In just a few years, life has changed out of all recognition in the Malagasy capital, Antananarivo. The traffic jams along the city’s roads are now caused less by a hopelessly inadequate road network than by the growing affluence of the population.

Madagascar’s startling change of fortunes took even the World Bank by surprise. In its 1999 report, the Bank deplored the island state’s poor performance over three decades when economic growth barely averaged 0.5%. Since 1999, and despite three cyclones, Madagascar has been growing at an average of 4.8% and expects the rate to reach 6% by 2003.

So what has brought about this transformation? Several factors are involved, with the most significant one being the sharp rise in foreign direct investments from nothing in the mid-eighties to $58.4m in 1999. On the back of investment in the country’s Export Processing Zones (EPZ), textile exports, particularly to the USA, have grown substantially and are likely to expand even more when the US’s Africa Growth and Opportunity Act (?Africa Bill’) kicks in.

Economic fundamentals are improving steadily. Tax revenue increased from 8.7% of GDP in 1996 to 12% in 2000, allowing the government to earmark an increasing proportion of earnings to public investments.

Madagascar became eligible for the Highly Indebted Poor Countries (HIPC) initiative last December, and is therefore able to reduce this year’s debt service ratio from 17% to 6% of total exports. In the context of an anticipated annual inflation rate of 3.5% during the 2001-2003 period, this debt relief should also favour an increase of domestic investments from 17% of GDP in 2000 to 20% in 2003. Reforms are also on the cards to allow commercial banks to extend their loans for longer terms and lower their rates. All these factors have energised the economy and made the rapid growth possible.

Militant rhetoric

Since his reelection in 1996 after three years of exile in Paris, President Didier Ratsiraka’s militant rhetoric against the Bretton Woods institutions and the evils of imperialism have come to end. By September 2000, the World Bank’s investment portfolio in the country totalled 18 projects pumping $629m into the social sectors, infrastructure, energy, agriculture, environment and the private sector.

Over the 2002/06 period, the European Union will give more than $350m to finance the rehabilitation and the extension of the main roads network, rural development and food security projects. Funds will also go to strengthen and reform the legal system and improve the competitiveness of the country’s cash crops.

Textile industry booms

The biggest boost to Madagascar’s exports is, without doubt, the duty-free and quota-free access to the US market which comes in the wake of the Africa Bill. Malagasy products will have unrestricted entry into the massive American market until 2004. Experts predict a ten-fold increase of Malagasy textile and apparel exports to the US over the next years. The impact for the entire economy should be sizeable since the sector represented 38.4% of total export revenues in 1999, ahead of shrimp exports (13.7%) and coffee (13.1%).

Even before the Africa Bill came into force, textiles sales to the US had increased dramatically from $22m in 1998 to $109m in 2000. By the end of May 2001, 150 textile corporations had registered as EPZ companies, 15 of these from Mauritius. The Malagasy-Mauritian synergy is particularly promising as both countries are eligible for the AGOA concessions. Malagasy products will be able to enter duty free and quota free beyond 2004, but only when products contain a certain amount of US-made or AGOA countries-made inputs.

Companies from Singapore, Hong Kong and China, which already have a market share in the US, are also opening plants in Madagascar, urged by their American clients to use this opportunity to produce at a cheaper cost and take full advantage of the low wages.

Footwear, fisheries and agricultural products should also benefit from AGOA, according to the commercial attaché at the US embassy in Antananarivo, Eric Rueter.

The IT niche

The EPZ boom is not confined to textiles. Ten corporations, most of them French-owned, are employing 2,000 workers in the IT industry, processing archives and data on behalf of large French corporations such as the BNP bank or TF1 TV-channel.

Two important international companies are running operations from Madagascar. A French-owned corporation, IP-3C Factories, is processing video, data and films for interactive TV channels on behalf of Pathé, and Microsoft is using ?video streaming’ techniques to design the latest generation websites for its first world clients. According to the young vice-chairman of the Groupement des Entreprises de Madagascar (GEM), Thierry Rajaona, Madagascar ?has the potential to become the francophone equivalent of India in the IT world?.

