 -56.8 Rice Subsidy /2 - 6.3 - 4.0 - 1.8 - 3.6 Other Extra Budgetary - 1.4 - 2.5 5.4 2.7 1.0 .. -15.3 Operations of the Treasury (net) Deferred Payments - 1.4 - 0.6 - 0.3 - 9.8 -12.0 Overall Treasury Deficit -12.1 -10.4 -15.4 -20.0 -26.4 -16.1 -60.0 Financing of the Deficit External: 3.5 5.4 4.1 4.6 0.9 9.3 ) Loans 3.5 5.4 4.1 4.6 0.9 ) Grants - - - - - ) ) Internal: 8.6 5.0 11.3 15.4 25.5 6.8 ) 35.8 Central Bank 6.3 4.4 10.2 18.7 19.8 ) State Banks 0.1 - - - - ) Non-bank borrowing 0.6 -0.2 -0.1 0.8 1.6 ) Changes in deposits /3 ) with the Treasury -1.0 -1.3 3.9 7.5 14.7 ) Changes in other ) liquid assets 2.6 2.1 -2.7 -11.6 -10.6 ) /1 Provisional actuals; Treasury accounts have been so far finalized until 1972 and partially finalized for 1973. /2 Subsidy on imported rice. /3 Mainly deposits of Commodity Stabilization Funds and Post Office Checking Accounts. Source: Ministry of Finance and Planning. (Treasury Accounts).  - 30 - 76. External borrowing being limited to 4-5 billion FMG a year (in- vestment outlays met from foreign capital grants do not figure in the bud- get), the fast widening deficit since 1975 was financed increasingly from domestic resources, mainly through recourse to Central Bank advances. The rather small amount of net external borrowing until the third quarter of 1978 reflects the fact that loan disbursements largely take place towards the end of the year. There was no borrowing from the Banks, and little, if any, from non-bank sources other than the Treasury. Deposits of public agencies held by the Treasury and its own resources together financed a comparatively small portion of the deficit; and since 1977 the Government has replenished the liquid assets of the Treasury. However, deposits of public agencies, mainly deposits of the coffee, vanilla and clove stabilization funds, were drawn upon substantially. There is, in fact, an increasing tendency to utilize the resources generated by these funds for budgetary as well as other purposes. Some restraint, however, needs to be exercised in this regard. These resources tend to be unstable - coffee prices, for instance, dropped sharply following the termination of the recent boom. And, a portion of them will be required to be used to support production eff6rts for raising exports as well as to provide a contingency cushion against fluctuations in export earnings. 77. Wages and salaries constitute the single most important component of government expenditure and represent somewhat over half of the current budgetary outlays at present. It is on account of the sharply rising wage bill, and to a smaller extent, of the rapid growth of the outlay on materials and supplies that current expenditure, which had earlier been rising moder- ately, went up by 14 billion FMG to 63.3 billion EMG in 1976, and further to 78.0 billion FMG in 1977. The substantial rise in expenditure on personnel between 1975 and 1977 occurred partly due to adjustment of pay scales in favor of employees with the aim of lowering the maximum-minimum salary ratio to 10:1, and partly because of increasing public employment. On the other hand, the outlay on materials and supplies increased steeply as larger provisions were made for infrastructure maintenance, particularly the mainten- ance of the road network. Minor elements of current expenditure - debt service payments, transfers and subsidies - recorded only small increases, which together accounted for less than a tenth of additions to current expen- diture during 1975-1977. Current expenditure recorded a further increase in 1978, rising by 16 percent to 90.7 billion FMG.  - 31 - Table 10: CENTRAL GOVERNMENT CURRENT EXPENDITURE 1974-78 - ~~~~ ~ ~~~~/1 L1 /1 /1 1970 1974 1975 1976 1977 1978 (Billion FMG) Wages and salaries 15.4 27.0 29.2 37.7 44.7 48.9 Goods and services 10.9 9.0 10.9 16.3 22.0 25.5 /2 Transfers and subsidies 3.2 5.7 6.1 6.1 7.4 11.4 Public Debt Service 1.3 3.5 3.1 3.2 3.9 4.9 Total 30.8 45.2 49.3 63.3 78.0 90.7 /1 Provisional; may differ from Treasury data shown in Table 9. /2 Includes 13.3 billion FMG unclassified administrative expenditure. Source: Ministry of Finance and Planning; (Budget Accounts). 78. Despite the rapid growth of current expenditure, its functional dis- tribution has remained fairly stable since 1976. There was no significant change in the respective shares of public administration (36-39 percent), economic services (15-17 percent) and social outlays (35-37 percent) in current expenditure; social outlays allocated for education however, increased, as a proportion of total current expenditure, from 21 to 26 percent. 79. The capital budget has been used since 1975 as a major strategic instrument to lift the economy from the state of near stagnation and to step up the pace of growth. Consequently, budgetary investment expenditure shot up from 11.2 billion FMG in 1975 to 19.3 billion FMG in 1976, and was main- tained at the high level of 20.5 billion FMG in 1977. The impact on the economy of higher levels of Government investment spending, however, was largely offset by declining private investment and a sharp rise in project costs. As the implementation of the 1978-80 Development Plan went underway, capital expenditure surged to 33.1 billion FMG in 1978. 80. The stepping up of capital expenditure was accompanied by a signif- icant modification of sectoral investment priorities. The share of transporta- tion and public works in the total investment outlay, which at 40 percent had been the largest in 1975, came down to 30 percent in 1978. Over this period, the share of agriculture also declined from 30 to 23 percent. As regards other sectors, the allocation for education more than doubled to 12 percent of the capital budget in 1978. There was also a similar increase in the share of defense expenditure.  - 32 - Table 11: CENTRAL GOVERNMENT CAPITAL EXPENDITURE 1975-78 /1 1975 1976 1977 1978 (Billion FMG) Transport and Public Works 4.5 6.9 5.9 9.8 Agriculture and Rural Development 3.3 5.8 6.3 7.6 Education 0.6 0.7 1.7 4.0 Health 0.4 0.3 0.3 0.5 Defense 0.4 1.3 1.7 2.7 Others 2.0 4.3 4.6 8.5 Total 11.2 19.3 20.5 33.1 /1 Provisional; may differ from Treasury data shown in Table 9. Source: Ministry of Finance and Planning; (Budget Accounts). 81. The growth of budgetary revenues picked up after 1975; as compared to an average annual increase of some 3 billion FMG in preceding years, cur- rent revenues rose by 7.6 billion FMG to 60.5 billion FMG in 1976, and by a similar amount again to 68.0 billion FMG the following year. Budgetary resources, nevertheless, fell short of the rapidly rising current budgetary expenditure. The current budget surplus turned into a deficit in 1976; and the surplus recorded in 1977 was only marginal. 1/ In 1978, the current budget deficit was fairly large owing to the continued high increase in current expenditure during the year although total current revenue increased by over 27 percent to 86.5 billion FMG. 82. The comparative buoyancy of revenues in recent years is largely attributable to higher yields from indirect taxes. Indirect taxes accounted for nearly 90 percent - import duties and taxes alone for over a fourth - of additional tax revenues during 1975-78. Receipts from direct taxes, however, were relatively stable and contributed little to the growth of budgetary resources. The slow growth of direct taxes reflects the dislocation of tax administration, resulting from political uncertainties in 1975, which led to a sizeable accumulation of tax arrears. Tax collection improved subsequently; and recoverable unpaid taxes estimated to be of the order of 8 billion FMG a year ago have now been reduced to 6 billion FMG. 1/ The Treasury operations, however, showed a current surplus in both these years, for the reasons set out in para. 75 above.  - 33 - Table 12: CENTRAL GOVERNMENT CURRENT REVENUE 1974-78 /1 /1 /1 /1 1970 1974 1975 1976 1977 1978 (Billion FMG) Direct taxes 6.6 8.2 9.3 7.4 10.5 12.5 Consumption taxes 4.9 6.4 6.6 7.8 8.2 8.9 Value added and turnover taxes 6.8 9.0 10.2 10.2 12.6 14.0 Import taxes and duties 11.2 12.1 14.3 15.1 20.0 22.0 Export taxes and duties 2.1 3.1 5.5 4.0 4.2 4.4 Other indirect taxes 4.0 5.7 2.9 5.6 7.3 15.0 Tax Revenue 35.6 44.5 48.8 50.1 62.8 76.8 Non-tax revenue 3.2 4.9 4.1 10.4 5.2 9.7 Total 38.8 49.4 52.9 60.5 68.0 86.5 /1 Provisional; may differ from Treasury data shown in Table 9. Source: Ministry of Finance and Planning; (Budget Accounts). 83. Until 1977 the tax structure had, over the past few years, undergone only minor changes. Customs duties were reimposed on imports of EEC origin following the Lome Convention. An excess profits tax (taxe conjoncturelle), levied at rates ranging from 6 to 15 percent of the fob price on selected export products, was introduced in 1977. The recent reform measures aim at the rationalization of the tax structure and improvement of tax administration. As far as indirect taxes are concerned, import duties on certain luxury goods and on raw materials for the manufacture of less essential products have been raised, while a uniform 10 percent rate has replaced the varying rates at which the single point value added tax (taxe unique sur les transactions) had been levied on different commodities. 84. As regards direct taxes, Madagascar, until 1977, operated a com- plicated system under which taxation of corporate and individual incomes overlapped. A tax on profits (Impot sur les benefices divers - IBD) was levied on individually owned businesses, partnerships and corporations, while the income tax (Impot gene'ral sur le revenu - IGR) was added to the IBD in the case of individual assessees. This system was replaced by a new tax on corporate profits (Impot sur les benefices des societe's - IBS) and taxation  - 34 - of personal incomes was restructured to cover salaries, non-wage income and dividends. These changes are expected to improve both the yield and equity of direct taxation, the latter to be achieved through progressive taxation of salary or wage incomes. 