MADAGASCAR ECONOMIC UPDATE Navigating Through the Storm © 2022 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street NW Washington, DC 20433 USA All rights reserved Photos: Unsplash and Shutterstock. Forewords Development prospects in Madagascar continue to In the absence of a new drive for reforms, Madagascar be hampered by the country’s low growth potential risks falling further behind as peers continue to grow and exposure to frequent, deep, and persistent crises. faster and demonstrate stronger resilience to shocks. Growth averaged 3.5 percent in the five years leading The country would need to sustain significantly higher up to the pandemic and was followed by a recession and more inclusive growth to bring poverty down in in 2020 that was about 3 times deeper than in the rest coming years. This can only happen if the government of Sub-Saharan Africa. Activity had started to recover kickstarts far-reaching reforms supporting private in 2021 but was disrupted again in 2022 by a third investment and job creation, better access to basic wave of the COVID-19 pandemic, a series of extreme services and infrastructure, and greater resilience to weather events and the fallout from the conflict in shocks. Several policy priorities are highlighted as Ukraine. The crisis in Ukraine is expected to have particularly urgent in this Economic Update, including a noticeable impact on economic developments in (i) a clear strategy to speed up vaccination for vulnerable Madagascar, particularly through slowing demand groups as well as in urban and tourist areas; (ii) the from key trading partners. Higher international oil restoration of essential public services and infrastructure prices are projected to lead to a deteriorating trade following the impact of severe cyclones; (iii) forceful balance and growing pressure on public finances actions to address the ongoing food insecurity crisis due to a lack of adjustment of regulated fuel prices and boost domestic food production; (iv) fuel and and growing losses of the national utilities company electricity price reforms that seek to protect the poor JIRAMA. The impact of rising international food prices, while preventing unsustainable fiscal deficits and particularly of wheat, corn and edible oil, is expected socially regressive subsidies; (v) a new momentum to to be more modest, given their relatively low share in boost access and affordability of broadband and digital overall imports and consumer spending. Against this services, particularly in rural areas; and (vi) more public backdrop, growth is projected to slow down to 2.6 sector transparency and accountability, guaranteeing percent in 2022 (less than half the previous forecast a strong and independent Court of Accounts, anti- of 5.4 percent), before picking up to a weaker-than- corruption institutions and the judiciary. This report expected 4.2 percent in 2023 and 4.6 percent in 2024, also highlights the importance of boosting public school as structural constraints and weaker external demand performance following the continued deterioration in prevent a faster rebound. The relatively subdued learning outcomes and advocates for a set of reforms economic outlook is reflected in a poverty rate that reinforcing teachers’ selection and evaluation, salary would remain close to 80 percent by 2024, nearly twice and school grant management, redress mechanism and the average of Sub-Saharan African countries. local community engagement. Marie-Chantal Uwanyiligira World Bank’s Country Manager for Madagascar iii ACRONYM S& ABBREVIATIONS BFM Banky Foiben’i Madagasikara (Central Bank of Madagascar) CDC Centres for Disease Control and Prevention CPB Centraal Planbureau DEWA Division of Early Warning and Assessment DHS Demographic and Health Survey D-RAS Disaster-Resilience Analytics & Solutions EM-DAT Emergency Events Database FAO Food and Agriculture Organisatio FDTIC Fonds de Développement des télécommunications et TIC (Reform of the Universal Access Fund ) FRAM Fikambanan’ny Ray Aman’dRenin’ny Mpianatra (Students’ Parents Association) GDP Gross Domestic Product GFDRR Global Facility for Disaster Reduction and Recovery GRID Global Resource Information Database HFS High Frequency Survey IMF International Monetary Fund INSTAT Institut National de la Statistique JIRAMA Jiro sy Rano Malagasy LIC Low Income Countries MICS Multiple Indicator Cluster Survey OEC Observatory of Economic Complexity PPP Purchasing Power Parity PPP Public–Private Partnership SCD Systematic Country Diagnostic SME Small and Medium sized Enterprise SMS Short Message Service SOE State-Owned Enterprise SPM State Procurement of Madagascar SSA Sub-Saharan Africa TIMSS Trends in International Mathematics and Science Study UNEP United Nations Environment Programme WDR World Development Report WHO World Health Organization WJP World Justice Project iv ACKNOWLEDGEMENTS The Madagascar Economic Update was prepared by a team led by Marc Stocker (Senior Economist, EAEM2) with core team members including Ibrahim El ghandour (Public Sector Specialist, EAEG2) and Antsa Raoelijaona (Economist, EAEM2). The work was carried out under the supervision and guidance of Marie-Chantal Uwanyiligira (Country Manager, AFMMG) and Mathew A. Verghis (Practice Manager, EAEM2). v TABLE OF CONTENTS vi Forewords .............................................................................................................................. iii Figure 1.20: Inflation and contribution from food and Acronyms & Abbreviations .................................................................................... iv energy prices .................................................................................. 8 Acknowledgements ...................................................................................................... v Figure 1.21: Inflation and contribution from imported Chapter 1: New Headwinds, Rising Risks ....................................... 1 goods and services .................................................................. 8 Growth and poverty reduction made limited Figure 1.22: Global trade and industrial production ................ 9 headways before the crisis .................................................................. 2 Figure 1.23: Global export orders and supplier’s Large socio-economic impacts of the 2020 recession .. 4 delivery time .................................................................................... 9 A fragile and lopsided recovery during 2021 ...................... 6 Figure 1.24: Public spending to GDP ratio during Monetary and fiscal policy played a stabilizing role ............. 9 crisis episodes .............................................................................. 10 Factors of fragility have continued to intensify in 2021 .... 11 Figure 1.25: Public revenue to GDP ratio during Outlook, Risks, and Policy Challenges ............................................. 12 crisis episodes .............................................................................. 10 New headwinds weighing on growth prospects ...................... 12 Figure 1.26: Average lending rates ............................................................ 10 The outlook is subject to growing risks .................................. 17 Figure 1.27: Exchange rate ................................................................................ 10 Policy challenges and priority interventions ....................... 19 Figure 1.28: Populations affected by cyclones ............................ 13 Figure 1.29: Estimated damages from the four tropical Chapter 2: Boosting School Performance ....................................... 23 storm systems in 2022 ........................................................ 13 Introduction .......................................................................................................... 24 Figure 1.30: Export destinations - 2019 ............................................... 13 Teacher Recruitment, Selection and Performance ....................... 