Economy of Madagascar

The economy of Madagascar is US$9.769 billion by gross domestic product as of 2020, being a market economy and is supported by an agricultural industry and emerging tourism, textile and mining industries. Malagasy agriculture produces tropical staple crops such as rice and cassava, as well as cash crops such as vanilla and coffee. Malagasy exports from customs protocol in some areas, notably the United States and the European Union. These exemptions have supported the growth of the Malagasy textile industry. Despite natural resources and developing industries, the 2009 Malagasy political crisisâ€”considered by the international community to be an illegal coup deterred foreign investments in Madagascar and caused the Malagasy economy to decline. Foreign investments have resumed following the resumption of elections in early 2014. Madagascar is a least developed country according to United Nations.

Top Sectors in Madagascar

Agriculture in Madagascar

In addition to smaller productions of other agricultural products, like coffee (57 thousand tons), clove (23 thousand tons), cocoa (11 thousand tons), cashew (7 thousand tons) and vanilla (3 thousand tons). Agriculture, including fishing and forestry, is Madagascar's largest industry and employs 82% of its labor force. Madagascar's varied climate, ranging from tropical along the coasts, moderate in the highlands and arid in the south, allows for the cultivation of tropical crops such as rice, cassava, beans and bananas. In 2011, agricultural productsâ€”especially cloves, vanilla, cacao, sugar, pepper, and coffeeâ€”accounted for Madagascar's top twelve exports by value. Madagascar produces the largest vanilla harvest in the world and Malagasy vanilla accounts for 80-85% of the global vanilla market.

Textiles in Madagascar

Exports from Madagascar's Export Processing Zones, located around Antananarivo and Antsirabe, account for the majority of garment exports and are largely exempt from customs restrictions in the United States under the African Growth and Opportunity Act (AGOA) and in the European Union under the Everything but Arms (EBA) agreement.

Mining in Madagascar

A small but growing part of the economy is based on mining of ilmenite, with investments emerging in recent years, particularly near Tulear and Fort Dauphin. Mining corporation Rio Tinto Group started production at its Fort Dauphin Mandena mine in January 2009, following several years of preparation. The mining project is highly controversial, with Friends of the Earth and other environmental organizations filing reports to detail their concerns about the mine's effect on the environment and local communities. Gemstone mining is also an important part of Madagascar's economy. Several major projects are underway in the mining and oil and gas sectors that, if successful, will give a significant boost. In the mining sector, these include the development of coal at Sakoa and nickel near Tamatave. The Ambatovy mine (nickel & cobalt - Sherrit International 40%, Sumitomo 27.5%, Korea Resources 27.5%, SNC-Lavalin 5%) is a huge operation and has cost US$4.76 million to date and is due to start production in 2011. In oil, Madagascar Oil is developing the massive onshore heavy oil field at Tsimiroro and ultra heavy oil field at Bemolanga.

Madagascar - Key Economic Indicators

Exports and Imports

Madagascar primarily exports raw materials like nickel (potential increase due to global demand for electric vehicles), vanilla, cloves, and cobalt. The United States, France, China, Japan, and Germany are the main destinations for these exports. However, the value of imports surpasses exports, resulting in a trade deficit. Recent data suggests a slight decrease in the trade deficit due to a rise in global demand for Madagascar's exports, particularly minerals.

Infrastructure Development

Infrastructure development in Madagascar faces challenges due to its geography. The total road length is around 50,000 km (as of 2023), with some estimates suggesting an increase of a few thousand kilometers due to ongoing construction projects. However, a significant portion remains unpaved, hindering connectivity, particularly in rural areas. The government is prioritizing expanding and improving the road network alongside other crucial infrastructure projects like power grids and telecommunications.

Balance of Trade

Madagascar has a chronic trade deficit, meaning the country spends more on foreign goods than it earns from exports. This deficit has been narrowing slightly due to recent export growth, but it can still strain the economy and limit growth.

Fiscal Policy

The government of Madagascar is aiming to manage the budget deficit and promote economic growth. Recent policies might include increased spending on social programs (data point to consider: possible focus on education and healthcare) and essential infrastructure to stimulate the economy while aiming to improve tax collection through digitalization efforts.

Monetary Policy

Madagascar's central bank recently eased monetary policy, lowering interest rates to encourage borrowing and investment. This, along with rising global demand for Madagascar's exports, is expected to boost economic activity.

Trade Agreements

Madagascar has trade agreements with several countries, including major partners like France and China. These agreements aim to reduce trade barriers and facilitate trade flows. However, some argue that complex regulations and limited access to larger markets can hinder the full benefits of these agreements. The government might be exploring ways to improve trade agreements for a more favorable outcome.

Environmental Regulations

Madagascar possesses unique ecosystems and enforces environmental regulations to protect them. These regulations might target areas like deforestation (national forest cover remains a concern, with a slight improvement due to recent conservation efforts), pollution control, and waste management. The effectiveness of these regulations is an ongoing discussion, with challenges like resource constraints and enforcement needing improvement. The government might be looking at ways to increase funding for environmental protection programs.

Tax System in Madagascar

Capital gains tax: Yes, Madagascar has a capital gains tax, but the rate depends on the asset type and holding period. Recent data point to consider: There might be discussions about reducing the capital gains tax rate on specific assets, like stocks held for more than five years, to encourage long-term investment in the Malagasy stock market.
Corporate tax rate: The current corporate tax rate in Madagascar is 28%. However, the government is exploring ways to make the tax system more competitive. Recent data point to consider: A potential decrease in the corporate tax rate for specific industries, particularly those focused on exports or technology, might be under consideration to attract foreign investment and stimulate economic activity.
Sales tax (VAT): Madagascar uses a Value Added Tax (VAT) system. The standard VAT rate remains at 20%, applied to most goods and services. There have been discussions about potentially introducing a lower VAT rate for essential goods.
Property tax: Property tax rates in Madagascar vary depending on the location and property type. Generally, urban areas have higher rates than rural areas. Recent data point to consider: The government might be exploring ways to improve property valuation methods to ensure a fairer property tax system. This could potentially lead to increased revenue collection.
Payroll tax: Madagascar has a social security system funded by contributions from both employers and employees (rates vary based on salary and program). Recent data point to consider: With a focus on improving social safety nets, the government might be considering a slight increase in payroll tax contributions, particularly from higher income brackets.
Tax deductions and credits: Various deductions and credits are available to reduce tax liability in Madagascar. These can include allowances for expenses like medical bills (up to a certain limit) and investments in specific sectors the government wants to encourage.
Tax compliance: Tax compliance in Madagascar is improving, but challenges remain. The informal sector is large, and tax evasion is still an issue. The government is implementing measures to improve tax administration and enforcement, including digitizing tax filing processes (recent data point to consider: These efforts might be leading to a gradual increase in tax collection efficiency).
Tax burden: The overall tax burden in Madagascar is considered moderate compared to some regional neighbors. However, the tax collection rate remains low due to the factors mentioned above. Recent data point to consider: With a recent increase in global demand for Madagascar's exports, the government might be looking at revising tax structures or implementing temporary tax breaks to encourage businesses to reinvest profits into expanding production capacity.

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