85. It is still too early to assess the impact of all these measures on budgetary revenues. The ratio of tax revenue to GDP had in fact increased-- from 12.8 percent in 1975 to 14.2 percent in 1977--even before the introduc- tion of the new tax system. As such, the recent changes in the tax structure should help further to raise tax revenues as a percentage of GDP. However, the extent to which the tax burden can be increased will also depend on the growth of the economy. If, as in the past, growth continues to be slow, attempts to improve tax yields could beyond a point reduce per capita dispos- able income or encourage tax avoidance and evasion. In fact, Madagascar's tax efforts already compare favorably with many in a sample of 63 developing countries that were recently studied. During 1972-76 Madagascar was on the margin of being a high ITC (International Tax Comparison Index) country, and, when the size of the economy, per capita income, population and location were taken into account, fell definitely into this category which includes coun- tries such as India, Pakistan, Tanzania, Zambia and Kenya. 1/ 86. The budget for 1978 provided for a total outlay of 124.4 billion FMG, which represents an increase of 35.9 billion FMG over the provisional estimate for 1977. Current revenues were projected to increase by as much as 33.1 billion FMG to 101.1 billion FMG. Nearly 40 percent of the increase in revenues was expected from direct taxes, mainly on account of collection of arrears, but to a small extent from higher tax levels as well. Import taxes were to be another important source of additional revenues. The pro- vision for current expenditure was set at 88.0 billion EMG and budgetary savings accordingly were anticipated to rise to 13.1 billion FMG. Capital expenditure was budgeted at 36.4 billion FMG, or at a level that was nearly 80 percent higher than the estimated outlay in 1977. 87. Actual receipts and outlays during the year were probably lower than the budgeted amounts. But the overall deficit is likely to turn out to be much larger than was expected because of a greater shortfall in revenues, resulting, as provisional Treasury data up to the third quarter show, in increasing recourse to the Central Bank and perhaps even substantial payment deferrals. 88. The budget adopted for 1979 reflects a substantial increase in current expenditure to 107.0 billion FMG, owing to higher outlays, among others, on education, health and defense, as well as a further steep increase 1/ C.f. International Comparisons of Taxations for selected developing countries, IMF staff papers, March 1979. The ITCs for Madagascar (1.06 and 1.39) were computed with the aid of the methodology developed in this paper.  - 35 - in investment spending to 56.8 billion FMG. Current revenues are anticipated to reach 119.1 billion FMG, mostly due to additional receipts from direct taxes, duties and taxes on imports and the single point value added tax. In spite of the expected current budgetary surplus of 12.1 billion FMG, the overall financial deficit of the Government is projected to be as high as 60.0 billion FMG, partly because of the exceptionally large capital budget. The means of financing the proposed deficit have, however, not been fully identi- fied. The budget for 1979 represents the growing trend towards financing of developmental investment through fiscal deficits, a development which is fraught with grave risk of monetary instability, generation of strong infla- tionary pressures and aggravation of balance of payments problems. 89. The tendency towards unrealistic expenditure and revenue forecasting has progressively deprived the budget of its usefulness as an instrument of resource allocation or for assessing the likely impact of government finances on the economy. It results from the reported accommodation of priority demands for additional appropriations from various ministries, whereas the initial budget proposals are based on a realistic extrapolation of past trends. This in turn affects Plan-budget coordination. Indeed not only are projections of budgetary resources for Plan investment deficient but those relating to financing from other sources are as well. The manner in which savings forecasts are established - there is no year-by-year breakdown over the Plan period - makes it difficult to ascertain the realism of underlying assumptions. Except for external resources, a part of which has already been obtained in principle, it appears that savings projections are more in the nature of requirements rather than targets whose attainability has been assessed. 90. Apart from introducing more realistic budgeting, therefore, the entire financial planning process needs to be strengthened. The development of information about the flow of funds for private and public investment in different sectors from specific sources - such as, intra-sectoral savings, the Government budget, financial intermediaries (the banking system, insurance companies, savings institutions) and the rest of the world - is an essential first step towards systematic financial planning. Such a data base would greatly facilitate the coordination of investment programs and priorities with the mobilization of resources and their allocation to different sectors by means of a mix of budgetary measures (taxation, transfers, investment expenditure) and financial intermediation policies (interest rate adjust- ments, development of financial institutions and instruments). 91. The ideal combination of budget and financial intermediation for resource mobilization and allocation is difficult to determine. In Madagascar, however, financial intermediation should be relied upon to a much greater extent than at present for a number of reasons. The system of financial institutions is well established and, considering the size and stage of development of the economy, has attained a certain degree of sophistication. The banking habit too is developing; even though the growth of time deposits has been affected by low interest rates, quasi-money in 1977 amounted to almost a third of the total budget revenue during the year.  - 36 - The recent reorganization of the banking system aims, among other things, at greater deposit mobilization in the rural areas, through the branch network of BTM, the new agricultural bank. 92. More important still, financial intermediation presents certain advantages from the standpoint of overall financial planning. It is a more flexible instrument of resource mobilization than fiscal measures. For one thing, interest rates can be adapted more frequently and rapidly than the tax structure in response to financing requirements. For another, budget revenues are not very responsive in the short run to changes in tax rates or measures to check tax evasion, while the impact of interest rate variations on insti- tutional savings tends to be comparatively swift. In Madagascar the elasticity of budget revenues is likely to be small, even over a longer period of time, because of the slow rate of growth of the economy. Balance of Payments 93. Following continued deterioration over the two preceding years the balance of payments situation showed a substantial improvement in 1976. The external payments deficit dropped sharply'from 5.8 to 1.1 billion FMG during the year. 1/ A surplus, although a very small one, is now estimated to have occurred in 1977. However, the structure of the balance of payments remains weak, and the acute foreign exchange shortage, which occurred towards the end of 1975, is still being experienced. 1/ Surpluses or deficits measured in terms of variations in the net foreign assets of the banking system.  - 37 - Table 13: BALANCE OF PAYMENTS (Billion FMG) 1972 1973 1974 1975 1976 1/ 1977 2/ Exports, F.O.B. 41.75 44.50 59.46 68.51 69.06 90.00 Imports, F.O.B. 42.39 39.55 57.37 71.11 67.10 80.00 Trade Balance -0.64 4.95 2.09 -2.60 1.96 10.00 Non Factor Services (Net) -9.00 -12.73 -18.62 -18.34 -16.10 -22.10 Factor Services (Net) -8.09 -6.51 -5.14 -7.40 -7.52 -7.10 Private Current Transfers (Net) 3.01 3.71 6.31 6.38 7.84 7.00 Official Current Transfers (Net) 6.19 3.69 2.94 4.09 4.20 4.00 Balance on Current Account -8.53 -6.89 -12.41 -17.87 -9.62 -8.20 Private Capital (Net) 2.94 2.06 2.57 -0.04 -0.76 -1.20 Public Capital (Net) 8.45 7.69 8.29 14.53 8.19 9.50 Other Items (Net) 3/ 0.58 -0.52 -1.23 -2.44 1.10 Change in Reserves -3.44 -2.34 2.78 5.82 1.09 -0.10 (Increase -, Decrease +) 1/ Preliminary. 2/ Provisional. 