25 Figure 1.31: Import structure - 2019 ....................................................... 13 Teacher Motivation ....................................................................................... 27 Figure 1.32: Growth and income per capita levels ................... 14 School Management ................................................................................... 28 Figure 1.33: Public and private investment rates ....................... 14 Determinants of Unethical Behavior and Motivation .. 28 Figure 1.34: Poverty rate and GDP per capita ............................... 15 Policy Recommendations ...................................................................... 29 Figure 1.35: Ratio of completed COVID-19 vaccine dose series per 100 people ............................................................ 17 Figures Figure 1.36: Estimated cost of natural disasters ....................... 17 Figure 1.1: GDP growth ...................................................................................... 3 Figure 1.37: Economic costs of cyclones by region ............... 17 Figure 1.2: Private and public investment rates ....................... 3 Figure 1.38: GDP per capita around crisis episodes .............. 18 Figure 1.3: Growth accounting in Madagascar and Figure 1.39: Public debt to GDP ratio ..................................................... 19 aspirational peers ...................................................................... 3 Figure 1.40: Public debt distress risks .................................................. 19 Figure 1.4: Sectoral contributions to GDP growth Figure 1.41: Years needed to reach pre-crisis living over the period 2013-19 ...................................................... 3 standards of peers ................................................................... 19 Figure 1.5: Poverty rate in Madagascar and Figure 2.1: Harmonized Test Scores for pupils ........................ 24 aspirational peers ...................................................................... 4 Figure 2.2: Harmonized Test Scores for pupils ........................ 24 Figure 1.6: Indicators of deprivation in the Sava Figure 2.3: Share of teachers recruited region (North) ................................................................................. 4 through competition ............................................................... 26 Figure 1.7: Indicators of deprivation in the Figure 2.4: Share of respondents agreeing that Atsimo-Andrefana region (South) ............................. 4 recruitment is transparent ............................................... 26 Figure 1.8: Indicators of deprivation in urban areas ............ 4 Figure 2.5: Area most at risk of corruption ................................... 26 Figure 1.9: GDP growth in Madagascar and Figure 2.6: Reporting of corruption cases ..................................... 27 low-income countries ............................................................ 5 Figure 2.7: Corruption risks and school Figure 1.10: GDP growth in 2020 in Madagascar and fund management .................................................................... 28 peer countries ................................................................................ 5 Figure 2.8: Impact of delayed salary payment on the Figure 1.11: Sectors’ contribution to the GDP contraction likelihood of unethical behavior .................................. 29 in 2020 ................................................................................................... 5 Figure 2.9: Impact of merit-based assessments on Figure 1.12: Employment change by firm size .............................. 5 unethical behavior ..................................................................... 29 Figure 1.13: Share of households experiencing food insecurity ............................................................................... 6 Boxes Figure 1.14: Weekly COVID-19 cases ...................................................... 7 Box 1: Food Security Crisis in Madagascar’s ‘Grand Sud’ .... 11 Figure 1.15: Number of air passengers ................................................ 7 Box 2: Transparency and accountability during the Figure 1.16: Employment registration .................................................... 7 COVID-19 crisis ......................................................................................... 15 Figure 1.17: Mining exports and nickel price .................................. 7 Figure 1.18: Rice production and imports ......................................... 8 Tables Figure 1.19: Domestic and international rice price inflation .... 8 Table 1.1: Macroeconomic Projections .................................................... 22 CHAPTER 1 New Headwinds, Rising Risks 1 CHAPTER 1: NEW HEADWINDS, RISING RISKS 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 2023-24, with the poverty rate now expected to remain close to 80 percent by 2024. A commitment by the government to implement bold reforms in order to stimulate private investment and job creation, improve public sector governance, and reinforce the resilience of the poor could set the country on a more favorable trajectory. Growth and poverty reduction made limited investment gradually recovered from an historical low headways before the crisis of 2.3 percent of GDP in 2012 to reach 5.4 percent in 2019 but remained significantly lower than most peers. Growth before the crisis remained insufficient to boost Overall, capital deepening contributed over the period living standards. The return to constitutional order in 2013-19 between 2 and 4 times less to growth than in 2013 helped spur a modest economic revival that was comparator countries like Rwanda Uganda, Tanzania, driven by renewed political stability, the reopening of key Cambodia, or Bangladesh (Figure 1.3). Productivity export markets, and the reengagement of development levels also continued to decline, due to deteriorating partners. However, despite these positive developments, supply side conditions in the agricultural sector and growth peaked at a still modest 4.4 percent in 2019 and subdued job creation in higher value-added sectors. averaged only 3.5 percent over the period 2013-19, which barely surpassed population growth and was significantly Only a handful of sectors were supporting activity weaker than the investment-led recovery of the mid- during the pre-crisis period. The mining sector 2000s (Figure 1.1). Overall, GDP per capita increased at accounted for about 30 percent of real GDP growth an average rate of 0.7 percent per year from 2013 to 2019, over the period 2013-19, while construction and public which was insufficient to allow a significant reduction in works, telecommunication, banking and business the poverty rate over that period. services accounted for another 50 percent (Figure 1.4). Sectors where Madagascar is considered to have strong Low investment was a key factor holding back activity comparative advantages such as textile, agribusiness and and job creation. Private and public investment tourism contributed only marginally to the recovery, partly averaged about 19 percent of GDP over the period reflecting a lack of new investments. The agriculture 2013-19 (in nominal term), lower than most peers sector has been stagnant, reflecting several years of weak and trending down from the early 2010s as capital crop production due to locusts, cyclones and droughts, as spending in the private sector decelerated (Figure 1.2). well as the impact of deteriorating infrastructure and the Low investment rates reflected an unfavorable and lack of improvement in production techniques. Informal unpredictable business environment, deteriorating services in urban areas absorbed an increasing share connectivity infrastructures, barriers to competition and of the labor force, partly reflecting the absence of job constrained access to energy, land, and finance. Public opportunities in other sectors. 