World Bank – October 20, 20 Amidst the uncertainty of tgovernment, the downward economic update persisted dspending, driven by lower rethe private sector activities (Figure 3). The inflation andof the cautious monetary polof public domestic borrowing

A few salient points merit fudimensions of the economy. banking system over the pas

1

009

the political crisis and the chaotic return to economic trends depicted by the last month W

during September. The Government continued evenues and limited external financing (Figures remained slow as evidenced by lower energy d domestic interest rates remained under controllicy, lower domestic aggregate demand, and thg on the T-Bill market (Figure 4).

urther attention as they indicate growing pressu First, the Government started to borrow from t two months, since the net credit to Governm

a democratic World Bank’s

to cut public 1 and 2), and consumption

l as the result he limited use

ure on several the domestic

ment increased

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by 88 billion Ariary betweenhalf of its monthly total spento the first few months of thdid not borrow on the domest The second development is lsince the local currency lostUSD between mid-Septembreflects the premium that exithe shortage of foreign curren(albeit partially compensatedhowever resisted interveningreserves to about SDR592 benefited from the IMF’s intmillion in August 2009 (bubetween the IMF and the Gov

The third and last developmepronounced decline in internexports volume (down by 62by the global recession, sincstatistics corroborate that Materms between August 2008 By contrast, the decrease in icaused to a large extent by th

1 The increase in net credit is due toof about 22 billion of Ariary of its

2

n August and September 2009, which is equivalnding.1 This is a significant change in behavior inhe crisis when the authorities followed a strict dtic financial market.

linked to the accelerated depreciation of the ext 6 and 4 percent of its value compared to the ber and mid-October 2009 (Figure 5). This isted on the parallel exchange market in early Sencies due to lower capital inflows (including aidd by the decline in imports). The monetary autg on the FOREX markets, maintaining the Ce

millions in mid-October 2009. In addition, ernational response to the global crisis by receivut the use of this facility is still subject to avernment).

ent, concurrent to the depreciation of the Ariary,national trade over the past year (Figure 6). T2 percent in August on a yearly basis) is above e the U.S. and E.U. are the main export markealagasy imports to the US decreased by 15 perand August 2009, including a 18 percent decreimports (down by 30 percent in August on a ye

he slowdown in domestic demand resulting from

o the increase of other credit to government by 66 billion deposits.

lent to almost n comparison discipline and

xchange rate, Euro and the depreciation

eptember and d) and exports thorities have entral Bank’s

Madagascar ving SDR100 an agreement

, has been the The decline in

all explained ts. U.S trade rcent in value ase in textile. early basis) is m the political

and the decline

3

crisis, at the exception of food imports that have partially compensated for the reduction in domestic food production.

The combination of pressures on public finances (net credit up significantly for the first time) and on the exchange rate as well as the pronounced decline in international trade reflects the growing risk of financial turmoil and economic recession in Madagascar. The thinness of the domestic financial market, as evidenced by the limited volume of transactions, might precipitate the depreciation of the local currency in case of a confidence crisis. The absence of political solution, endorsed by the international community, will exacerbate those pressures not only because aid flows will remain minimal but also in reason of the increasing probability of economic and political sanctions, including from the EC (the deadline for the Cotonou’s evaluation is on November 6) and from the US that will decide upon the suspension of Madagascar to AGOA by end December 2009.