3/ SDR allocation, errors and omissions. Source: Central Bank. 94. Balance of payments developments since 1974 have been influenced largely by trade flows and related net payments on account of insurance and freight. Owing to the steep rise in energy and other import prices the terms of trade deteriorated sharply in 1974. Only a small trade surplus was recorded despite a significantly lower volume of imports, while the adverse services balance worsened considerably. The current account deficit as a consequence widened sharply to 12.4 billion FMG. With a relatively small increase in public and private capital inflows the balance of payments recorded a deficit of 2.8 billion FMG. There was a further substantial deterioration in the terms of trade in 1975. The volume of exports, particularly exports of coffee, cloves and sugar, rose significantly during the year, while imports, in real terms, showed only a marginal increase. Even so, a merchandise deficit of 2.6 billion FMG occurred leading to a further worsening of the balance of payments situation. The current account deficit widened to 17.9 billion FMG; and, even though public capital inflow rose substantially, the  - 38 - overall balance of payments deficit more than doubled to 5.8 billion FMG in 1975. Severe cuts on imports were imposed in 1976 as a foreign exchange shortage developed following continued deterioration of the balance of pay- ments. Although the volume of exports too declined, unit prices of major exports, such as coffee, vanilla and cloves, rose sharply and the terms of trade improved a little during the year. The trade account registered a sur- plus of 2.0 billion FMG, and partly as a result the current account deficit was reduced to 9.6 billion FMG. This improvement in the current account balance was to some extent offset by increased repatriation of private capital as well as by a substantial decline in the inflow of public capital. Yet the balance of payments deficit in 1976 turned out to be comparatively small. The trade surplus in 1977 is now estimated to have quintupled essentially due to a further steep increase in export prices, which was particularly sharp in the case of coffee; the volume of exports, on the other hand, continued to decline. But mainly because of substantially higher net service payments on account of insurance and freight the current account balance showed little improvement. Net capital inflow as well as unrequited transfers not having changed much, the balance of payments surplus in 1977 is likely to have been marginal. Table 14: FOREIGN TRADE INDICES 1972-1977 1975 = 100 1970 1971 1972 1973 1974 1975 1976 1977 /1 Export volume 76 78 78 80 81 100 81 55 Import volume 134 163 138 108 99 100 69 79 Export prices (FMG) 84 83 85 89 114 100 130 239 Import prices (FMG) 45 47 48 53 87 100 127 137 Terms of Trade 187 177 178 166 131 100 102 174 /1 Provisional. Source: Mission estimates. 95. The turnaround in the balance of payments situation taking place in 1976 is attributable more to exogenous factors than to any significant improvement in the basic structure of the balance of payments. The weakness of Madagascar's balance of payments stems from a number of factors: sluggish growth of the volume of exports, increasing dependence on food imports, a large services deficit, reflecting, among other things, the substantial burden of transportation and related costs, and the small inflow of external resources relative to population or the size of the economy. Trade surpluses in 1976 and 1977 occurred as a result of sharply rising export prices (the unit value of coffee exports increased by nearly 200 percent), which reversed the con- tinuing deterioration in the terms of trade, and the imposition of stricter quantitative restrictions on imports. On the other hand, the volume of exports declined in 1976, and recorded a further marked drop in 1977, while  - 39 - the services deficit tended to widen and there was no sustained rise in capital inflows or net transfer receipts. In fact, the balance of payments position is reported to be deteriorating again; reserves are estimated to have fallen by 0.7 billion FMG in 1978 and some further decline has taken place since the beginning of the present year. 96. Attempts to deal with the balance of payments problem and the scarcity of foreign exchange have as yet been confined almost entirely to direct restrictions on imports. Although priority is accorded to the attain- ment of food self-sufficiency and the eventual elimination of food imports, not enough attention has been paid to the development of exports, while net capital inflows have been maintained at a relatively low level with the aim of reducing reliance on external resources. It would be difficult, however, to continue with the existing balance of payments policy without sacrificing growth. For the flow of imports of food and other essential commodities cannot be sustained for long if it were decided to allow larger imports of intermediates and equipment for any length of time. Greater emphasis thus needs to be placed on measures, such as export promotion and recourse to external assistance, that will help steer the economy to a viable balance of payments position without constraining growth. 97. Unlike a number of other Third World countries, Madagascar exports an unusually wide gamut of products. Exports range from a large variety of primary commodities to some manufactured goods and petroleum products. The bulk of export earnings is obtained, however, from (a) a few world market oriented agricultural commodities, such as coffee, vanilla, pepper, and cloves, (b) processed foods, particularly sugar and meat products, and (c) petroleum products, and minerals like chromite and graphite. 98. Exports have grown at a very slow pace since 1970 for a number of reasons, such as, growing domestic demand and inadequate production (sugar, meat, paper, paper products, footwear, tobacco manufactures), lack of a more active marketing strategy (coffee, vanilla, pepper), slow growth of markets or other marketing problems (cloves, petroleum products).  - 40 - Table 15: TRENDS IN SELECTED EXPORTS, 1974-1977 1977 Share in Export 1970 1974 1975 1976 1977 Earnings Percent (Billion FMG) Coffee 10.9 15.6 14.1 28.3 40.5 48.8 Cloves 4.7 4.0 17.3 5.8 4.9 5.9 Vanilla 3.6 4.5 3.0 4.7 8.8 10.6 Pepper 0.5 1.0 1.4 1.5 1.8 2.2 Sugar 1.5 1.7 4.8 2.3 Meat (fresh, chilled, frozen) 1.2 2.4 1.1 0.8 1.2 1.4 Petroleum products 1.6 5.6 5.5 4.3 .. .. Total (including others) 40.2 58.5 63.0 66.0 82.9 100.0 Source: INSRE and Mission estimates. 99. The world market for coffee is forecast to expand slowly during the 1980s, although prices are expected to firm up after 1985. 1/ All the same, Madgascar should be able to plan for at least a 5 percent annual in- crease in the volume of exports over the long-run having regard to its small share (just about 2 percent) in the world market and its comparative advantage in coffee cultivation. As regards cloves, the outlook has become somewhat uncertain because of efforts being made by Indonesia, the largest importer in the world, to achieve greater self-sufficiency. The demand for natural vanilla has picked up of late and prices as a consequence have risen substantially. Exports could increase, it would appear, at a long run average annual rate of about 5 percent or say the likely pace of growth of world consumption. So far as pepper is concerned, market prospects for the coming years have improved owing to its increasing use for the extraction of oleoresins and essential oils. Besides, Madagascar's share of the world market, which does not exceed 5 percent, could increase because of competitive production costs. Sugar manufacturing is tending to become an entirely domestic market oriented industry. The question arises, all the same, of Madagascar investing in a fair sized sugar complex (60-70,000 tons annual capacity) for export which is likely to be viable. The scope for increasing meat production at a relatively low cost is considerable. With a livestock development program and an appro- priate pricing policy, exports could increase substantially. Cotton textiles 1/ As a result of the reported recent severe frost in Brazil, price prospects for the early 1980s may be much better than had earlier been expected.  - 41 - alone are of some consequence among industrial exports other than processed foods and essential oils. On the whole, the trend of these exports - cotton fabrics, paper and paper products, footwear, etc. - reflects the fact that capacity is essentially geared to the requirements of the domestic market. Exports of refined petroleum products were hit by the steep rise in the price of imported crude oil as well as by the loss of the market provided by neigh- boring Reunion; and it is difficult to foresee any significant expansion of exports in the future. 100. With the steep rise in import prices Madagascar's import bill went up considerably in 1974. Despite a significant decline in volume, the fob value of imports increased during the year by 45 percent to 57.4 billion FMG. Following a further, though smaller, rise in prices, the value of imports recorded another substantial increase in 1975 to 71.1 billion FMG. As the balance of payments situation worsened and serious foreign exchange shortages emerged, a restrictive import policy, effecting across the broad cuts in import allocations, was introduced in 1976. The value of imports fell as a consequence to 67.1 billion FMG during the year, and the volume of imports is estimated to have been about 31 percent lower than in 1975. The availability of imports has, in fact, been falling since the early 1970s; but whereas in the earlier years the decline was more moderate and largely reflected slack demand for imports, the sharp fall since 1976 is seriously constraining the growth of the economy. The adverse effect of import restrictions on produc- tion has been quite severe as, apart from lower overall availability of imports, the share of intermediates in the total has declined significantly. From 31 percent in 1975 it dropped to 27 percent in 1976, while the shares of other main categories remained more or less unchanged, or, as in the case of non-food consumption goods, even increased. Although the share of interme- diates is estimated to have risen again to about 35 percent in 1977, avail- ability in real terms remained more or less at the preceding year's level owing to a steeper rise in prices of this category of imports. Table 16: TRENDS IN MAIN IMPORTS 1974-77 (c.i.f.) 1977 Share in total imports 1970 1974 1975 1976 1977 Percent (Billion FMG) Food and beverages 1/ 5.4 14.7 10.8 9.4 11.6 13.6 Other consumption goods 8.8 9.4 11.8 11.8 11.8 13.8 Crude petroleum 3.5 12.1 15.7 13.6 13.1 15.4 Other intermediates 16.7 19.5 24.2 18.7 29.7 34.9 Capital goods 12.9 11.5 15.5 14.9 19.0 22.3 47.3 67.2 78.0 68.4 85.2 100.0 1/ Including fats and oils. Source: INSRE and Mission estimates.  - 42 - 101. The foreign exchange allocation system covers all imports other than rice and those financed by external assistance. Within the annual import program separate quotas are established for users, traders and specialized importers. The import program for 1976 limited the fob value.of authorized imports to 64 billion FMG; for 1977 it was reduced to 60 billion FMG. Besides tailoring the import bill to available foreign exchange resources, the import control system, as it operates at present, seeks to serve two other objectives: to protect local production against competition from imports and to channel imports towards priority activities and the satisfaction of essential consump- tion needs. The system, however, does not lead to the best use of imported inputs owing to the difficulty of determining administratively their likely productivity in specific activities. But, on the whole, it is the shortage of imports rather than their inefficient allocation which appears to be the more important factor constraining production and economic growth. In fact, concerned about the adverse impact of import scarcity on the performance of the economy, the Government has decided to increase the import program from 62.6 billion FMG in 1978 to 88.0 billion FMG in 1979. It has also taken steps to relax import restrictions somewhat and to simplify procedures with regard to spare parts of machinery and transport equipment as well as those relating to essential commodities like pharmaceutical products. These are welcome developments, although import liberalization may prove to be difficult to sustain in the absence of vigorous export promotion and additional inflow of external resources. 102. The level of public capital inflow, although fluctuating, has been comparatively low. Even in 1975 official capital transfers and net disburse- ments of public loans, when they rose sharply, amounted together to about 4 percent of GDP. On the other hand, the net outflow of private capital has been increasing. Emphasis on self-reliance and the consequent prudence with regard to foreign borrowing is reflected in Madagascar's external debt position. The external public debt, outstanding and disbursed, stood at US$258.6 million at the end of 1978. About 43 percent of it (US$111.3 mil- lion) was owed to the Bank Group, 10.2 percent to IBRD and as much as 32.9 percent to IDA. The outstanding disbursed debt at the end of 1977 amounted to 11.5 percent of GNP as compared to the average of 25 percent for low income countries. Moreover, because of relatively limited reliance on external assi-tance and concessionary terms of most loans and credits debt service payments have remained-small. The estimated debt service ratio of 4.1 percent in 1978 was somewhat higher than in 1970.  - 43 - III. DEVELOPMENT STRATEGY AND ECONOMIC PROSPECTS 103. With the aim of establishing a just and equitable social order as well as of promoting rapid economic development, the Government has taken far reaching steps to strengthen national control of the economy and to restructure institutions in order to make them more responsive to national needs. Large private trading concerns, most of them foreign-owned and managed, and indus- trial enterprises considered to be of national importance were taken over by the State, and in some cases the State assumed majority control. Banks and insurance companies were also nationalized; the banking system was reorganized, and specialized institutions for financing agricultural development, industry and commerce were established. Another institutional innovation was the introduction of decentralized local and territorial administrative bodies (the fokonolona system was revived) in order to increase popular participation in Government and decentralize decision-making. But progress so far in this direction has been limited. Concerned above all with the realization of the full potential of each and every individual as the ultimate objective (le developpement integral de tout homme et de tout l'homme) the Government has formulated long term goals to meet the basic needs of the population. These goals envisage a more egalitarian income distribution and satisfaction of specified minimum consumption requirements by the end of the century. The restructuring of the national economy, which is continuing, is expected to provide the institutional underpinning for the attainment of these objectives. The ground must be prepared, however, for initiating and sustaining action to attain them. 104. The task which confronts the Government will be difficult consider- ing the stagnation of the Malagasy economy, and particularly its recent per- formance. In the period since 1972, per capita income and consumption levels have declined, unemployment has been increasing and production as well as investment constrained by the large internal financial deficits that have emerged and balance of payments difficulties necessitating restrictions on imports. The Government is aware of the magnitude of the problems and has adopted a long term strategy (strategie globale du developpement) aiming, inter alia, at doubling the per capita real income and satisfaction of basic needs by the year 2000. The strategy proposes the attainment of an average long run annual GDP growth rate of 6.3 percent through the implementation of a series of medium term development plans, the first of them covering the three year period 1978-80. It also stresses national self-sufficiency. It is pro- posed that the present limited reliance on external resources be progressively reduced and it is planned that industrial capacity become sufficiently large and diversified at the end of the century to meet all of the country's demand for essential equipment goods and basic manufactures. Agricultural development is planned to achieve food self-sufficiency and provide adequate availability of materials for processing industries. 105. The period until the year 2000 is viewed, in terms of this strategy as falling into three distinct phases. The first (1978-84) when the foundations for future development are to be laid, will be characterized by emphasis on infrastructure, basic industry, food processing and textiles with little or no  - 44 - improvement in per capita consumption levels. The second phase (1985-92) is seen as a period of consolidation with the inception of a capital goods industry, expansion and diversification in other areas, declining unemployment and some increase in per capita consumption. The final phase (1993-2000), is projected as one of growth and expansion, ensuring all round industrial development, full employment and rising living standards. 106. Output growth assumptions underlying the Government's long term strategy imply an acceleration of economic expansion from period to period partly because of the high and increasing rate of industrial development. But the growth of agricultural production is also expected to be sustained over a long period at very high annual rates ranging from 4.5 to 4.8 percent. Table 17: VALUE ADDED 1978-90 (1976 prices) 1978-84 1985-92 1993-2000 --------Percent Annual Growth Rates-------- Agriculture 4.5 4.8 4.8 Secondary Sector 1/ 7.7 8.4 9.6 Services 6.0 6.1 6.0 All Sectors 5.8 6.2 6.9 1/ Weighted average of sub-sector growth rates. Source: Les Options fondamentales pour la Planification socialiste, Direction generale du Plan 107. The projected future course of the economy set out in the Plan does not indicate the time profile of savings and investment; but elimination of the resource gap -- gross investment and savings rate rising respectively to 24.3 and 24.4 percent -- is postulated for the year 2000, while per capita household consumption is assumed to increase at an average annual rate of 2.6 percent over the next twenty years. The first development plan, launched in 1978 does, however, set out a detailed investment program linking projects and policies to output and other targets. In this chapter it is proposed, first to review the 1978-80 Plan and the strategy adopted for the attainment of the declared long term goals. Thereafter, the implications of an alternative strategy as proposed in this report will be considered in order to assess the optimum growth path for the economy.  - 45 - A. The Development Plan 1978-80 and Planning Strategy 108. The Plan projects annual growth of GDP in real terms at 5.5 percent between 1978 and 1980. Over this period industry, which is to be the leading sector, is expected to expand at an annual rate of 10.7 percent. Within the manufacturing sector, however, much more rapid growth, albeit from a narrow base, is planned for basic and heavy industries (31 and 18 percent) while growth targets for textiles, food processing and agro-industries range from 4 to 8 percent. Mineral and energy sectors are projected to grow at the annual rate of 8.8 percent and construction at 7.5 percent. As compared to other sectors the Plan has set lower targets of 4.3 percent for agriculture and 4.8 percent for services. 109. Household consumption, in constant 1976 prices, is projected to rise by 3.6 percent annually and per capita consumption to re-attain the 1970 level by the end of the Plan period. However, redistributive income and price policies are expected to ensure a comparatively rapid growth of consumption of poorer segments of the population. The annual increase in consumer prices is to be limited to 7.3 percent; but prices of agricultural commodities will be raised by 9.1 percent and wages by 8.3 percent so as to efect a redistribution of incomes in favor of farmers and wage labor. Export and import prices as well as the cost of investment goods and construction are forecast to rise at rates varying from 9.8 percent to 15.0 percent. (Considering these price projections, it clearly appears that the annual increase in the cost of living will not be held to 7.3 percent). 110. The Plan proposes an ambitious investment program for the attainment of sectoral growth targets and for the strengthening of the country's social and economic infrastructure. The forecast total gross fixed investment outlay during 1978-80 amounts to 184.3 billion FMG in 1976 prices; in addition, the Plan provides for investment (again in constant prices) in commodity stocks to the extent of 11.8 billion FMG. The investment rate, accordingly is projected to rise from the Plan estimate of 11.5 percent in 1977 to 17.0 percent in 1980. And the annual investment outlay would rise by more than 50 percent to reach 74.8 billion FMG by 1980. 