2 MADAGASCAR ECONOMIC UPDATE | NAVIGATING THROUGH THE STORM FIGURE 1.1 GDP growth FIGURE 1.2 Private and public investment rates Percent Percent of GDP 10 30 8 6 25 4 2 20 0 15 -2 -4 10 -6 -8 5 -10 -12 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Agriculture Industry Private Public - domestic financed Services GDP growth Public - foreign financed Source: Instat, World Bank. Source: Ministry of Economy and Finance, World Bank. FIGURE 1.3 Growth accounting in Madagascar and FIGURE 1.4 Sectoral contributions to GDP growth over aspirational peers the period 2013-19 Percent Percent 9 30 25 20 6 15 10 3 5 0 -5 0 Extractive industry Construction Service to enterprises Banks and insurance Telecommunication Transport Trade and commerce Food and drinks Livestock and fisheries Other industries Utilities Textile Services to households Metal industry Forestry Wood and paper Construction material Health Education Agriculture Equipment Hotel and restaurants Administration -3 1990-99 2000-09 2010-19 1990-99 2000-09 2010-19 1990-99 2000-09 2010-19 1990-99 2000-09 2010-19 1990-99 2000-09 2010-19 1990-99 2000-09 2010-19 Madagascar Uganda Tanzania Bangladesh Cambodia Rwanda Labour Quantity Labour Quality Share of GDP from 2013 to 2019 Capital Deepening TFP Growth GDP Growth Share of GDP in 2019 Source: Conference Board, World Bank. Source: Instat, World Bank. Poverty reduction made limited headways in the period poverty was significantly higher in rural areas, due to low leading up to the pandemic. The share of the population and generally declining labor productivity in agriculture, living in extreme poverty (below the international poverty the lack of accumulation of productive and human line of US$1.90 per day in 2011 PPP) is estimated to have capital, and exposure to frequent climatic shocks. This fallen slightly from 78.8 percent in 2012 (the last year for continued lack of progress in raising living standards and which household survey data is available) to 77.4 percent reducing poverty sets Madagascar apart from most other in 2019. The persistence of high monetary poverty during peers (Figure 1.5). the pre-crisis period reflected primarily the slow pace of income per capita growth and the associated lack Access to basic services improved, but gains of economic opportunities. The prevalence of extreme concentrated in wealthier regions. Modest improvements 3 CHAPTER 1: NEW HEADWINDS, RISING RISKS in access to electricity, sanitation, housing, and cooking in child mortality, nutrition, access to water and school fuel helped reduce non-monetary poverty rates during attendance. Worryingly, non-monetary poverty increased the decade leading up to the pandemic but these were in urban areas as a rapidly growing urban population put largely concentrated in wealthier Northern regions (Figure severe strains on infrastructure and public services, as 1.6), exacerbating the gap with Southern regions where visible in deteriorating access to water, electricity, and limited progress was observed (Figure 1.7), including housing (Figure 1.8). FIGURE 1.5 Poverty rate in Madagascar and FIGURE 1.6 Indicators of deprivation in aspirational peers the Sava region (North) Percent of population 100 100% 80 78% 80% 80% 70 75% 68% 67% 60% 59% 60 50 50% 54% 55% 47% 40 31% 39% 42% 20% 30 25% 17% 31% 4% 23% 20 2% 12% 10 0% Child mortality Nutrition School attendance Years of schooling Assets Water Housing Electricity Sanitation Cooking fuel 0 2000 2005 2010 2016 2019 2020 Bangladesh Madagascar Rwanda SSA Tanzania Uganda 2008 2018 FIGURE 1.7 Indicators of deprivation in the Atsimo- FIGURE 1.8 Indicators of deprivation in urban areas Andrefana region (South) 100% 100% 85% 84% 87% 87% 80% 81% 81% 75% 71% 78% 72% 72% 70% 69% 75% 75% 50% 50% 35% 50% 41% 41% 33% 35% 33% 25% 25% 25% 27% 28% 22% 36% 36% 22% 25% 25% 20% 20% 13% 16% 13% 10% 9% 3% 8% 4% 0% 0% Child mortality Nutrition School attendance Years of schooling Assets Water Housing Electricity Sanitation Cooking fuel Child mortality Nutrition School attendance Years of schooling Assets Water Housing Electricity Sanitation Cooking fuel 2008 2018 2008 2018 Source: MICS (2018), DHS (2008), World Bank. Large socio-economic impacts resulted in a GDP contraction of 7.1 percent in 2020, of the 2020 recession which was the sharpest recession since 2002 and about three times deeper than in the rest of Sub- The COVID-19 pandemic triggered one of the Saharan Africa (Figure 1.10). In this context, income deepest recessions in Madagascar’s history. A per capita contracted by 9.6 percent in 2020, falling collapse of export revenues and private investment back to new historical lows. 4 MADAGASCAR ECONOMIC UPDATE | NAVIGATING THROUGH THE STORM FIGURE 1.9 GDP growth in Madagascar FIGURE 1.10 GDP growth in 2020 in Madagascar and low-income countries and peer countries 12 Percent 10 4 8 6 2 4 2 0 0 -2 -2 -4 -4 -6 -8 -6 2019 2020 2021 2022 2023 -8 Low Income Madagascar Rwanda Bangladesh MDG RWA CMB SSA LIC TZN UGD BGD Source: World Bank. Source: World Bank. FIGURE 1.11 Sectors’ contribution to the GDP FIGURE 1.12 Employment change by firm size contraction in 2020 Percent Percent change from January 2020 to November 2020 50 10 40 5 30 20 0 10 -5 0 -10 -10 -20 -15 -30 Extractive industry Hotel and restaurants Construction Administration Transport Education Service to enterprises Trade and commerce Services to households Textile Construction material Equipment Forestry Wood and paper Metal industry Utilities Food and drinks Other industries Livestock and fisheries Health Agriculture Banks and insurance Telecommunication -20 -25 -30 Total Small Medium Large Share of GDP contraction in 2020 Share of GDP in 2019 (6-19) (20-99) (>=100) Source: Instat, World Bank. Source: Instat, World Bank, High Frequency Surveys, 2020. Mining, tourism, transport and public services were particular, rice and cassava production, which account hardest hit. Industrial output contracted by -19.5 percent for a significant share of food consumption, increased in in 2020, with the temporary shutdown of mining activity 2020, while the output of forestry, livestock and fishing accounting for nearly 50 percent of the GDP contraction subsectors was stagnant. Despite gains in agricultural that year (Figure 1.11). Tertiary sector activity suffered output at the national level, extreme droughts in the a sharp drop as well, with activity in tourism sector South led to widespread crop failures and rising food coming to a standstill. Public works and transport were insecurity. The lack of pasture and water led to the also significantly impacted by the interruption of public loss of livestock, while an outbreak of Rift Valley Fever services, lockdowns in major cities and travel restrictions. affected pastoralist livelihoods. In contrast, telecommunications, healthcare and financial services posted gains, which helped offset contractions Smaller enterprises have been hurt the most. While all in other services subsectors. firms were impacted by the economic downturn, small and medium sized enterprises (SMEs) experienced the Agriculture, livestock, fishing and forestry experienced biggest revenue contraction and have also shed the most low but positive growth during the recession. In jobs (Figure 1.12). Businesses with access to digital 5 CHAPTER 1: NEW HEADWINDS, RISING RISKS platforms have fared better as they were able to ensure poverty line of $1.90/capita/day (in 2011 PPP) during the continuity of their activities and consequently, protect the recession. These impacts reflect job losses in the jobs. Out of the surveyed firms, 41 percent were able to formal sector and declining incomes more generally. improve their operations thanks to digital technologies, By the end of 2020, 48 percent of employees reported with social distancing measures accelerating the use of having received their normal wage, while 30.6 percent digital technologies for both public and private services. had received no payment since the start of the crisis. In this context, the share of households that reported having More than a decade of