A powerful incentive for foreign companies moving into Madagascar is the comparatively low salaries of workers. For example, a programmer’s salary amounts to just $360 monthly. The question is, how long will these workers accept such low wages?

EPZ firms also include printing, jewellery and furniture enterprises. Some success stories, such as that of Mad Attitude - an exporter of rosewood furniture, are detrimental. Unchecked logging of the last remaining rosewood forests is causing international concern and the authorities are under strong pressure to scale down the activities of timber companies.

Tourism can do much better

Tourism, which earned $100m last year, is expanding at annual rate of 14%. Yet, given the abundance of the island’s attractions which include exotic flora and fauna, opportunities for trekking and scuba diving, pristine beaches and an exhilarating local culture, the potential has hardly been tapped. In 2000, there were only 130,000 visitors, well below the target figure of 200,000.

Cyclones, and cholera - which remains endemic in some parts of the island - have been blamed for the low visitor numbers. But there are other obstacles, including insufficient accommodation, poorly maintained roads and the relatively expensive cost of scheduled airline travel between Madagascar and Europe.

Air Madagascar and Air France hold a joint monopoly over most routes, although a few charter flights are available. In addition, independent travellers often find it difficult to find seats on domestic flights operated by Air Madagascar.

For years, the government was reluctant to change restrictive legislation on land leasing to hotel groups and discouraged Club Méditerranée from building a hotel/leisure park/holiday resort. In 1996, the situation improved when transferable leases was introduced.

Yet, tour operators and other investors are still inhibited by the level of corruption in the Malagasy judiciary and the administration. Last May, a survey by ATW revealed that institutional corruption was the number one concern of 78% of the managers of EPZ companies.

End of ?wild west’ mining

Mining is another promising growth sector. The Minister of Mines, Charles Rasoza, told African Business that mining of precious stones will be regulated through Special Economic Administrative Zones. Holders of exploration permits would be required to form partnerships with local miners. The main mining areas are the ruby and sapphire catchments of Vatomandry on the eastern coast and the ruby-rich area of Andilamena, to the north-east of Antananarivo. The gems will be auctioned at a precious stones exchange similar to those operating in Lesotho and South Africa.

The aim of the permit scheme is to avoid the ?wild west’ scenario of the 1995 rush on the Ilakaka sapphires of the Toliara province, when thousands of diggers invaded the concessions granted to companies which had formally applied for permits.

In a matter of days, the little village of Ilakaka became an anarchic city of 150,000 inhabitants, and became a paradise for crooks. Thai and Sri-Lankan dealers conspired with Malagasy miners to smuggle gems illegally out of the country, sometimes from little airstrips in the area.

But other promising perspectives are looming. The US company, Phelps Dodge, plans to develop a $200m project for the exploitation of nickel deposits of 168mt in the Moramanga area as soon as Parliament adopts new legislation on large foreign investments. Meanwhile, Canada’s Qitfer corporation is awaiting the results of an environment impact study before going ahead with a project to exploit 11.6mt of ilmenite deposits in the coastal sands of the Port Dauphin area.

There are also hopes of offshore oil and gas finds on the West Coast. So far, Vanco Energy, Gulfstream, Triton Energy, Hunt Oil and Xpronet have signed production sharing agreements with the national mining and industry parastatal.

Fragile ?pink gold’

?Pink gold’ or shrimps are an important part of the country’s exports. Shrimp exports by 15 French and Japanese companies accounted for most of the export earnings from the fisheries sector in 2000. The production is high quality to meet the health standards of both Japan and the EU. But the management of this resource which provides 10,000 direct and 30,000 indirect jobs in the formal sector alone, is delicate. There are dangers of over-fishing and environmental damage, according to Bertrand Couteau, the secretary general of Madagascar Aquaculture and Shrimp Fishermen Groupment (GAPCM).