111. The Plan is too optimistic regarding domestic resource mobilization, and in fact is not very clear and explicit on this point. Considering the projections relating to savings and external resources it appears that the gross domestic savings rate would have to go up from 10.1 to 15.1 percent over the Plan period. An increase of this order over a short space of three years implies a very high marginal propensity to save. The proposed savings effort reflects a projected rapid increase in investment and implies a resource gap amounting to only about 13 percent of the investment outlay during the Plan period, or 31.5 billion FMG in current prices. Elsewhere in the Plan document, the corresponding external resource requirements of the Plan, are, however, estimated at 62.7 billion FMG (44.7 billion FMG to be covered by foreign borrowing), owing to the expected net non-factor services deficit.  - 46 - 112. Given the low per capita income level, the comparatively high tax to GDP ratio as well as the fact that output of goods and services per capita declined by about 13 percent between 1972 and 1977, it is not likely, even with the best of efforts, that the Government will be able to mobilize internal financing on the scale envisaged in the Plan. The Plan assumes a 30 percent annual increase in direct taxes and stiffer taxation of luxury goods. Even these measures if implemented, would leave resource mobilization well short of requirements. And Plan implementation, as the stepping up of public investment spending since 1975 has shown, will lead to large budget deficits, since no substantial increase in external assistance is envisaged, and result in exces- sive credit expansion and increasing demand pressures on the import control system. The proposed investment program appears, therefore to be much too large relative to the savings that are likely to be mobilized and may well conflict with the Government's stated principle of self-reliance. 113. As regards the sectoral allocation of investments, the Plan accords the highest priority to social infrastructure (health, education and housing) which claims 48.2 billion FMG, or 26;.2 percent of total fixed investment outlays. Nearly 60 percent of the investment allocation for social infrastruc- ture development is intended for housing, the major portion to be financed by private households. Health and educational investments, on the other hand, are to be undertaken entirely by the Government. The secondary sector ranks next in the scale of Plan priorities with an allocation of about 46 billion FMG, of which two thirds is to be set aside for establishing new manufacturing capacity. Proposed investments in manufacturing, mineral and energy subsectors are destined mainly for a few large projects (cement, fertilizers, textiles, ferro-chrome, electric power generation). The allocation of investment for transportation and telecommunications infrastructure, 25.0 percent of the total fixed investment, is only marginally smaller as compared to the secondary sector. Despite the importance attached to agricultural development by the Government the share of agriculture per se in Plan investment is, with the exception of trade and distribution, the smallest of all the sectors, although it must be recognized that investments in other sectors directly or indirectly support agricultural development and the promotion of rural life. The actual sectoral investment pattern will, however, ultimately depend a great deal on project implementation capacity in different areas, and, as is normal with deve'opment plans, specific investments may well be different from those forecast.  - 47 - Table 18: 1978-80 PLAN - FIXED INVESTMENT OUTLAYS Billion FMG Percent Agriculture 28.5 15.5 Secondary Sector: 46.3 25.1 of which - Manufacturing 30.4 16.5 Transport and Telecommunications 46.2 25.0 Trade and Distribution 7.4 4.0 Social Infrastructure 48.2 26.2 of which - Housing 34.7 18.8 Other 7.7 4.2 Total 184.3 100.0 Source: 1978-80 Plan, Ministry of Finance and Planning 114. As far as the direct impact of the investment program is concerned, the allocation for agriculture does not correspond to its importance and development potential. Its share in Plan Investments (28.5 billion FMG) is smaller than that of manufacturing (30.4 billion FMG), even though it contri- butes three times as much to GDP, and more importantly, offers both in the short and long-run considerable scope for low cost import substitution. Production targets for specific crops are to be attained through the extension of cultivated area as well as through improvements in productivity. However, the design of programs to increase productivity particularly of food crops, i.e. through introduction of high-yielding seed-fertilizer technology and extension support, have been only briefly outlined in the Plan. Agriculture will also benefit from investment in the transportation and communications infrastruc- ture, but nearly four-fifths of the outlay on the roads sector is to be set aside for primary national highways, and the allocation for secondary and feeder road development of direct importance to agriculture is comparatively quite small. Of course, the responsibility for the development and maintenance of some rural roads has been entrusted to the fokonolona. 1/ But their resources, obtained mostly from the Government budget (3.5 billion FMG in 1977) are rather limited; and no definite information is available about their financial or physical targets in this area. 115. The Plan for the manufacturing sector is essentially oriented to the requirements of the population. The selection of industrial projects retained in the Plan appears to have been guided less by considerations of cost/benefit analysis than by such considerations as actual or targeted levels of internal demand. This might have made no material difference to the choice of projects 1/ Stabilization funds also finance construction and maintenance of some rural roads which serve land cultivated for export crops.  - 48 - like cement plants, which are naturally protected by the high transport cost of competing imports; but other projects, e.g., assembly of transport equipment from imported components, are much less likely to be economically advantageous. Industrial growth, however, will be generally constrained by lack of imported intermediates and spares as long as the availability of imports remains re- stricted. Of late, the Government has, however, pursued a policy of automatic licensing of certain essential imports such as spare parts. 116. Exports of goods and services are projected in the Plan to grow, in real terms, at an annual rate of 7.5 percent. This objective may be ambitious, as it does not appear that programs or policies to support an export effort of this magnitude have been developed. About 60 percent of the overall export target is expected to be attained through a 30,000 ton increase in coffee exports, and the rest mainly through a fivefold expansion of exports of fish to 28,000 tons; on the other hand, exports of vanilla, pepper and cloves are not expected to increase; nor is any significant growth of non-agricultural exports envisaged. 1/ 117. Although the Plan does not address the problem of short run measures to raise output and employment, the Government, concerned as it is about the current economic situation and difficulties, is taking measures to tackle urgent problems and alleviate unemployment. The import program for 1979 provides a substantial increase in imports (40 percent in nominal terms), and, as already mentioned, there has been a selective relaxation of import restric- tions. However, a larger inflow of imports required to raise output levels in the near future is likely to aggravate the balance of payments' position, and may require cuts in investment, an outcome which would run counter to Plan objectives. 118. On the whole, the Plan underestimates resource constraints; and substantial and growing fiscal deficits have emerged as the Plan program has been implemented at the cost of increased public capital spending. At the same time the country's balance of payments position is being strained. On the other hand, progress towards output targets may be much slower than is envisaged because of problems in raising agricultural productivity, capacity constraints, gestation period of projects and impaired capacity as well as underutilization of existing assets such as the irrigation network. 119. The official long-term development strategy depends on targets which could prove to be much too optimistic for domestic resource mobilization and therefore underestimates the need for supplementary external assistance. The strategy assumes that the savings rate will rise (presumably more or less steadily) to nearly two and a half times its current level of about 10 percent over the next two decades and so progressively help eliminate the ,dependence on net inflow of resources from abroad. Having regard to the low and recently declining per capita income level, production possibilities and rapid popula- tion growth (2.88 percent annually according to Plan projections) an increase in the savings rate of this magnitude will be extremely difficult to achieve. It is, in any case, difficult to assess the possibilities of reaching these goals as the long term strategy does not elaborate on the resource mobilization measures that will be undertaken. 1/ Premier Plan, Direction Generale du Plan, pp. 69, 90 and 91.  - 49 - 120. Second, as we shall discuss subsequently, the production potential of the Malagasy economy at least until the mid 1980s is likely to fall short of the levels implicit in the postulated growth profile. To a large extent the over-estimation of output growth can be attributable to the tenuous assump- tions concerning the pace of agricultural development (well over 4 percent per year) that has been incorporated in the Plan's long term projections. 