gains in poverty reduction have reduced food consumption, sold assets, and/or borrowed been reversed in a year. The share of the population in in response to the pandemic increased significantly extreme poverty is estimated to have risen to 81 percent during the crisis, with 50 percent of all households in 2020, up from 77.4 percent in 2019, implying that an reporting that they did not have enough food to eat at additional 1.8 million people fell below the international the end of 2020 (Figure 1.13). FIGURE 1.13 Share of households experiencing food insecurity 70 66 63 58 60 53 52 54 50 50 51 50 45 40 35 34 30 32 30 27 23 21 19 20 16 11 10 7 4 5 3 0 Did not have Were not able Ate the Skipped Ate less food Had nothing to Were hungry but Did not eat enough food to eat same food a meal than enough eat at home did not eat during an to eat nutritious food every day entire day Jun-20 Jul-Aug 2020 Oct-Nov 2020 Source: Instat, World Bank, High Frequency Surveys, 2020. Notes: The results are based on 3 waves of the High Frequency Survey (HFS). The 1st wave took place in mid-June reaching 1,240 households. The second and the third waves covered each 1,580 households and took place in August and November 2020. A fragile and lopsided recovery during 2021 COVID-19 outbreaks continued to disrupt activity in 2021, but a recovery was ongoing. Madagascar faced two additional waves of COVID-19 in 2021, one starting in March and another in November (Figure 1.14). The State of Emergency was re-instated during the second wave but was lifted again in September 2021. Beyond special flights for emergency and repatriation purposes, Madagascar has remained shut to air passenger traffic for most of 2021. A partial reopening was operated in October 2021, with traffic remaining at about a third of pre-crisis levels (Figure 1.15). Between the second and third wave of pandemic, domestic activity had started to recover but private investment remained subdued and employment registration started moderating again towards the end of the year (Figure 1.16). 6 MADAGASCAR ECONOMIC UPDATE | NAVIGATING THROUGH THE STORM FIGURE 1.14 Weekly COVID-19 cases FIGURE 1.15 Number of air passengers Number Number Number of air passengers 5,000 80 60,000 4,500 70 4,000 50,000 60 3,500 40,000 3,000 50 2,500 40 30,000 2,000 30 1,500 20,000 20 1,000 10,000 500 10 0 0 0 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jan-20 Jul-20 Jan-21 Jul-21 New deaths New cases National Regional Long haul Source: World Bank. Source: Instat, World Bank. FIGURE 1.16 Employment registration FIGURE 1.17 Mining exports and nickel price Number of new jobs Bn of LCU USD per ton 7,000 500 30,000 450 6,000 400 25,000 5,000 350 20,000 300 4,000 250 15,000 200 3,000 150 10,000 2,000 100 5,000 50 1,000 0 0 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Mining exports Nickel price Source: Instat, World Bank. Source: Instat, World Bank. Export revenues were bolstered by the resumption of mining production and strengthening global demand. Mining export recovered rapidly following the reopening of the Ambatovy mine in March 2021, which led to a significant rebound in revenues (Figure 1.17) and contributed to a faster-than-expected pick up in GDP growth during the third quarter of 2021. Other supportive factors included strong global demand and rising prices of nickel and cobalt, bolstered by accelerating stainless- steel production in China (which accounts for about two thirds of global nickel consumption) and a surge in electric vehicle sales (boosting the demand for battery components). A rebound in export revenues was also observed in the vanilla and textile sector. 7 CHAPTER 1: NEW HEADWINDS, RISING RISKS FIGURE 1.18 Rice production and imports FIGURE 1.19 Domestic and international rice price inflation 1,000 tons Percent Percent 5,000 30 30 4,500 25 4,000 25 20 3,500 20 15 3,000 10 2,500 15 2,000 5 1,500 10 0 1,000 -5 5 500 -10 0 0 -15 2016 2017 2018 2019 2020 2021 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Share of imported rice in local consumption (RHS) Paddy production International Domestic Source: Instat, World Bank. Source: FAO, Instat, World Bank. FIGURE 1.20 Inflation and contribution FIGURE 1.21 Inflation and contribution from from food and energy prices imported goods and services Percent Percent 11 11 9 9 7 7 6 6 3 3 1 1 -1 -1 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Energy Ex food and energy Food Domestic products Imported and semi-imported products CPI Inflation Avg Inflation 2010s Avg Inflation 2000s Inflation Source: Instat, World Bank. Source: Instat, World Bank. Rice production declined. National paddy production during 2018 upsurge. The government imposed a ceiling dropped about 6 percent in 2021 (to an estimated 4 million on the retail price of imported rice in December 2020 and tons), despite relatively favorable weather in the central intervened on the market through the State Procurement of and northern regions (Figure 1.18). Sown areas declined, Madagascar by importing and distributing subsidized rice. owing to a poor start of the rainy season and the impact of the recession on farmers ability to save and invest. Inflation rose but remained below historical averages. Given domestic production shortfalls the import of rice Since reaching a two-decade low of 3.9 percent around accelerated in 2021, covering 18 percent of the domestic mid-2020, inflation has been trending upwards, reaching consumption (up from 15 percent in 2020). Deteriorating 6.2 percent in December of 2021 (Figure 1.20). While the supply conditions contributed to an uptick in the price increase was noticeable, inflation remained still below of rice, which was at the end of 2021 about 7 percent historical averages and was not particularly elevated from higher than a year earlier (Figure 1.19). This acceleration an international perspective, as supply chain disruptions, occurred after a prolonged period of relative price stability higher commodity prices and recovering demand led and contributed to amplify the impact of the crisis on to a broad-based increase in inflationary pressures in vulnerable households. This said, this episode of rice price both advanced and developing economies during 2021. inflation was about four times milder than that observed Price increases in Madagascar were most noticeable in 8 MADAGASCAR ECONOMIC UPDATE | NAVIGATING THROUGH THE STORM the food sector and reflected local market conditions, contribute much to the uptick in consumer price inflation as both imported and semi-imported products did not (Figure 1.21). FIGURE 1.22 Global trade and industrial production FIGURE 1.23 Global export orders and supplier’s delivery time Percent, y-o-y Index, 50+ = expansion 30 70 25 20 60 15 10 50 5 40 0 -5 30 -10 -20 20 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Goods trade Industrial production New export orders Suppliers’ delivery time Source: CPB, World Bank. Source: Markit, World Bank. Growth among trading partners lost momentum since in activity (Figure 1.24). This response also contrasted mid-2021. Global trade was growing at a robust pace with that of a majority of emerging and developing at the start of 2021, as activity in China, the United economies, which generally cut public investment amid States and Euro Area recovered in unison from the tightening financing conditions. On the revenue side, 2020 recession and as global demand rotated toward the shock was milder than during previous recession more trade-intensive manufactured goods. However, episodes (Figure 1.25). While helping to alleviate the the recovery in those economies lost steam during the impact of the crisis, this countercyclical increase in both second half of year reflecting the resurgence of the current and capital spending led the budget deficit to 4.1 pandemic, diminishing policy support, supply bottlenecks percent in 2020, which contributed to an uptick in public and rising inflation (Figure 1.22). This contributed to debt to 49 percent of GDP in 2020, up from 38.5 percent