ANTANANARIVO, September 10, 2015 — The World Bank Country Office in Madagascar has released its quarterly Economic Update, covering the first half of 2015. “The country’s hopes for accelerated growth in 2015 have been dashed by unfavorable global and local conditions,” said Keiko Kubota, the World Bank’s lead economist in Madagascar. “And the forecast made at the beginning of the year will most likely be revised down.”
Catastrophic meteorological conditions early in the year and the weather-related damage have fueled inflation, which reached 7.9% in March (annualized rate), its highest level since October 2011, before decelerating slightly with the arrival of the rice harvest period. The disruptions caused by the strikes at JIRAMA, the electricity and water company, as well as Air Madagascar and political uncertainties created by disagreements between the executive and the legislature have hurt the private sector.
“With the slowdown of domestic demand, the country imported less of both consumer and capital goods. In all, a 13% decrease in import value relative to the same period in 2014 was recorded in the first half of the year,” said Kubota.
While the budget deficit is under control, although it has increased moderately compared to previous years, public finance remains under pressure. Tax revenue increased 19% compared to the first half of 2014, but lags behind the target by 21%. Thus, public finance remains under pressure. “Public spending is allocated mainly to current expenditures including staff costs and spending on transfers and subsidies, including public companies, which represent 37% and 18% of total expenditures in the first half of the year,” said Faniry Razafimanantsoa, a World Bank economist in Madagascar. Only 20% of the total expenditure is allocated to capital spending, 80% of which is funded by external financing.
The report also provides an update on the impact of oil price fluctuations on the economy. The recent decline in oil prices in the first half of the year reduced the import bill and the subsidies for petroleum products. The government opted, however, to maintain the subsidies, which consume a large share of discretionary spending, and didn’t adjust local prices to adapt to changing international market conditions. “In general, gains related to weak commodity prices on international markets are offset by the depreciation of the local currency and the loss of export earnings, due to a decline in the price of nickel,” added Razafimanantsoa.
The report evaluates also the fiscal impact of public sector wages. The size of the civil service wage bill as a share of GDP in Madagascar is comparable to other low income countries (5.3% on average over the past five years). Since 2009, the wage bill share of total government expenditures has increased gradually, from an average of 26% over the period 2005 – 2009 to 38% between 2010 and 2014.
“The government chose to prioritize the payment of wages while total public spending went down, particularly investment spending,” said Razafimanantsoa. Compared to countries with comparable income levels, the ratio of wage bill to tax revenue is among the highest for Madagascar. This ratio has steadily increased in recent years and reached 55% in 2014, because of weak tax revenues.
To date, this increased spending has not widened the budget deficit and fiscal sustainability is not yet under threat. However, the large size of the wage bill comes at the expense of other investments. According to Razafimanantsoa, the remaining resources are not sufficient to ensure the provision of quality public goods and services. “To avoid cuts in important categories of expenditure, the government needs to increase its resources by increasing tax revenues, optimizing expenditure and improving governance institutions to facilitate access to external financing,” she concluded.