Shrimp production, which reached 12,810 tonnes (8,032 tonnes from industrial fisheries) in 2000, up from 10,755 tonnes in 1997, has reached its maximum sustainable production levels.

The only way output can be increased is through the expansion of aquaculture. Production from this method rose from 2,477t to 4,800t between 1997 and 2000. The sector needs careful control and monitoring if it is to be sustainable. Already as many get-rich-quick entrepreneurs are rushing to the coast as are heading for the sapphire mines. These newcomers, says Couteau, have little respect for biological breeding patterns and stock replenishment.

Meanwhile, artesenal fishermen blame factory ships, operating illegally within the two-mile protection zone, of destroying their nets. The only way to solve the problem, claims GAPCM, is to set up a joint management of the resource by all the parties. At the same time, GAPCM is collaborating with the World Wildlife Fund in the eco-labelling of its production to guarantee sustainability and promote quality.

Madagascar could also increase its revenues from high seas fishing if it could clamp down on pirate ships from Taiwan and other Asian countries. But that is not the only challenge. African Business was told by Malagasy and foreign fishermen that the catches by tuna fleets belonging to European Union member go largely under-reported. Madagascar does not have nearly enough patrol boats to protect its 5,500km coastline.

Agriculture - a total dichotomy

The agricultural sector shows a total dichotomy. On the one hand, cash crops such as vanilla are doing very well; on the other, food crops, including rice, have seen a marked decline.

The essential oils industry, using extracts from ylang ylang and geranium flowers, is performing well and supplying much of its output to the French perfume industry. Vanilla, another success story, is providing stable earnings to some 60,000 workers in the North-Eastern Sava region, which produces 90% of the national output. A third of these workers also receive technical support from the European Commission’s Stabex unit which is financing a new 2,000 hectare plantation. Some 400t of vanilla from this plantation should be ready for harvesting by 2005. This is to replace 400 hectares destroyed by cyclones in 2000.

However, speculation on green vanilla has been driving up the price of this crop. There has been a significant increase in theft of the mature black vanilla (which fetches prices as high as $150 per kilo) and farmers have been tending to avoid the risk of theft by harvesting the crop in its green stage. In this form, the crop has less vanilla content. With real vanilla becoming more expensive, the fear is that users will seek cheaper, synthetic forms of it. This year, farmers paid government gendarmes to patrol their fields during the maturing season.

Over the last few years, production of lychees has also been supported by the EU, and has increased sizably with exports doubling from 8,000t to 16,000t between 1997 and 2000, and rising in value from $10m to $20m. By contrast, the output of canella, cloves and pepper decreased last year, while the current fall of coffee’s world prices makes the crop uneconomical.

After a fall from 34,500t to 26,000t between 1999 and 2000, cotton output should increase this year, since the planted areas have grown and insect-resistant cotton plants are being developed. The production of deciduous fruits rose from 63,000t to 97,000t last year as a result of the rejuvenation of the plantations.

Rice yields low

Rice yields, however, are very low, below 2t per ha on average as against 6t in Asia. The paddy output went down from 2.63mt in 1999 to 2.18mt in 2000, while imports have increased from 8,000t to 94,000t between 1996 and 2000. Projections for the 2001 crop anticipate a total of 2.6mt due to good rainfalls.

In future, the funding by various donors including the EU of feeder roads and rice perimeters, may improve the situation. Nevertheless, the food crops sector is cause for concern. For example, last year cassava production dropped from 2.43mt to 2.22mt, while sweet potatoes output declined from 520,000t to 476,000t as a result of a drought in the South of the country.

The FAO is also assisting farmers to recover from the swine-fever disaster, which killed about 60% of the 850,000 pigs on the island.