a deceleration in global demand, including for goods in 2019, but still well below risk thresholds considered and agribusiness products exported by Madagascar. for a country like Madagascar. Significant strains in global supply chains were observed last year, constraining activity and pushing up prices, but these are expected to be mostly transitory, reflecting pandemic-related factory and port shutdowns and logistics bottlenecks (Figure 1.23). Monetary and fiscal policy played a stabilizing role Fiscal policy contributed to limit the impact of the crisis, in contrast with previous recessions. Access to emergency lending allowed the government to increase public spending in both 2020 and 2021, in contrast with the experience of previous recessions when a sharp contraction in public spending deepened the contraction 9 CHAPTER 1: NEW HEADWINDS, RISING RISKS FIGURE 1.24 Public spending to GDP ratio FIGURE 1.25 Public revenue to GDP ratio during crisis episodes during crisis episodes Percent of GDP Percent of GDP 19 15 18 14 17 13 16 12 15 11 14 13 10 12 9 11 8 t-1 t t+1 t-1 t t+1 2002 crisis 2009 crisis COVID-19 crisis 2002 crisis 2009 crisis COVID-19 crisis Source: IMF, World Bank. Source: IMF, World Bank. Price and exchange rate stability was maintained. An to stimulate credit to the private sector. The gradual uptick in inflation led the central bank to raise interest rates transition of the monetary policy framework to an interest twice in 2021, and again in May 2022, but the monetary rate targeting system has helped to improve monetary policy stance remained broadly accommodative (Figure policy transmission while enhanced foreign exchange 1.26). The central bank narrowed the interest rate corridor market operations contributed to smooth exchange rate by raising interest rates on its deposit facility while fluctuations, alongside ample foreign exchange reserves maintaining interest rates on its marginal lending facility supported by significant emergency lending operations and the reserve requirement unchanged to continue by development partners (Figure 1.27). FIGURE 1.26 Average lending rates FIGURE 1.27 Exchange rate Percent 16 4,800 4,050 15 4,700 4,000 14 4,600 3,950 13 4,500 3,900 12 4,400 3,850 11 4,300 3,800 10 9 4,200 3,750 8 4,100 3,700 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 Short term Medium term Long term EUR USD Source: BFM, World Bank. Source: BFM, World Bank. The financial sector was recovering in 2021, although by the effectiveness of regulatory and supervisory areas of weakness persisted. Lending from the arrangements. Banks have been traditionally risk averse banking sector recovered somewhat in 2021, while in their lending practices and favored a business model liquidity remained adequate, capital adequacy ratios based on charging high real interest rates and fees on were above minimum requirements, and profitability loans to a limited number of creditworthy clients. This improved. The resilience of the banking sector is small client base limits financial inclusion and is a source explained by conservative financing policies and control of a risk for the banking sector as it increases exposure exercised by international banking groups, rather than to idiosyncratic shocks. 10 MADAGASCAR ECONOMIC UPDATE | NAVIGATING THROUGH THE STORM Factors of fragility have continued to intensify migrants are not expected to return to their place of origin in 2021 in either the short or medium term. Historic droughts have led to crop failure and widespread Health and education outcomes have worsened. In food insecurity in the South. Exceptionally low rainfalls addition to the impact of the crisis on poverty, access to caused devastating damage to agricultural production services has also been negatively affected. Estimates during the main harvest in 2021, with losses of up to 60 suggest that due to disruptions in health services, child per cent in three of the most populated districts (See mortality and maternal mortality in Madagascar could Box 1 for details). Moreover, seed stocks were severely have increased in 2021 by 18 percent and 12 percent depleted, with an estimated 70 percent of households in respectively. School closures increased already high the Androy and Anosy regions reported having no seeds drop-out rates among poorer children, while household or other inputs critical to reviving agricultural production. surveys indicate that the low proportion of children able Households in many areas ran out of food reserves much to engage in remote learning likely worsening learning earlier than usual and have resorted to desperate feeding inequality. Gender-based violence also increased while practices. Many households have also been forced to sell the provision of services to address the risk and protect assets, accumulate debt, or migrate elsewhere in search young girls have been disrupted. for food. However, evidence suggests that migration out of the most affected regions remains primarily local, likely Environmental sustainability has been negatively reflecting the cost of moving to more remote areas and impacted. Madagascar remains highly vulnerable to the constrains to settling in denser urban areas. In fact, most over-exploitation of natural resources, with their depletion migrants from Atsimo Andrefana and Androy appear to resulting from the unregulated expansion of extractive remain in those regions while a smaller proportion are industries, illegal trafficking, and open access to common seeking to move further North in regions like Mianavaratra resources, such as forests and fisheries. The pandemic has in central Madagascar or Boeny in the North-West. placed additional pressure on natural resources by reducing Analamanga, the region of the capital, doesn’t appear the availability of public funding to manage protected areas to be a major destination for migrants from Southern while the economic downturn pushed more people into regions during the recent drought episode. A majority of poaching, deforestation and other illegal activities. Box 1: Food Security Crisis in Madagascar’s ‘Grand Sud’ Decades of underinvestment compounded by a The drought-induced crisis has coincided with the severe and prolonged drought has contributed to one COVID-19 pandemic, amplifying downside impacts of Madagascar’s worst food crises. The South of the and aggravating poverty and vulnerability. COVID-19 country experienced five below-average rainy seasons restrictions disrupted food supply chain operations, since 2015, leading to broad-based crop failure1 and reduced urban to rural remittances, restricted labor pushing an estimated 1.64 million people in a state migration, and otherwise debilitated the population’s of acute food insecurity by early 2022.2 More than traditional coping capacity. The supply of food and 300,000 children are expected to suffer from acute seeds, necessary for emergency provision and malnutrition during 2022. recovery, was also disrupted by movement restrictions. 1 For the main 2020–2021 agricultural campaign, food production was estimated to be less than 40 percent of the five-year average across large swaths of the southern region. Vegetable harvests were particularly affected: on average reduced by more than 80 percent compared to last year. Herd sizes (cattle and small ruminants) are about 40 percent lower than the previous year. 2 FEWSNET Food Security Outlook - Madagascar, December 2021. https://fews.net/southern-africa/madagascar/food-security- outlook/march-2021. 