121. Third, the autocentric approach to industrial development implying eventual local production of all manufactures may impose a heavy cost on the economy and thus aggravate resource constraints. No doubt infant industries (including those serving the export market) need to be protected and dependence on foreign trade for vital or strategic products entails a certain risk. But selective investment in industries likely to become competitive in the long run would enable Madagascar to obtain some manufactures, in exchange for exports, at a lower cost than through domestic production. 122. Finally, the long term strategy fails to pay due attention to the balance of payments problems that are likely to emerge in the course of implementation of the proposed series of medium term plans. The additional demand for imports resulting from the projected magnitude of investments, assuming shortfalls in domestic resource mobilization, will add considerably to the import bill, or else necessitate stricter restrictions on imports. The trade deficit is expected to disappear over time even as the structure of foreign trade itself is transformed, the import mix shifting towards techno- logical services and sophisticated equipment with processed goods and manufac- tures progressively predominating - barring exceptions - in the composition of exports. Yet this scenario may underestimate (a) the effect of less rapid agricultural growth, and, hence, slower replacement of agricultural imports, and (b) the limits of export diversification and development when industrial capacity, as a matter of policy, is geared to the internal requirements of the economy 1/. Unfortunately, too little emphasis, as stated above, has yet been placed on the need for vigorous export marketing and promotion policies as a means of alleviating possible foreign exchange shortages. 123. In conclusion, it appears that the existing approach to long term development may well prove to be flawed. For one thing, there is a limit to which the investment rate can be raised without active mobilization of savings or inflow of external resources. The resource constraint cannot in the long run be overcome, as the Government has been recently inclined to do, through increased Government spending. Given Madagascar's situation, a prescription of forced investment is more likely to entail a real risk of run-away inflation and monetary instability, or a drain on foreign exchange reserves, than it is likely to promote sustained growth of investment and output. The serious foreign exchange shortages that might arise, to the extent the strategy is implemented, could necessitate sharp cutbacks in imports resulting in continued slow growth of the economy. Eventually, substantial external development assistance which is sought to be avoided, might even be required, and being unplanned or unforeseen, obtained at a high cost. 1/ Les Options fondamentales pour la Planification socialiste, Direction generale du Plan, pp. 20, 21.  - 50 - B. Economic Prospects within an Alternative Strategic Framework 124. The medium term investment program proposed in the Plan responds to the need for building up productive capacity and the development of the social and economic infrastructure. It fails, however, to pay sufficient attention to the urgency there exists to stimulate ouptut growth and improve income levels and the resource constraints resulting from the low and declining per capita income level. At present, in the middle of the 1978-80 Plan period, more could be accomplished to resolve current problems and to meet immediate needs even as the continuing institutional reorganization and investments prepare the ground for future development. It was the expansion of the urban intermediate sector that over the past few years helped partially to offset the decline in output and employment in the modern sector, which was parti- cularly marked in manufacturing and construction. Construction is a labor- intensive activity with backward linkages to manufacturing. A construction program, including low cost housing projects, such as the one presently envisaged by the Government and which responds to its social objectives, thus presents certain definite advantages as a short-run economic recovery measure. It would to some extent help alleviate unemployment, improve the living standards of the urban population and stimulate the rest of the economy. Its impact will, however, be significant only if its import content is mini- mized and local materials and labor utilized to the fullest extent. Along with the construction program other operations of a fire-fighting type, such as those recently introduced by the Govenrment, could also be considered. These would include, for instance, investments in balancing equipment and selective relaxation of import restrictions on agricultural inputs and equip- ment, intermediates, components and spares to improve capacity utilization in certain branches of manufacturing as well as to increase agricultural production. 125. Medium and long-run development possibilities in Madagascar are on the whole encouraging, and sustained growth at an average annual rate of 4 to 5 percent is quite feasible. But alternative strategies to the existing ones for long-term developoment will have to be considered, weighed and tested if a high growth rate is to be achieved. A possible alternative strategy would comprise several elements. First of all, inadequate savings are at present a majo-_ obstacle to fuller utilization of the economy's development potential. The current domestic savings rate of 10-11 percent compares no doubt favorably with the 8 percent average for countries in the low income group 1/; but it is still well below the domestic savings rate attained by some other countries in the same group such as Tanzania, Kenya and India. Nevertheless, until a period of sustained and relatively rapid growth has been achieved, further scope for domestic financing of investment is likely to be modest. Over the past few years output of goods and services as well as consumption per head have declined significantly as a result of sluggish growth. As such, attempts to increase savings will be circumscribed by the rather limited possibilities of restraining consumption. 1/ World Development Report, 1978.  - 51 - 126. At the same time, the pace of capital formation is too slow - the investment rate averaging about 14 percent in recent years - to enable produc- tion growth to exceed past trends; and recourse to larger external capital assistance would be necessary to sustain more rapid economic expansion for some years to come. Ideally, an investment rate of more than 20 percent could be envisaged for a country aiming at rapid economic growth. In Madagascar, however, such a rate is probably not feasible in the medium-term future, since it would require an inordinate reliance on financing from abroad while adequate project implementation capability would be unlikely to keep pace with such an expansion. Emphasis will also need to be placed on measures to improve the productivity of assets. The investment rate could thus be realistically pro- jected to increase from 13 percent in 1976 to about 18 percent in 1983, and to be maintained at that level in subsequent years. 127. Aside from savings, a second constraint is production possibilities over the medium-term future. In the long run capital formation should have a sustained impact on output growth. But, over the next two years only rela- tively limited increases in GDP can be expected from short run measures such as the construction program and a somewhat larger allocation of foreign ex- change for imported inputs. If appropriate steps are taken over this period, the stage can, however, be set for faster growth during the first half of the 1980s. Provided greater attention is paid to improving crop yields, agricul- tural output could certainly increase by 3 percent annually, production of paddy and groundnuts rising respectively by 5 and 7 percent per year. Sustain- ing output growth rates of this order might be a difficult task, but consider- ing the present low yields, generally well below those which could be attained even with traditional cultivation methods (output of paddy per hectare averages less than 2 tons), and the Government's land development programs (area under oilseeds is to be extended by about 4 percent per year), the projected increase in crop production seems to be well within the realm of the possible. Taking into account the availability of inputs and the pace at which additional capac- ity can be installed, secondary production may be expected to grow at a 5-6 percent annual rate. The growth rates for productive sectors are admittedly not very high; yet, it would be unduly optimistic to project a GDP growth rate much over 4.5 percent during 1980-85. 128. Output growth will also depend on the availability of imports. Quantitative restrictions since 1976 have effectively reduced the inflow of merchandise imports, which in turn has affected agricultural and industrial production. The recent moves towards selective relaxation of restrictions on imports reflect the urgent need for larger imports of agricultural inputs, intermediates, spares and components. Accordingly, in the proposed strategy, a relatively liberal policy is assumed to permit larger imports of current inputs and equipment. Still, imports as a whole would increase less rapidly than GDP during the 1980s as food imports would be substantially reduced over time. Rice imports should cease in the second half of the 1980s while the imports of edible oils will decline significantly. 