Infrastructure improvements

The Malagasy economy has never grown as fast since independence and could grow faster if bottlenecks in the transport, energy and telecommunications sectors were removed. Traffic conditions in Antananarivo should improve in a couple of years with the Japanese-financed construction of a road by-passing the capital and links to the national roads between the capital and the South on the one hand, and the capital and the main harbour, Toamasina, on the other.

The French government is financing several roadworks in the capital, while a number of donors, including Gulf countries, the World Bank and the EU are considering two roads projects that will link the capital with the ports of Mahajanga on the west coast and Antsiranana in the north.

The privatisation of the RNCFM railway, leading from Antsirabé in the central highlands via Antananarivo to the port of Toamasina is about to be finalised. It will be operated by the South Africa-based international consortium COMAZAR, in which the Commonwealth Development Corporation and the French group Bolloré have a stake.

But Eric Peiffer, who leads the consortium’s negotiations team, claims the terms of COMAZAR’s 1999 offer (approved by the Malagasy authorities) should be reviewed. The initial investment should be re-evaluated he says, because of the deterioration of the infrastructure and equipment. Since 1999, bridges have been destroyed, sleepers have disappeared and some wagons were transferred to the Southern network of the RNCFM which is not part of the COMAZAR-Madagascar agreement.

The World Bank is backing a project to build a new container terminal in Toamasina, and financing the French public works company Colas to rehabilitate the infrastructure and increase the capacity of the ports of Toliara and Mahajanga.

The French Development Agency, (AFD), is financing the rehabilitation of the tuna fishing harbour of Antsiranana and of the port of the Nosy Bé Island, where tourism is the main activity.

The government is also planning to launch tenders by mid-2001 for the construction of several hydro-electric dams, worth a total investment of $300m. Private companies will be invited to tender under Build-Own-Operate agreements. These investments could double Madagascar’s generating capacity within five years.

Telecoms is booming and by the end of the year, the mobile phone market should grow from 95,000 to 150,000 users. The competition is fierce; Telecel, a subsidiary of America’s Starcel corporation, has been replaced as market leader by Antaris, a France Telecom and Groupe Bourbon joint venture.

Madacom and SACEL, is a real estate joint-venture between the Malay group SAMEM and the TELMA Malagasy parastatal. Young businessmen, Hassanein Hiridjee, anticipated three years ago the need for real estate infrastructure by local and foreign businesses,eager to find a hub to develop their activities. Since then, Hiridjee’s company, First Immo, has built three business parks - Galaxy, Futura and Ivandry - covering a total 180,000sqm of industrial premises (including textile factories), offices and shops.

Expatriates complain but stay

Madagascar’s rapid development is far from harmonious and balanced. Antananarivo has two feet in the 21st century whereas most of the countryside lags two centuries behind. Despite the recent creation of a Court of Arbitration and Mediation to settle disputes between the state and companies, there is much room for improvement in terms of the security of business deals. ?The trouble is that even when we have legislation, it is not implemented?, complains Hiridjee’s friend Thierry Rajaona. Hiridjee explains that some of his competitors don’t pay taxes on the inputs which they import and undercut the competition.

A lot could also be done to improve education standards, in order to meet the demand of skilled manpower from the companies which settle in the island. For instance, the use of English by both high-ranking civil servants and even professionals remains marginal. Many opportunities to develop new markets are lost because of the insular mentality of the population. Unlike Mauritius for example, Madagascar’s commercial and other links with Africa are very limited. Clearly, the priority is the development of business and other links with Asia.

Political leaders could show much more concern for the welfare of the population in a country where 70% of the people live below the poverty line and the government is doing little to fight the massive deforestation.

There are 25,000 French citizens in Madagascar, and French investments account for two thirds of total foreign investments. All the major French banks have returned to the country. Over the last few years, Champion, Cora and Leader Price supermarkets have mushroomed around the capital and the main cities. Many feel there are opportunities to be seized..

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