11 CHAPTER 1: NEW HEADWINDS, RISING RISKS The drought crisis has compounded long-standing l’Émergence du Grand Sud de Madagascar’), to vulnerabilities in the South and driven communities consult and agree on a comprehensive humanitarian to adopt extreme coping measures to survive. These and development strategy for the South. This include desperate feeding practices, such as eating process emphasized the need to move beyond a clay mixed with tamarind, termites and grasshoppers, humanitarian crisis response to interventions that wild tubers, or unripe mangoes, accumulating debt, or will more systematically address the drivers of selling their critical livelihood assets such as livestock, vulnerability and enhance the resilience and coping farm implements, kitchen utensils, and even their land capacity of communities. to buy food and other essentials needed to survive. Others have resorted to engaging in illegal activities Amid massive assistance and expectations of the in the South-West while countless thousands have first good harvest in years in some areas, the food been forced to migrate elsewhere in search for food security situation appears to be improving. Reflecting and assistance. more supportive rainfall trends and crisis response interventions, more than a half-million people are The crisis has been the catalyst to initiate a new expected to move out of crisis status over the period development strategy for the South. Following the from May to August 2022. However, roughly 1.1 million launch of the National Response Plan and the Flash people are expected to continue facing high acute Appeal in June 2021, the Government convened food insecurity, corresponding to 25 percent of the the ‘Regional Symposium for the Emergence of the population in affected areas, including an estimated Deep South of Madagascar’ (‘Colloque Regional pour 182,000 people facing emergency conditions. OUTLOOK, RISKS, of GDP, with reconstruction and recovery efforts likely AND POLICY CHALLENGES extending over a decade in the most affected areas. The loss of crop and agriculture assets would account New headwinds weighing on growth prospects for 42 percent of estimated damages (Figure 1.29). High poverty rates, a lack of functional institutions, and decades Growth is projected to moderate in 2022, reflecting a of underinvestment in infrastructure have amplified the combination of severe domestic and international shocks. vulnerability of farming communities, especially among The combined impact of a third wave of the pandemic women and other marginalized groups, undermining around the turn of the year, 4 major tropical storms hitting their capacity to mitigate and recover from climatic and the country since January and the escalating conflict in other shocks. Supply disruptions could continue to impact Ukraine are expected to result in growth dipping in 2022 economic activity for several months. to 2.6 percent (less than half of the previous forecast of 5.4 percent), while inflation accelerates to 7.5 percent (compared with 6.3 percent previously expected) and the current account deficit widens to 7.0 percent (compared with 5.4 percent previously). The cyclone season was one of the most disruptive in recent years. More than 450.000 people were affected by the four tropical storm systems hitting Madagascar during the first quarter of 2022, the largest number since 2008 (Figure 1.28). According to initial estimates, damages could amount to $660 million, or 4.8 percent 12 MADAGASCAR ECONOMIC UPDATE | NAVIGATING THROUGH THE STORM FIGURE 1.28 Populations affected by cyclones FIGURE 1.29 Estimated damages from the four tropical storm systems in 2022 Number of affected people US$ million 600,000 300 500,000 250 400,000 200 300,000 150 200,000 100 100,000 50 0 0 2008 2010 2012 2014 2016 2018 2020 2022 Agriculture Infrastructure Residential Non-residential Source: EM-DAT, World Bank. Source: GFDRR, D-RAS, World Bank. The conflict in Ukraine will have significant export demand for key agribusiness and manufactured repercussions on growth prospects among major products, including textile, as well as a slower-than- trading partners, reducing demand for Madagascar’s expected recovery in tourism arrivals. The impact from exports. As the European Union is the destination of slowing demand in the United States and China will be more than 32 percent of Madagascar’s exports, well less pronounced, reflecting more moderate effects of ahead of the United States (20 percent) and China (5 the conflict on those two economies (the United States percent), the deepening energy crisis in Europe will have is a major producer of oil and natural gas, and China has a significant knock-on effect on economic prospects in a lower share of oil in its energy consumption) as well Madagascar (Figure 1.30). The downgrading of Euro Area as smaller bilateral trade flows. Overall, the impact of growth projections alone is expected to reduce growth slowing demand from major trading partners is expected in Madagascar by 0.3 percentage points in 2022. The to shave about 0.5 percentage points off 2022 growth impact will be felt mostly through a deceleration in projections for Madagascar. FIGURE 1.30 Export destinations - 2019 FIGURE 1.31 Import structure - 2019 Source: OEC, World Bank. Source: OEC, World Bank. 13 CHAPTER 1: NEW HEADWINDS, RISING RISKS Rising international energy prices, and to a lesser impact on consumer price inflation will be modest, given degree, rising international food prices will also have that 86 percent of the consumption basket is made of adverse effects, particularly on public finances given domestic products and wheat imports amount to about 1 price regulations and government interventions. percent of total consumer spending. Moreover, the State Increasing international oil prices will contribute to Procurement of Madagascar (SPM) is intervening directly widen the trade and current account deficits, as refined in the purchase and distribution of imported food and first petroleum products account for 14.5 percent of the total necessity goods to cap prices. value of imports in Madagascar, or 5.1 percent of GDP (Figure 1.31). It will also entail significant fiscal pressures The increase in import costs will be partially offset by reflecting an increase in government liabilities vis-à- the rising price of nickel, cobalt and gold. The conflict in vis fuel distributors as regulated pump prices will only Ukraine has contributed to a sharp increase in the price partially adjust to rising international prices and as the of nickel, which accounts for 14.7 percent of total export public utilities company JIRAMA and the national airline revenues in Madagascar (4.5 percent of GDP). Assuming Air Madagascar will face rising fuel costs. Considering that Nickel prices in 2022 remain on average 40 percent the possibility of a fuel price adjustment at the pump in above 2021 levels, this would add 1.8 percentage points June, liabilities towards oil distributors are estimated to of GDP in export revenues, or $190 million. However, increase by about US$40 million in 2022 (0.3 percent of the price of Nickel has been extremely volatile since the GDP) while fuel costs at JIRAMA by US$117 million in start of the conflict in Ukraine, making any assumptions 2022 (0.8 percent of GDP), deepening losses and requiring for 2022 highly uncertain. The impact of rising prices of additional public transfers. The increase in international cobalt and gold would be less pronounced, reflecting food prices such as wheat, edible oil, and corn will have a more limited price changes and the smaller share of significantly milder effect on the trade balance given their these metals in export revenues. Overall, the impact of limited share in overall imports. For instance, wheat flour recent commodity price shocks on Madagascar’s terms accounts for 1.9 percent of import values (0.7 percent of trade is predicted to be moderately negative in 2022, of GDP), compared to 4.5 percent for imported rice (1.6 with the deceleration of export volumes being a key percent of GDP). Baseline projections assume a 35 driver of the projected widening of the trade and current percent increase in both oil and wheat prices in 2022 account deficit this year. (compared with 2021). Under this scenario, total oil and wheat imports value would increase in 2022 by 1.8 and The government announced increases in public wage 0.2 percentage points of GDP, respectively, corresponding salaries and support for minimum wages in the private to a total