Structural Adjustment in MADAGASCAR


The following is excerped from the Country Studies--Area Handbook program of the U.S. Department of the Army. The original version of this text is available at the Library of Congress.
Full index of Country Studies-Madagascar


Madagascar

Structural Adjustment

The structural adjustment requirements of the World Bank and the IMF were and remain critical to understanding the liberalization policies of the Ratsiraka and Zafy regimes. In 1980 severe balance of payments deficits led the Ratsiraka regime to seek the first of ten IMF standby and related agreements to be signed during the 1980s. The last series of agreements of the decade included one in 1988 using IMF trust funds and one in 1989 that expired in 1992. Throughout the 1980s, Madagascar also drew four times on the IMF and received four adjustment loans from the World Bank for industrial rehabilitation (1985--US$60 million), agricultural reform (1986--US$60 million), trade and industry adjustment (1987--US$100 million), and public sector reform (1988--US$127 million).

The granting of these standby and related agreements was linked to a coordinated set of structural adjustment requirements designed to foster the liberal, export-oriented economy favored by the IMF and the World Bank. For example, an IMF standby agreement signed on July 9, 1982 to cover the 1982-83 period released 51 million in special drawing rights (SDRs--see Glossary) only after the Ratsiraka regime agreed to reduce both the current account deficit and the budget deficit, devalue the Malagasy franc (FMG--for value, see Glossary), limit domestic credit expansion, avoid any new short- or medium-term foreign borrowing, and limit public sector salary increases. Among the major measures required by later agreements were a ceiling on rice imports, increases in producer prices of rice and coffee, and a further devaluation of the Malagasy franc. Despite a reputation for reneging on commitments to reform, formerly Marxist Ratsiraka ironically became known as one of the IMF's "star pupils" in Africa.

According to its agreement with the IMF, Madagascar was required to limit its deficit to 5 percent of GDP for the period from 1989 to 1992. It succeeded in doing so until 1991 when production dropped, inflation increased, and tax income decreased because of political disturbances. Since then the government has not acted on the increased budget deficit, which was scheduled to be 6.2 percent of GDP in 1994, causing dissatisfaction on the part of World Bank officials.

Economic reform was stalled by the economic and political turmoil associated with the downfall of Ratsiraka and his replacement by the popularly elected Zafy regime in 1992. Although publicly critical of the IMF and World Bank during the 1993 election campaign, Zafy, who is a strong proponent of a liberal, free-market economy, initiated negotiations with these financial institutions to resume Madagascar's structural adjustment programs (and thereby gain access to more than US$1 billion in blocked development funds). However, negotiations throughout the first half of 1994 were tense as Zafy sought to avoid conditions that, no matter how logical from the macroeconomic perspective of long-term reform and development, would constitute political suicide. General principles of reform that the World Bank considered necessary included macroeconomic stability, which implied moderate rates of inflation and of exchange; foreign trade and financial policy modifications that allowed the convertibility of the current account and liberalized import regulations; and the elimination of barriers to economic activity, such as eliminating obstacles to foreign investment and to participation in the export processing zones (EPZs). The World Bank's reform principles also involved encouraging the private sector by privatizing the parastatals, as well as concentrating government investment on infrastructure programs and the development of human resources by improving education, including technical education, and health facilities, including family planning to limit population growth. Among the specific reforms demanded by the World Bank were the revision of the 1994 budget, a new timetable for proposed privatization of parastatals, further reforms of the public sector, and the restructuring of terms for marketing agricultural products, most notably vanilla.

The IMF echoed these demands and added several more. These included allowing the Malagasy franc to float freely on the international currency market, restructuring the National Bank for Rural Development, privatizing the National Bank for Trade Development, and forcing all banks to maintain reserves of 10 percent of all deposits. To avoid pressures from the World Bank, the government sought funds from other sources. Considerable furor developed in the spring of 1994, when it became known that without the knowledge of the minister of finance, who was supposed to authorize such transactions, or the prime minister, but with the agreement of president Zafy and the president of the National Assembly, Richard Andriamanjato, the governor of the Central Bank of the Malagasy Republic, Raoul Ravelomanana, had signed promissory notes to several European banks committing Madagascar to repay loans of US$2 million. In short, the Zafy regime must balance the need for international funds (and the conditions that accompany their disbursement) with the need to maintain popular support if Zafy intends to seek a second term in office.

Data as of August 1994

This is excerped from the Country Studies--Area Handbook program of the U.S. Department of the Army. The original version of this text is available at the Library of Congress.
Full index of Country Studies-Madagascar



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