Cyclone Gafilo affects economic outlook

Efforts to strengthen Madagascar's fragile economy were expected to suffer a setback following the destruction of export crops by Cyclone Gafilo, the Economist Intelligence Unit (EIU) reported on Wednesday.

The cyclone ripped through the giant Indian Ocean island last month with wind speeds of up to 300 km/h, leaving close to 200 people dead and causing serious damage to vanilla and rice production.

According to the EIU, the export value of vanilla and shellfish, two of the country's major foreign exchange earners, was set to fall to around US $785 million from an earlier estimate of US $900 million as a direct result of the adverse weather.

"Pre-cyclone, the government was predicting GDP [gross domestic product] growth of around 6 percent, but this may now be out of reach. Similarly, export growth had been projected at 8 percent, but the anticipated decline in vanilla and shellfish sales suggests that this, too, is unattainable," the Unit noted.

A dispute over the presidency two years ago almost crippled the country's ailing economy, but since then it had staged a dramatic comeback and grew by almost 10 percent last year.

Inflation had also slowed dramatically from a forecast 7 percent to just 0.3 percent in December, mainly due to lower food prices following a good harvest, tight monetary policy and stable domestic petrol prices.

This trend was unlikely to continue in 2004, partly because of the impact of the cyclone on key exports and the sluggish pace of privatisation.

Government overspending remained a cause for concern, the EIU observed.

"After a good first half in 2003, when budget revenue was 4 percent above target, the fiscal situation deteriorated, mainly due to tariff and value-added-tax exemptions for all capital goods and selected commodities, which are estimated to have cost the government some 0.25 percent of GDP in lost revenue. At the same time Antananarivo overspent, resulting in a budget deficit of almost 8 percent of GDP that had to be financed by bank borrowing," the EIU noted.

The report highlighted suggestions raised by the International Monetary Fund, which encouraged Madagascar to do more to cut production costs and boost productivity, notably by improving efficiency in the cotton industry, while increasing both the output and quality of vanilla.

Accelerated privatisation would also make a major contribution to cutting business costs and improving competitiveness, the EIU said.