increase in import costs of US$230 million. The sector to offset the impact of higher inflation on FIGURE 1.32 Growth and income per capita levels FIGURE 1.33 Public and private investment rates Percent Index = 100 in 1960 Percent of GDP 10 80 25 5 75 20 0 70 15 -5 65 10 -10 60 -15 55 5 -20 50 0 2000 2005 2010 2015 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 GDP growth GDP per capita growth GDP per capita level (RHS) Public investment Private investment Source: World Bank. Source: World Bank. 14 MADAGASCAR ECONOMIC UPDATE | NAVIGATING THROUGH THE STORM purchasing power. A public sector wage increase of 13 uncertainty remains elevated, which has caused firms percent on average is expected to increase the wage bill to delay or scale down investment plans, with negative by about 0.4 percent of GDP in 2022 and 0.9 percent of consequences for growth and jobs prospects (Figure GDP in 2023. The minimum wage in the private sector 1.33). These factors are expected to result in the was increased by 25 percent (from MGA 200,000 to MGA growth potential of the economy slowing to around 4 250,000), 15 percent of which will take the form of public percent in the absence of reforms enabling more private support through reduced social security contributions. investment and job creation. This would amount to an additional 0.03 percent of GDP in public support for 2022 and 0.05 percent in GDP Against this backdrop, the poverty rate is expected in 2023. As a result of these measures, as well as the to remain well above pre-crisis levels. The expected expected payments of accumulated liabilities towards recovery in economic activity in 2023-24 will translate into fuel distributors, additional transfers to JIRAMA and the a gradual decline in poverty rates, from an historical high impact of slowing growth on revenues, the budget deficit of 81 percent in 2020 to 80.2 percent in 2023 and 79.9 is expected to increase to 7.2 percent of GDP in 2022, up percent in 2024, thereby remaining well above pre-crisis from 6.3 percent in 2021. levels (Figure 1.34). Progress with poverty reduction will largely be determined by the capacity of the economy Growth is projected to recover at a slower-than- to bounce back and the absence of additional climate expected pace in 2023 and 2024. Growth is expected or other shocks. to pick up to 4.2 percent in 2023 (compared to a previous projection of 5.1 percent) and 4.6 percent in 2024, FIGURE 1.34 Poverty rate and GDP per capita driven by a modest rebound in consumer spending and Poverty rate (%) private investment (Figure 1.32). Beyond conjunctural 100 factors, the growth potential of the economy remains 95 low and has been negatively impacted by the crisis. 90 First, job losses are expected to have pushed more 85 people into self-subsistence agriculture and low- 80 75 productivity informal services. This process, which 70 impacts aggregate productivity and living standards, 65 has been observed during previous recessions and 60 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 proved difficult to reverse even as activity recovered. Second, the quality of human capital has been impacted, International pov. rate Lower middle-income pov. rate with evidence of deteriorating learning outcomes and Upper middle-income pov. rate the loss of on-the-job skills. Third, economic and policy Source: World Bank. 15 CHAPTER 1: NEW HEADWINDS, RISING RISKS Box 2: Transparency and accountability during the COVID-19 crisis The government has implemented reforms to a dashboard on budget execution performance and promote budget transparency in recent years, sporadic information on COVID-related funds, but including the 2019 Open Budget decree and the 2020 implementation has been slow and the timeliness COVID-19 fund decree. This led to the publication of and quality of the data remains weak. FIGURE BOX 1 Control of corruption Index 0.70 0.65 0.60 0.55 0.50 0.45 0.40 0.35 0.30 0.25 0.20 2012 - 13 2014 2015 2016 2017-18 2019 2020 2021 Bangladesh Cambodia Madagascar Rwanda Tanzania Uganda Source: World Justice Project. The Government has recently published the findings recruitment, public procurement, and illicit asset of four audit reports by the Court of Accounts on recovery. Moreover, the Parliament adopted a revision government operations during the COVID-19 crisis. to the anti-corruption law in 2021 limiting the mandate The auditor highlighted evidence of widespread and independence of Anti-Corruption Poles. As a weaknesses in the budget control framework, result of the index of corruption in the World Justice including several examples of senior management Project (WJP) dropped further in 2021, and remains override of procurement processes and payments below aspirational peers like Rwanda, Tanzania, or through the use of emergency procedures that have Bangladesh (Figure Box 1). legally unclear applicability, coverage and duration. Moreover, the government seemed to have relied A renewed commitment to greater transparency heavily on the use of direct contracting as the standard and accountability of civil servants and public for COVID-related spending. and elected officials will be critical to restore trust in government and reinforce the social contract While an accountability framework is in place, between the state and the population. This requires its effectiveness remains limited. Over the years, strengthening accountability institutions including successive administrations have established anti-corruption institutions and the court of accounts an anti-corruption system composed of several and enforcing rules on asset declarations, asset institutions with mandates ranging from prevention recovery, and whistleblower protection. Accelerating to investigation and prosecution. The enforcement the modernization and digitization of public financial of anti-corruption policies also remains deficient; with management systems which continue to suffer insufficient financial autonomy and human resources from weak capacity and siloed management and for anti-corruption agencies, lack of effective focus information systems would ensure more transparency on high vulnerability areas such as public sector and reduce waste and corruption. 16 MADAGASCAR ECONOMIC UPDATE | NAVIGATING THROUGH THE STORM The outlook is subject to growing risks vaccination campaign in March 2021 but only 4 percent of the population has been fully vaccinated so far, which Both international and domestic risks have increased. At the is among the lowest rates in Sub-Saharan Africa (Figure international level, a further escalation of geopolitical tensions 1.35). Amid high vaccination hesitancy, there is a risk that associated with the Russian invasion of Ukraine could have the objective of vaccinating 50 percent of the population larger-than-expected repercussions on global energy, fertilizer by June 2023 will fall significantly short. In this context, and grain prices and trigger a recession among main trading the pandemic may become an endemic public health partners. New variants of COVID-19 could also heighten the problem leading to recurrent and extended disruptions risk of a hard landing of the global economy, which would to economic activity and health services. The emergence negatively impact a small open economy like Madagascar. of new strains that are able to circulate within previously At the national level, additional climate shocks could lead infected populations could prove especially damaging. to further damages to infrastructure, crop production and New variants could encourage governments around the the livelihood of most affected populations. world to reinforce travel restrictions and could make tourists more selective about travel destinations depending Low vaccination rates. The Government launched a on vaccination coverage. FIGURE 1.35 Ratio of completed COVID-19 vaccine dose series per 100 people Seychelles 79 Mauritius 71 Botswana 43 Rwanda 41 Lesotho 34 Comoros 30 Eswatini 27 South Africa 27 Mozambique 25 Zimbabwe 21 Namibia 13 Kenya 8 Uganda 4 Malawi 3 Zambia 3 Ethiopia 3 Madagascar 3 United Republic of Tanzania 3 South Sudan 2 0 20 40 60 80 Source: WHO. FIGURE 1.36 Estimated cost of natural disasters FIGURE 1.37 Economic costs of cyclones by region Percent of GDP Mean of economic costs by cyclone (annual GDP) 10 8 6 4 2 0 Average Centennial events Value 60.9 to 44,464.5 Earthquakes Floods Cyclones 15.0 to 60.9 3.7 to 15.0 Source: GFDRR and World Bank (2016). 