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Country Commercial Guides for FY 2000: Madagascar Report prepared by U.S. Embassy Antananarivo, released July 1999

CHAPTER I:   EXECUTIVE SUMMARY

This country commercial guide (CCG) presents a comprehensive look at Madagascar's commercial environment, with economic, political and market analysis. The CCGs were established by recommendation of the Trade Promotion Coordinating Committee (TPCC), a multi-agency task force of the U.S. Government, to consolidate various reporting documents prepared for the U.S. business community. Country commercial guides are prepared annually at U.S. embassies through the combined efforts of several U.S. government agencies.

An island nation in the Western Indian Ocean with a population of about 14.6 million, Madagascar ranks among the poorest countries in the world. Over 70 percent of the population fall below a GOM baseline poverty level of $50 per year. In spite of Madagascar's extreme poverty, the island's unique natural environment, wide variety of resources, low cost labor force, and location on the crossroads between Asia and Africa make it worth a second look for serious, long-term investors.

In March 1997 a World Bank Structural Adjustment Credit of $70 million was approved by the Executive Board, and by July 1999, the GOM expects the release of the first $25 million tranche of a second structural adjustment credit (SAC II) of 100 millions USD from the World Bank and the approval of a $ 40 million Second Enhanced Structural Adjustment Facility (ESAF II) from the IMF.

Partly as a result of these credits but also as a result of the reforms which preceded them, average GDP growth exceeded the population growth rate of 2.8% in both 1997 (3.5%) and 1998 (3.9) for the first times since 1990.

Madagascar's appeal to the open-eyed investor stems from its low-cost, trainable work force. Over 125 investors, particularly garment manufacturers, have organized under the country's Free Trade Zone system since it was established in 1991. The absence of quota limits on textile imports to the United States and special access to the European market under the Lome Convention has helped to stimulate this growth. Liberalization of the foreign exchange market has further enhanced Madagascar's export competitiveness.

The country's transition to democracy in 1993 had the unfortunate side effect of impeding economic decision making and halting reforms begun in the late 1980s. In the past two and a half years alone, the country has seen a two-round Presidential election, a constitutional referendum granting broader powers to the President, and legislative elections. The current need is to continue economic reforms, particularly in the area of privatization, to pull the country out of the failed socialist experiment of the past.

Unfortunately, the dilapidated state of Madagascar's infrastructure is a major impediment to doing business. The local road network is in very poor condition and parts of it are impassable during the rainy season. The rail system is in poor shape, both in terms of track conditions and rolling stock. The water and energy parastatal Jirama is in desperate need of rehabilitation. Infrastructure investments which go towards the maintenance of improvement of human capital--health, education, and public security--are also woefully behind schedule.

The legal and regulatory environment in Madagascar can be a further source of frustration for foreign investors. Foreign ownership of land, though technically possible, is rare, although investors can now enter into 99-year lease arrangements. Security of private property, enforcement of contracts and the assignment of liability are not assured by the existing judicial system. Potential investors in Madagascar should also be aware of the country's unique but critically endangered environment. Some investment projects require environmental impact assessments prior to approval.

In spite of political preoccupations, the Government is making a serious effort to implement a structural adjustment program.

The Government has passed legislation permitting the free transfer of profits from hard currency investments. The export processing zone program offers permanent exemptions from taxes, including taxes on imports of primary materials. Nevertheless, in order to cut down on fraudulent production for the local market by EPZ companies, the Government imposed a VAT on EPZ in 1999, refundable upon proof of export. Outside the export processing zone, the most promising sectors are fishing, mining, tourism, and agriculture.

Best prospects for future U.S. sales and investment are in the infrastructure, petroleum, telecommunications and mining sectors. Tourism, especially ecotourism, has significant potential. There are also under-exploited opportunities in consulting and engineering.

BUSINESS LANGUAGE:   French

Country commercial guides are available for U.S. exporters from the National Trade Data Bank's CD ROM or via the Internet. Please contact STAT-USA at 1-8OO-STAT-USA for more information. Country Commercial Guides can be accessed via the World Wide Web at http://www.stat-usa.gov; http://1997-2001.state.gov; and http://www.mac.doc.gov. They can also be ordered in hard copy or on diskette from the National Technical Information Service (NTIS) at 1-800-553-NTIS. U.S. exporters seeking general export information/assistance and country-specific commercial information should contact the U.S. Department of Commerce, Trade Information Center by phone at 1-800-USA-TRAD(E) or by fax at (202) 482 4473.