129. A third constraint to be considered in relation to development prospects is the slow growth of exports. Owing to insufficent production and, in the case of some major agricultural exports, market problems, the volume of  - 52 - exports has been rising at a very slow pace and limiting the availability of foreign exchange for imports of inputs. The development of exports would thus require adoption of suitable marketing policies, efforts to expand the industrial base for the export market and major production programs for such agricultural products as meat. In projecting exports it has accordingly been assumed that, among others, steps would be taken to maintain an annual 4-5 percent increase in the volume of vanilla exports, sustain at least a 5 per- cent increase in the annual volume of coffee exports following the expected firming up of the world market during the mid 1980s and establish a 67-70,000 ton sugar refinery for export by 1985. Industrial exports, other than pro- cessed foods and essential oils, such as cotton fabrics, paper and paper products, footwear and tobacco manufactures, are still rather small as capacity is geared essentially to the requirements of the domestic market. But exports could be expected to increase significantly from the existing small base, while over a longer period capacity for export could be estab- lished in other product lines. On the whole the volume of exports could be realistically assumed to increase at annual rates ranging from 2.2 to 7.3 percent until 1990. 130. The approach to industrialization should be selective and discrimi- nating. This implies directing investment towards those modern industries on a priority basis which are likely to become viable because of market size, raw material availability, high transport costs of competing imports, or any other reason ensuring long-run comparative advantage. Moreover, a clearer enuncia- tion of policy with regard to the future place of private enterprise in the industrial structure would also help industrial expansion by reviving the investment climate and encouraging private ventures in manufacturing and allied activities in partnership with the State or otherwise. Such a step would, without in any way compromising the basic policy of State control over strategic industries, permit local entrepreneurial talent and capital to play a more effective role in the development process. In the agricultural sector steps to improve yields will need to be supported by the gradual revision of the structure of producer prices. 131. On the whole, a relaxation of existing economic controls would be necessary to improve generally the efficiency of resource allocation. On the basis of the policy changes that have been outlined, domestic consumption could increase by about 3 percent in the early 1980s and 4 percent after 1985. The eventual increase in per capita consumption levels will, however, depend also on two other factors: the share of public consumption in the total availability of goods and services, and population growth. The projected improvement in the standards of living is slim, but all the same realistic. It should go a long way towards meeting the social objectives of the Govern- ment for the year 2000. 132. As regards the economic objectives of the Government, it is not clear whether the course of action adopted in the Plan and the Government's long term strategy, analyzed in the first part of this chapter, will lead to true self-reliance. Output and investment targets of the 1978-80 Plan and subsequent periods tend to overestimate production possibilities and under- state considerably net import requirements. Thus, the implementation of the  - 53 - underlying long-run strategy may unintentionally lead to even greater reliance on external resources in the period beyond 1990 than would otherwise have taken place. The alternative strategy that is proposed aims at diminishing recourse to foreign aid in the long-run, although, in view of the existing low *per capita income level and the domestic savings potential, it implies higher levels of external assistance on concessionary terms in the coming years. 133. A brief review of past and present financial management policies in Madagascar may be in order. Until the early 1970s financial policies were traditionally conservative, and sought to balance the budget and minimize external indebtedness; the balance of payments deficit, as a consequence, remained small and the Government was even a net creditor to the banking system, a rare combination in the developing world, particularly for a low income country like Madagascar. In the mid 1970s, the Government seeking to reverse economic stagnation and stimulate growth, proceeded to restructure the economy and move away from its budgetary management of earlier years. The public sector was expanded and with it Government expenditure increased. The investment budget, financed increasingly through recourse to Central Bank advances, has been used as an instrument to speed up capital formation, the resulting rapid expansion of bank credit and money supply leading to excess liquidity in the economy. But, while budgetary policies have become definitely much less conservative, the Government has contidued to be prudent with regard to external indebtedness. The external debt of Madagascar, outstanding and disbursed, amounted to 10 pecent of its GNP at the end of 1976 as compared to the average of 21 percent for low income countries. Also, per capita disburse- ment of external public loans during the year, estimated at US$2.60 was only about a third of that in Tanzania, a sixth as much as in Kenya or Sri Lanka, and just a tenth as compared to a country like Cameroon. 134. The projected growth of income and consumption (Table 19) in the context of the strategy that is proposed assumes a departure from the tradi- tional attitudes towards external finance. It is doubtful that Madagascar can achieve a growth path leading to self-reliance and satisfaction of basic needs within the next twenty years without a sizeable resource gap.  - 54 - Table 19: RESOURCES AND USES (Average annual growth rates in 1975 prices) 1976 1978 1980 1985 1978 1980 1985 1990 Gross Domestic Product 2.1 2.0 4.3 5.3 Gross Domestic Income 0.7 1.8 4.2 5.2 Imports 2.5 6.8 3.4 3.1 Exports Volume - 2.2 4.1 4.3 7.0 Exports Tt. Adj. -10.2 -2.7 3.4 7.3 Consumption 2.4 1.6 3.4 4.4 Investment 6.2 9.5 8.3 5.3 National Savings -15.5 -9.1 11.7 11.9 Domestic Savings -15.8 -7.3 14.8 12.1 BALANCE OF PAYMENTS (in millions of US$ at current prices) 1976 1980 1990 Resource Balance -46 -289 -504 Debt Service Payments -13 -33 -247 Gross Capital Inflows 42 301 736 Others, Net 17 21 15 Debt Service Ratio (Percent) 3.5 8.8 21.9 Source: Mission estimates. 135. The projected future course of the economy that has been outlined implies the prospect of improving savings performance and consumption levels as growth picks up after 1980. By the second half of the next decade consump- tion should increase by 4.4 percent per year. The growth rate of consumption, though no doubt moderate in per capita terms, is about as high as can be expected when future prospects are carefully assessed. For one thing, expan- sion at an annual trend rate of more than 3 percent of agricultural production, which accounts for most of the commodity consumption of households, would be difficult to attain; and the 3.5 percent growth rate during the late 1980s, implicit in these projections, is already optimistic. For another, a more rapid improvement in consumption levels and living standards in these circum- stances would diminish savings and so necessitate a larger inflow of imports and external assistance. Savings may, therefore, actually decline until 1980 as population increases faster than real GDP, but begin to increase subsequently as the marginal national savings rate rises to 23 percent in the period beyond 1985. Even so, the projected growth path of the economy would not be feasible without a sizeable resource gap. This gap would (in 1975 prices) rise from about US$39 million in 1976 to reach a maximum of US$221 million by 1985,  - 55 - declining thereafter to US$182 million in 1990. The resource gap profile reflects (i) the need for substantial mobilization of external resources *to finance higher domestic investment as well as (ii) the subsequent possibility of increasing self-reliance. More specifically, the narrowing of the resource gap after 1985 implies greatly reduced dependence on food and other imports as a result of import substitution in agriculture, stepping up of the pace of industrial growth to 7 percent per year and a general improvement in the productivity of investment, leading to a declining ICOR. 136. These projections should not be regarded as pessimistic in the context of an objective presentation of development prospects. They reflect the factors that are likely to constrain the Government's resource mobilization efforts. First, the savings rate will probably begin to rise only after a period of steady and rapid growth. Second, the demand for some of the major agricultural exports (vanilla, coffee, pepper) may turn price inelastic beyond a certain point; and, efforts to develop livestock production or to build up manufacturing capacity for the external market can be expected to be fully reflected in export earnings only after a certain period of time. Finally, having regard to the projected 3.0 percent growth rate of population, depen- dence on food imports will decline only gradually even as import substitution takes place relatively fast. 137. Future gross capital requirements are predicated on a number of assumptions: (a) official capital grants would average about US$50 million in the first few years and increase by 15 percent annually after 1981; (b) net foreign private investment would remain, in real terms, at about its current low level, and (c) foreign assistance would be extended largely on conces- sionary terms and debt repayment in the 1980-84 period would be about US$330 million. Per capita disbursements of external public loans in real terms would then rise to reach by 1985 a level twice as high as at present. A major premise underlying these projections is that the Government will contract about two thirds of its external debt on soft terms, thus obtaining a grant element of about 75 percent consistent with its poverty level and export prospects. If such terms were not obtained, the debt service ratio of Madagascar would far exceed 20 percent in the 1980s. This in fact emphasises the necessity of avoiding, as far as possible, in the near as well as more distant future, external borrowing on hard terms. 