Can Madagascar turn the page to a more prosperous future? The country’s recent democratic transitions are cause for optimism that Madagascar can finally write a new chapter in its economic development. President Rajoelina’s ambitious development plan, the “Plan Emergence de Madagascar” (PEM), outlines infrastructure development, private sector-led growth, the environment, and education as the key pillars of growth and prosperity.
Economic recovery will hinge on two key factors – the rate and amount of new investment (public and private, as well as domestic and foreign) and improvements in the business climate (both perception and reality) to attract this new investment. In the short-term, as world economies emerge from the COVID-related slump, there will be heightened competition for foreign investment from all quarters. Investors and lenders will assess the business and political risk factors at play. In Madagascar’s case, these factors will include the government’s willingness to invest in critical sectors, movement on stalled high-profile projects like Sahofika and Volobe, and whether there is a rules-based, transparent investment and regulatory environment that offers investors a level playing field to compete for contracts and respect for the rule of law and sanctity of contracts when disputes arise.
Given the intense scramble for scarce funds and other resources internationally, public investment will likely have to lead the way, in particular investment in the priorities outlined by the government in the PEM and the Multi-Sectoral Plan. In fact, many of these public investment projects such as roads, bridges, water and power infrastructure and capacity, and environmental preservation, are foundational to future growth and attracting new private sector investment. The short-term success or failure to implement these ambitious projects will likely be the turning point for Madagascar’s economy.
The momentum they will create – i.e., evidence that economic plans are actually being executed, that major projects are under way, that there is swiftness and certainty in decision-making – is key. It will drive how the commercial world assesses Madagascar’s business climate and will inform their calculations of the risk of doing business in Madagascar. The PEM’s impressive growth estimates are predicated on success in raising investment from 21.8 percent of GDP in 2021 to 30.9 percent by 2023, and 36.4 percent by 2040, while halving its indebtedness from 35.4 percent in 2021 to 17.8 percent in 2040. Are such increases in investment doable? Certainly so, but only if the world is able to look at Madagascar and see a place where future investors are comfortable with the mid- to long-term risk profile and the returns they will receive on their investments.
INCREASING U.S. – MADAGASCAR BILATERAL TRADE AND INVESTMENT
Few U.S. companies have established a beachhead in Madagascar despite its extraordinary resource-rich environment. Opportunities abound across sectors and U.S. companies could be natural partners for Malagasy entities. Madagascar should offer interested investors and businesses a clear pathway for entry, a well-delineated legal and regulatory framework, tender processes that meet international standards, and demonstrate a commitment to honoring prior agreements.
Trade: The United States became Madagascar’s single biggest export market in 2018. Madagascar produces the bulk of the world’s vanilla and exported close to 50 percent of the crop to the United States last year. Exports under the African Growth and Opportunity Act (AGOA) such as textiles, spices, essential oils, and artisanal products are also crucial to Madagascar’s export earnings. The Generalized System of Preferences (GSP) and AGOA offer reduced duty or duty-free access to the U.S. market for over 7000 products. Since Malagasy exporters only utilize a small fraction of those options, the U.S. Embassy is supporting the government in identifying how Madagascar can take better advantage of these trade preferences.
Mining: The mining sector presents both opportunity and cause for caution. Madagascar is blessed with great mineral wealth, but there are currently no large American mining companies operating in Madagascar. The near ten-year pause in issuing new mining licenses and the inability to reach agreement on changes to the mining code has dampened interest among those considering entry into Madagascar. A mining code that reflects stakeholders’ equities and provides predictability and transparency will create an environment that is more attractive to U.S. companies.
Textiles: Madagascar’s textile sector is well-known for the quality of its workmanship and high-end finishing. Over 30 percent of Malagasy textile exports go to the United States. We believe Madagascar offers further potential for expansion for U.S. apparel companies which have found success by establishing local factories, partnering with local businesses, and identifying new suppliers to offset production cutbacks elsewhere. Improved transportation and power infrastructure and realizing plans for an economic zone for textile manufacturers near the main commercial port of Toamasina would be powerful incentives to attract American apparel companies.
Energy: The government has highlighted the need for increasing power generation capacity and distribution through green energy solutions. Making this vision a reality would be a game-changer. U.S. green energy companies, component makers, and vendors of standalone solutions have significant competitive advantages. U.S. private equity firm Denham Capital is a major investor in the $1 billion Sahofika hydroelectric project, which is expected to provide power to eight million new consumers. USAID, Power Africa, and the Southern Africa Energy Program have provided consultancy services to build technical capacity. As part of the U.S. government’s effort to improve access to electricity in Madagascar, USAID/Power Africa recently awarded three local companies a combined $1.2 million in grants to develop mini-grids to bring electricity to more than 5,200 rural homes and businesses. Such projects have only just scratched the surface of what is possible if we bring U.S. technology and ingenuity to address one of the most basic requirements for economic development – access to reliable electricity.
Tourism: Madagascar is increasingly a must-see destination for western tourists. Keeping in mind the need to preserve the country’s fragile ecosystem and biodiversity, ecotourism options to visit Madagascar’s national parks and beach resorts offer opportunities for U.S. investment. Though the tourism sector has been devastated by restrictions on international travel, we anticipate there will be pent-up demand for travel to less-traveled places like Madagascar after the pandemic. If Madagascar can address its infrastructure challenges and arrange for better external/internal air linkages in the interim, the tourism sector will not only revive quickly, but also bring investor interest with it.
U.S. A PARTNER-IN-WAITING
Madagascar has faced many existential challenges since independence, but the country is nothing if not resilient. Time and again, the U.S. government has demonstrated our commitment to work with the Government of Madagascar and the Malagasy people like mpirahalahy mianala. We announced recently that the U.S. government will remain Madagascar’s foremost development partner, investing more than $490 million in development assistance over the next five years to help the Malagasy people and to drive Madagascar’s journey to self-reliance. Not only is the United States the single largest donor to Madagascar in the health and sanitation sector, but we are also the single most important market for Malagasy goods. There is room for improvement – for example, we should and must improve the range and quantity of U.S. exports to Madagascar. Deeper commercial engagement should attract U.S. investors who bring capital, expertise, and experience to developing new innovative solutions to long-standing problems. If the investment climate improves and if Madagascar can show it is truly open for business, our two countries can be partners in kickstarting the Malagasy economy. Mpirahalahy mianala isika; ianao tokiko, izaho tokinao.