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The Impact of the Financial Crisis on Madagascar

Noro Andriamihaja's picture

The negative impact of the financial crisis on economic growth in Madagascar is expected to be relatively limited; growth is still likely to attain 7% in 2008. Over the medium term, declining demand in industrial countries is expected to affect strategic export oriented sectors such as mining, tourism, textiles and agribusiness. The depth of the banking sector in Madagascar is still very modest with deposits accounting for less than 9 percent of GDP. Therefore, the transmission mechanism is more likely to affect the real sectors, especially labor intensive ones.

The short term impact of the current financial crisis on the domestic financial sector is likely to be modest because of weak integration in international markets; the local banking sector has remained highly liquid, adequately capitalized and profitable. Prudential indicators provided recently by the Central Bank confirm that the average regulatory capital risk to weighted assets is high (14.1%) and the share of non-performing loans is low (8.5% of gross total loans). In the long run, the banking sector will remain vulnerable to delinquent loans coming from exporting firms.

The challenge ahead for the government would be to take away lessons from the current situation and address certain structural issues by accelerating international competitiveness by reducing the logistic costs on exports (customs, transportation, forwarding agents); increasing labor productivity and redefining the export strategy; securing the fiscal position of the government by increasing tax revenue and promoting more effective government spending.