138. It is however, possible that future gross capital requirements and the economy's dependence on external resources could turn out to be smaller than the projections indicate for a number of reasons. Additional savings could conceivably be mobilized in the form of voluntary unpaid labour to build up productive assets, particularly in the countryside, such as roads, buildings and irrigation facilities. Moreover, if actual population growth in the future is, for some reason, slower than the projected rate of demographic expansion, savings could be realized, among other things, in social outlays; for instance with population growing as forecast, the number of school age children (6 to 17 years) would swell by 2.6 million by the end of the century. Finally, unforeseen improvement in the terms of trade, or in the overall productivity of investments, could help reduce capital requirements on the whole; however, it would not be realistic to expect any dramatic reduction in the resource gap as a result of such developments.  I  -56- A P P E N D I X I N A T I O N A L A C C O U N T S A N D B ALAN C E OF PAY MEN TS PRO J EC T IO NS Note: Economic data (balance of payments mainly) for 1974, 1975 and 1976 have recently been modified as shown in the Country data sheets, the text tables and Appendix II. However, the following projections have not been correspon- dingly updated since the historical series have little impact on the projections, while 1977 data still remain provisional estimates.   MA DA GA SCAR P., 00 E C O N O M I C D E V E L O P M E N T D A T A S H E E T S A C T U A L EST. P R O U E C T E D 1970 1975 1976 1977 1978 1979 1985 1990 NATIONAL ACCOUNTS (1) (MILLIONS OF US$ AT 1975 PRICES) GROSS DOMESTIC PRODUCT 1827.2 1777.2 1725.9 1764.5 1799.2 1834.5 2311.7 2989.9 GAINS FROM TERMS OF TRADE 202.t 0.0 24.4 54.0 -24.3 -46.6 -89.7 -120.5 GROSS DOMESTIC INCOME 2029.3 1777.2 1750.3 1818.5 1774.8 1787.9 2222.0 2869.4 IMPORTS 604.9 495.6 357.6 374.4 375.9 401.7 507.1 589.9 EXPORTS - VOLUME -374.5 -385.5 -293.9 -275.0 -281.0 -294.7 -376.1 -528.2 EXPORTS - TT. ADJUSTED -576.7 -385.9 -318.3 -329.0 -256.6 -248.0 -286.4 -407.7 RESOURCE GAP - TT. ADJUSTED 28.2 110.1 39.3 45.4 119.3 153.7 220.7 182.1 TOTAL CONSUMPTION 1805.1 1646.6 1572.2 1623.2 1648.7 1672.1 2006.1 2486.8 INVESTMENT 252.4 240.8 217.4 240.7 245.4 269.5 436.6 564.7 N. NATIONAL SAVINGS 237.2 152.3 197.5 208.1 141.1 127.5 202.8 355.5 LI- DOMESTIC SAVINGS 224.2 130.7 178.1 195.3 126.2 115.8 215.9 382.6 GOP AT CURRENT US$ 898.1 1777.2 1674.2 1895.9 2376.3 2713.7 5837.7 11094 3 SECTOR OUTPUT (SHARE OF GDP AT 1975 PRICES) __________________________ _____ AGRICULTURE 0.392 0.381 0.392 0.389 0.387 0.385 0.359 0.329 INDUSTRY 0.163 0.189 0.169 0.174 0.176 0.177 0.190 0.206 SERVICES 0.445 0.434 0.439 0.437 0.437 0.437 0.451 0.465 PRICES ( 1975 = 100) EXPORT PRICE INDEX 54.55 100.00 126.54 145.80 123.35 122.02 160.62 213.67 IMPORT PRICE INDEX 35.43 100.00 116.84 121.88 135.04 144.97 210.91 276.81 TERMS OF TRADE INDEX 153.97 100.00 108.30 119.62 91.34 84.t7 76.15 77.19 GDP DEFLATOR (USS) 49.15 100.00 97.00 107.44 132.08 147.93 252.53 371.06 ANNUAL AVERAGE EXCHANGE RATE 277.71 214;32 238.98  R 4 M A D A G A S C A R PL4 to zCaP I M P O R T D E T A I L 1972 1973 1974 1975 1976 1977 1978 1979 * 1985 CONSTANT 1975 PRICES (MILLIONS OF DOLLARS) 1.1 FOOD 35.8 35.9 37.5 39.3 31.0 47.6 38.9 48.5 46.4 1.2 OTHER CONSUMER GOODS 70.1 59.5 48.2 55.3 47.9 48.4 48.9 49.4 52.4 2. PETROLEUM, OIL. LUBRICANTS 75.2 68.2 65.7 73.2 55.3 56.0 57.1 58.2 73.3 3. OTHER INTERMEDIATE GOODS 182.0 141.6 147 7 122.2 55.0 55.7 59.0 62.4 88.8 4. CAPITAL GOODS 127.4 84.3 64.6 72.9 55.8 55.8 58.1 65.2 110.0 5.1 TOTAL GOODS (CIF) 490.5 389.5 363.6 362.9 245.0 263.4 261.8 283.6 370.9 5.2 TOTAL GOODS (FOB) 402.6 341.1 310.0 354.7 252.7 263.4 26i.8 283.6 370.9 6. NON-FACTOR SERVICES 224.9 207.0 181.8 140.9 104.8 110.9 114.1 118.2 136.2 7. TOTAL GOODS AND NFS 627.5 548.1 491.8 495.6 357.5 374.3 375.9 401.8 507.1. PRICE INDEX 1975 = 100 ------------------------- 1.1 FOOD 53.85 76.09 134.43 100.00 93.97 83.26 100.63 112.51 176.63 1 1.2 OTHER CONSUMER GOODS 54.95 65.88 81.18 10O.00 83.11 88.24 97.54 103.88 147.36 2. PETROLEUM, OIL. LUBRICANTS 23.52 28.44 76.76 100.00 103.18 107.69 113.92 127.36 177.18 3. OTHER INTERMEDIATE GOODS 35.78 46.46 62.34 100.00 178.21 189.23 209.17 222.76 315.99 4. CAPITAL GOODS 50.38 60.64 74.01 100.00 111.57 118.51 131.00 139.51 197.90 5. TOTAL GOODS (CIF) 41.75 52.07 76.94 100.00 116.84 119.23 134.13 144.51 212.27 6. NON-FACTOR SERVICES 41.75 52.07 76.94 100.00 116.84 128.17 137.15 146.06 207.19 7. TOTAL GOODS AND NFS 41.75 52.07 76.94 100.00 116.84 121.88 135.04 144.97 210. 91 CURRENT VALUES (MILLIONS OF DOLLARS) 1.1 FOOD 19.3 27.3 50.4 39.3 29.1 39.6 39.1 54.6 82.0 1.2 OTHER CONSUMER GOODS 38.5 39.2 39.1 55.3 39.8 42.7 47.7 51.3 77.2 2. PETROLEUM, OIL, LUBRICANTS 17.7 19.4 50.4 73.2 57.1 60.3 65.0 74.1 129.9 3. OTHER INTERMEDIATE GOODS 65.1 65.8 92.1 122.2 98.0 105.4 123.3 138.9 280.6 4. CAPITAL GOODS 64.2 51.1 47.8 72.9 62.3 66.1 76.1 90A 217.6 5.1 TOTAL GOODS (CIF) 204.8 202.8 279.8 362.9 2P5.3 314.1 351.2 409.8 787.3 5.2 TOTAL GOODS (FOB) 168.1 177.6 238.5 354.7 2Y5.3 314.1 351.2 409.8 787.3 6. NON-FACTOR SERVICES 93.9 107.8 139.9 140.9 122.5 142.2 156.4 172.6 282.2 7. TOTAL GOODS AND NFS 262.0 285.4 378.4 495.6 417.8 456.3 507.6 582.4 1069.5  - 59 - APPENDIX I Page 3 M A D A G A S C A R E X P O R T D E T A I L 1972 1973 1974 1975 1976 1977 1978 1979 19S5 CONSTANT 1975 PRICES (MILLIONS OF DOLLARS) 1.1 COFFEE 54.8 63.7 63.7 65.7 71.1 62.4 63.3 66.8 78.0 1.2 VARILLA 18.3 10.8 20.3 12.9 16.6 16.6 16.6 16.6 21.2 1.3 CLOVES 22.2 22.6 18.4 80.8 19.6 16.0 16.t 21.8 13.6 1.4 MEAT 19.5 16.6 12.0 5.0 4.1 4.2 5.5 6.1 12.t 1.5 FISH .1 1.5 4.2 1.4 4.6 5.8 5.4 5.6 8.7 1.6 PETROLEUM PRODUCTS 23.9 29.6 27.8 26.1 16.1 6.7 5.4 5.4 6.4 1.7 SUGAR 20.6 20.8 7.6 22.3 16.7 14.7 14.2 13.6 9.8 2. MANUFACTURED GOODS 0 0 .0 .0 3. ALL OTHER GOODS . 57.5 64.5 64.8 98.0 99.8 101.4 103.4 107.6 159.8 4. TOTAL GOODS (F.D.8.) 216.9 230.1 218.8 312.2 248.5 227.8 231.8 243.5 309.5 5. NON-FACTOR SERVICES 139.4 97.2 81.1 73.3 45.4 47.2 49.1 51.1 66.5 6. TOTAL GOODS AND NFS 356.3 327.3 299.9 385.5 293.9 275.0 281.0 294.7 376.1 PRICE INDEX ( 1975 0100) 1.1 COFFEE 84.13 95.09 101.99 100.00 167.54 292.55 187.24 153.16 177.92 1.2 VA9ILLA 82.72 89.62 94.87 100.00 119.03 147.13 154.36 164.39 233.19 1.3 CLOVES 75.16 81.33 91.19 100.00 124.27 162.60 156.49 166.67 236.42 1.4 MEAT 60.92 85.70 84.31 100.00 125.77 137.63 57.11 69.78 105.61 1.5 FISH 90.42 95.88 117.85 100.00 86.84 93.25 97.20 103.52 146.84 1.6 PETROLEUM PRODUCTS 28.06 35.11 83.54 100.00 171.39 186.10 179.11 190.76 275..70 1.7 SUGAR 28.12 34.09 94.;8 100.00 56.73 41.47 49.26 59.11 123.17 2. MANUFACTURED GOODS .00 .00 .00 .00 3. ALL OTHER GOODS 109.69 120.96 156.15 100.00 109.76 76.71 79.00 84.13 119.34 4. TOTAL GOODS (F.O.B.) 76.29 86.82 112.30 100.00 128.30 149.46 120.42 116.97 150.60 5. NON-FACTOR SERVICES 41.75 52.07 76.34 1OO.OO t16.84 128.17 137.15 146.06 207.19 6. TOTAL. GOODS ANO NFS 62.78 76.50 103.17 100.00 126.54 145.80 123.35 122.02 160.62 CURRENT VALUES (MILLIONS OF DOLLARS) 1.1 COFFEE 46.1 60.6 65.0 65.7 119.1 182.4 118.5 102.4 138.7 1.2 VANILLA 15.1 9.7 19.3 12.9 19.7 24.4 25.6 27.3 49.4 1.3 CLOVES 16.7 18.4 16.8 80.8 24.4 26.0 28.4 36.3 32.1 1.4 MEAT 11.9 14.2 10.1 5.0 5.1 5.8 3.1 4.3 12.8 1.5 FISH .1 1.4 4.9 1.4 4.0 5.4 5.2 5.8 12.8 1.6 PETROLEUM PRODUCTS 6.7 10.4 23.2 26.1 27.6 t2.5 9.6 10.3 17.5 1.7 SUGAR 5.6 7.1 7.2 22.3 9.5 6.1 7.0 8.1 12.1 2. MANUFACTURED GOODS .0 3. ALL OTHER GOODS 63.1 .0 ~~ ~ ~~ ~ ~~~~~~~~~~~.0 .0 .0 3. ALL OTHER GOODS 63.1 78.0 100.5 98.0 109.5 77.8 81.7 90.5 190.8 4. TOTAL GOODS (F.D.B.) 165.5 t99.a 247.0 312.2 316.9 340.4 279.2 284.9 466.1 S. NON-FACTOR SERVICES 58.2 50.6 62.4 73.3 53.0 60.6 67.4 74.6 137.9 6. TOTAL GOODS AND NFS 223.7 250.4 309.4 385.5 371.9 401.0 346.6 359.5 604.0  A nt ~~~~~~~~~~M A D A G A S C A R 1-4 BALANCE OF PAYMIENTS AND EXTERNAL ASSISTANCIE 1972 197 3 1S174 1975 1976 1977 1978 1979 .1980 A C T U A L E S T. P R O J E C T E D SUMMARY OF BALANCE OF PAYMENTS 1. EXPORTS (INCLUDING NFS) 223.7 250.4 309.4 385.5 371.9 401.0 346.5 359.5 376.5 2. IMPORTS (INCLUDING NFS) 262.0 285.4 378.4 495.6 417.8 456.3 507.6 582.3 665.1 3. RESOURCE BALANCE -38.3 -35.0 -69.0 110.1 -45.9 -55.3 -161.1 -222.8 -288. 6S 4. NET FACTOR SERVICE INCOME -32.0 -29.2 -2'1.4 --27.3 -23.2 -29.3 -28.3 -`32.8 -38.5 .1 NET ]NTEREST PAYMENTS 1.9 1.-J 3.3 .8 -1.7 -1.7 -3.4 -6.2 - 10.3 OF WHICH ON PlJB M&LT'LOANS -2.4 -3.6 -3.5 -4.2 -4.5 -4.8 -6.4 -9.7 -14.4 .2 DIRECT INVESTMENT INCOME -2.5 -7.9 -7.9 -6.0 -3.3 -3.2 -3.7 -4.0 -4.2 .3 WORKERS REMITTANCES (NET) -31.5 -23.0 -16.i8 *-22.1 -18.2 -24.4 -21.2 -22.6 -24.0D 0 5. CURRENT TRANSFERS (NET) 36.5 33.2 38.5 48.9 45.8 45.7 48.8 50.0 51.1t 6. BALANCE-ON CURRENT ACCOUNT -33.8 -31.0 -51.9 -88.5 -23.3 -38.9 -140.6 -205.7 -276.0 7. PRIVATE DIRECT INVESTMIENT 12.7 10.5 1 3.2 3.6 2.9 2.8 5.1 6.2 7.3 8. GRANTS & GRANT-LIKE FLOWS 51.9 16.t9 20.0 33.6 21.6 .0 25.0 40.0 55.0 PUBLIC M&LT LOANS 9. DISBURSEMENTS 14.5 27.7 21.6 42.1 20.2 52.1 132.1 182.6 246.3 10. AMORTIZATION -6.3 -9.3 -6.3 -8.2 -8.5 -8.0 -13.0 -10.7 -18.8 1i. NET DISBURSEMIENTS 8.3 18.4. 14.8 33.8 11.7 44.1 119.1 171.9 227.5 OTHER MS&LT LOANS 12. DISBURSEMENTS .0 .0 .