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This edition of 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 implications for policymaking. The first chapter of the report stresses that Madagascar¡¯s economy is recovering, but growth remains both uneven and insufficient to significantly improve living standards. The second chapter 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 promote entrepreneurship.

Development prospects in Madagascar continue to be hampered by the country¡¯s low growth potential and exposure to frequent, deep, and persistent crises. Following a recession in 2020 that was about three times deeper than in the rest of Sub-Saharan Africa, an economic recovery started in Madagascar in 2021 but was interrupted in 2022 by a sequence of domestic and international shocks. In addition to these new headwinds, the growth potential of the economy has been negatively impacted during the crisis by a retrenchment in private investment, deteriorating human capital and weakening governance. In this context, growth projections were downgraded to 2.6 percent in 2022 and to an average of 4.4 percent in 2023-2024, with the poverty rate now expected to remain close to 80 percent by 2024. This report also highlights the importance of boosting public school performance following the continued deterioration in learning outcomes and advocates for a set of reforms reinforcing teachers¡¯ selection and evaluation, salary and school grant management, redress mechanism and local community engagement.

The impact of the COVID-19 pandemic resulted in a recession in 2020 comparable to that of the 2009 political crisis and the reversal of close to a decade of progress in poverty reduction. COVID-19 pushed 1.38 million people into extreme poverty due to job losses in key manufacturing and service sectors, as well as the sudden loss of income for informal workers affected by lockdowns in major cities. Measures to preserve livelihoods and prevent a resurgence of the pandemic remain a key priority in the short term, but these will need to be combined with ambitious reforms to set the country on a course to recovery.

This edition of the Madagascar Economic Update assesses the competitive landscape the telecommunications, vanilla, and lychee sectors. These sectors are characterized by high levels of concentration and low competition. The report emphasizes the importance of market competition as a driver of productivity, export competitiveness, and innovation. The report then offers solutions to improve the policy frameworks and promote a level playing field in these sectors to stimulate higher and more inclusive growth. The first part of the report highlights the opportunities to accelerate growth-enhancing reforms offered by the successful political transition in 2019 and the country¡¯s vulnerability to shocks.

This edition of the Madagascar Economic Update aims is to inform the public debate on fuel pricing in Madagascar. The government has been engaged in reforms to fuel pricing with the objectives of ensuring fuel supply at an affordable price, in a way that does not require the State having to pay. Notably, a universal fuel price subsidy was eliminated, which was regressive because it disproportionately benefited the rich, and reduced the level of resources available for spending on pro-poor priorities. In the first quarter of 2018, the government also agreed with petroleum companies that the formula for calculating fuel prices could be modified to reduce the final retail price paid by consumers. While these advances show that steps have been taken in the right direction, there is still further scope for reforming fuel prices. This report discusses: (i) why the reform to fuel pricing and subsidies is important; (ii) considerations in pricing fuel; and (iii) policy options available to Madagascar.

While 41 percent of the population are excluded from the financial system, there have nevertheless been important developments in the sector to increase access. Notably, mobile network operators have successfully been able to increase mobile banking, including for those individuals who cannot afford a mobile phone and do not have access to electricity. A 55 percent increase in mobile money market penetration in just five years is a remarkable achievement and a reflection of innovation in practice when companies are willing to adapt and there is a supporting enabling environment. Key opportunities include scaling up mobile banking, encouraging MFIs and banks to also leverage technology, and increasing financial literacy to support the uptake of financial services to promote entrepreneurship and growth.