Impact of COVID-19 pandemic undoing nearly a decade of economic gains and poverty reduction
ANTANANARIVO, December 16, 2020 – The latest World Bank economic update for Madagascar estimates that the economy contracted by 4.2 percent in 2020 due to COVID-19 disruptions to global trade and domestic activity. The depth of the recession is therefore comparable to that of the 2009 constitutional crisis and was primarily driven by a sharp drop in export revenues and private investments.
According to the Madagascar Economic Update, Setting a Course for Recovery, a sudden stop in activity led to significant increase in extreme poverty, with vulnerable populations in urban areas being particularly affected. Nearly 1.4 million people are expected to have fallen below the poverty line (at $1.9/day) in 2020, bringing the poverty rate to 77.4 percent, its highest level since 2012. In the first semester of 2020, 64.4 percent of households reported a loss of revenue and 97 percent of companies a decline in the demand for their products and services.
The sudden loss of fiscal revenues coupled with increases in government spending resulted in a widening of the fiscal deficit to 5.2 percent of gross domestic product (GDP) in 2020. Debt distress risks have increased in recent months but are still moderate thanks to past fiscal prudence and a heavy reliance on concessional financing. The financial sector has also been affected by rising credit risks, but bank solvency remains generally sound.
“Beyond the knock-on effect of the crisis, growth remains structurally constrained by inadequate human capital, a high prevalence of informality and self-subsistence agriculture, insufficient and poorly maintained infrastructures, and governance and institutional weaknesses. In the absence of ambitious reforms, the crisis risks exacerbating these constraints with the effect of durably hindering the country’s growth potential”, explained Marc Stocker, World Bank Senior Economist in Madagascar and author of the report.
With the 2020 recession leaving a long shadow, growth is expected to recover only slowly in 2021 to reach 2 percent, before bouncing back more noticeably in 2022 to 5.8 percent. The poverty rate will remain well above its pre-crisis levels, declining only moderately to 76.6 percent in 2022. Projections are particularly uncertain, and risks mostly titled to the downside as a second wave of the pandemic could still hit Madagascar and its impact be compounded by other shocks, including natural disaster and the risk of social unrest amid persistent economic hardship.
“Delivering a sustained economic revival will require the mobilization of additional domestic resources for priority investments in human capital and infrastructure as well as far-reaching reforms to stimulate private investment and job creation, leapfrog the digitalization of the economy, and boost agricultural productivity and food security,” said Marie-Chantal Uwanyiligira, World Bank Country Manager for Madagascar.