STORY HIGHLIGHTS
- This edition of the Madagascar Economic Update stresses that Madagascar’s economy is recovering, but growth remains both uneven and insufficient to significantly improve living standards.
- The report notes the low and declining productivity and underscores the critical need of creating conditions for more productive firms to enter the market and grow in order to generate more and better jobs.
- Bridging the productivity divide will require well-designed reforms to improve the business environment, as well as measures enhancing the capabilities of firms and promoting entrepreneurship.
The Madagascar Economic Update: Bridging the Productivity Divide presents recent economic developments and medium-term outlook. The focus section of the report uses data from the 2022 World Bank Enterprise Survey (WBES) to analyze recent firm productivity performance, the main drivers of productivity growth, and the implications for policymaking.
Report Highlights
1. The economy is recovering, but growth remains uneven.
After plunging to -7.1% in 2020—the most severe contraction since the 2002 political crisis—growth remained broadly stable at an estimated 4.2% in 2024. Growth has been driven by private investment followed by private consumption, while net exports did not contribute. Overall export performance was diminished, softening global demand and falling prices for major exports. Insufficient revenue collection constrains the government’s capacity for public investment and service delivery. Despite efforts to boost tax revenue, the tax-to-GDP ratio remained low at 10.8%. The central bank has tightened monetary policy in response to high inflation. The ratio of credit to GDP (15.2% in 2024) remains below regional comparators (SSA average of 26.7% in 2023). The lack of access to finance is a key constraint for businesses.
2. In addition, growth is insufficient to significantly improve living standards and the poverty rate far exceeds the levels of neighboring countries and international comparators.
Current growth remains insufficient to support sustained poverty reduction or significant job creation. Almost 70% of the population lives below the international poverty line of $2.15 per capita per day. Over 70% of the population was considered multidimensionally poor, experiencing deprivations. in basic necessities such as education, health, and living conditions. Employment rates are low, with only 54.9% of the working-age population employed, with 60.7% of jobs being in agriculture. This heavy reliance on low-productivity agriculture, coupled with limited opportunities in higher-paying sectors, underscores the persistent poverty. The economy’s vulnerability to climate shocks further deepens household poverty.
3. The growth momentum hinges on the implementation of critical structural reforms and is subject to downside risks.
Growth is expected to gradually pick up and should converge with the potential growth rate starting in 2025. Key risks to the outlook include frequent power outages and climate change, threats to which manufacturing and agriculture are particularly exposed. To accelerate the growth and improve livelihoods, the authorities may consider accelerating structural reforms – especially in the energy, mining, and digital sectors.
4. Creating the conditions for more productive firms to enter the market and grow is critical to generate more and better jobs.
In Madagascar, the most productive 25% of firms often pay wages up to seven times higher than those offered by firms in the bottom 25%. Younger firms and exporting firms, especially those that invest in research and development (R&D), tend to be more productive. Yet, productivity has been declining over the past two decades and is now among the lowest in the world.
5. Productivity growth is hampered by limited access to finance, infrastructure challenges, and political instability.
Only 8% of Malagasy firms report having access to a bank loan/line of credit. More than half (52%) of firms experience electrical outages and roads are in poor conditions. Up to 17% of firms cite political instability as the biggest constraint to business. Furthermore, 30% of firms identified an inadequately educated workforce as a major constraint to their operations and growth.
Male-managed and foreign firms often achieve higher productivity level, as female-owned and local firms face various challenges such as limited access to finance, quality certifications, and a skilled workforce that hinder their productivity potential.
6. Improving productivity will require well-designed reforms to strengthen the business environment coupled with measures to enhance the capabilities of firms and promote entrepreneurship.
These reforms include adopting legislation (such as a start-up act) and facilitating procedures to facilitate the entry and operation of start-ups, and promoting entrepreneurship training to encourage the creation of new businesses; establishing an SME acceleration program, coupled with worker training and technology adoption initiatives to strengthen existing firms; developing leasing options and digital financial services to expand access to finance; and advancing business environment reforms, such as digitizing government services. Addressing specific constraints faced by women-led firms is essential to promote inclusive growth.