0.8 to 3.7 Note: Modelled estimates of the total impact of hazards. Centennial events 0.0 to 0.8 are once in 100-year estimated losses. A larger return period is associated with less likely occurrence but a greater intensity of disasters. Source: UNEP/DEWA/GRID-Europe. 17 CHAPTER 1: NEW HEADWINDS, RISING RISKS Exposure to climate shocks. Madagascar has one of the Eastern Coast (Figure 1.37). This year’s cyclone the highest cyclone risks among African countries, with season was severe, with estimated costs significantly an average of 3 to 4 cyclones affecting the country each above historical averages. Beyond the frequency and year. The cyclone season (from November to March) severity of these shocks, other factors of fragility consistently results in serious impacts such as crop such as poverty, weak infrastructure, lack of access to loss, flooding, waterborne diseases’ outbreaks, coastal public services and financial protection systems can degradation, and damages to critical infrastructure and turn even moderate events into humanitarian crises. services. On average, natural disasters are estimated to Research suggests that while the frequency of cyclones cost the economy about 1 percent of GDP each year, might not necessarily increase in coming years, their and up to 8 percent of GDP for once-in-a-century events intensity could, which would require stronger disaster (Figure 1.36), with devastating consequences for rural risk management, more resilient infrastructure, and communities and agriculture-based activities along social safety nets. FIGURE 1.38 GDP per capita around crisis episodes Index, t-1 = 100 105 100 95 90 85 80 75 70 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 t+6 1981 1991 2002 2009 2020 Source: World Bank. Political instability. Political crises have disrupted all but one growth spurts since independence in 1960 and have led to losses in GDP per capita far exceeding gains during periods of stability (Figure 1.38). These crises were manifestations of conflicts among the ruling elites jockeying to regain or maintain control of the country’s natural resources. The 2009-13 crisis and particularly long, and had lasting economic and social impacts, including the suspension of preferential trade agreements and international aid, which contributed to a sharp decline in the delivery of services. Political stability has been maintained since the return to constitutional order in 2013, but social discontent could escalate amid rising poverty, higher inflation and a lack of progress with reforms. 18 MADAGASCAR ECONOMIC UPDATE | NAVIGATING THROUGH THE STORM FIGURE 1.39 Public debt to GDP ratio FIGURE 1.40 Public debt distress risks Percent of GDP Percent of GDP 180 90 Growth shock scenario 160 80 140 70 120 60 100 50 80 40 60 30 Baseline 40 20 20 10 0 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2021 2023 2025 2027 2029 2031 LIC - IQ range Madagascar Rwanda Baseline Benchmark Source: World Bank and IMF. Source: World Bank and IMF. Fiscal risks. Following an uptick to 7.2 percent of the 2020-22 crisis and 73 years to reach current living GDP in 2022, the budget deficit is predicted narrow standards in Rwanda, which is Madagascar’s closest gradually to reach 5.0 percent in 2024, mainly driven aspirational peer (Figure 1.41). To have a meaningful by a projected recovery in government revenues and shot at reducing extreme poverty in coming years, post-election restraints on the spending side. Projected the country would need to sustain significantly higher debt levels remain relatively modest compared to other and more inclusive growth. For instance, increasing low-income countries (Figure 1.39) and debt distress Madagascar’s average growth rate to 7 percent would risks are assessed to be moderate, assuming ongoing allow shortening the time needed to catch up with reforms to boost domestic revenue mobilization and Rwanda’s current living standards by a factor of five prudent management of contingent liabilities (Figure (from 73 years to 15 years). This can only happen if 1.40). However, experience from other low-income the government kickstarts far-reaching reforms that countries suggests that debt sustainability risks can will enable new investments in sectors critical to job rapidly escalate once debt dynamics start deteriorating. creation and structural transformation, better access In fact, one-third of the countries that experienced an to basic infrastructure, greater resilience of vulnerable increase in debt distress risks from low to moderate (as populations, and more transparency and accountability Madagascar did in 2020) saw a further deterioration to high distress risks within three years. Among the fiscal FIGURE 1.41 Years needed to reach pre-crisis risks that require particular attention in Madagascar is living standards of peers public investment management, institutional capacity to manage contingent liabilities, and growing financial Number of years to reach 2019 GDP per capita level pressures facing key SOEs, including JIRAMA and Air 180 160 Madagascar. The creation of a sovereign wealth in 2021 140 also raises concerns as its resources, mandate, and 120 100 governance framework remain unclear to this day. 80 60 40 Policy challenges and priority interventions 20 0 Low-Income Rwanda Uganda Tanzania Africa Cambodia Bangladesh In the absence of a new drive for reforms, Madagascar risks falling further behind. Based on pre-crisis trends, it would take about 10 years of uninterrupted growth to Historical growth (2013-19) Doubling of historical growth revert the loss in average incomes that occurred during Source: World Bank. 19 CHAPTER 1: NEW HEADWINDS, RISING RISKS in public policies (see Chapter 2 for a discussion mitigate adverse impacts include improving access of governance reforms in the education sector). to agricultural inputs (mainly seeds and fertilizers) Concrete policy recommendations along those lines and farm equipment; reinforcing irrigation systems are presented in the recent World Bank’s Systematic maintenance and financing; increasing access to Country Diagnostic report,3 but several reforms are agricultural loans for off-season production; scaling highlighted here as being particularly urgent to speed up cash transfer programs; increasing food storage up the recovery. capacities; and enhancing the productivity and resilience of food systems through more efficient public Accelerate COVID-19 vaccination to prevent further investments. Revising the land law would also offer economic and social dislocations. At the current rate hope of land security for millions of farmers and hence (less than 10,000 people vaccinated per week), it will contribute to boosting investment and food security. take more than 20 years to reach the government’s Rapid-response programs to alleviate the impact of a own objective, which fall short of the Africa CDC sequence of severe cyclones in early 2022 also need recommendations. While vaccine availability is not an to be accelerated, alongside improvements in multi- issue, with more than 4 million doses received so far hazard early warning systems, contingency plans and and another 3 million doses already secured, vaccine implementation capacities at the local level. hesitancy is the most binding constraint to higher coverage. The impact of new waves of COVID-19 could Ensuring a balanced and sustainable response to the quickly overwhelm health services and causes avoidable impact of the crisis in Ukraine. Initiatives to buffet deaths. Impact of human capital are also significant, as the impact of rising international energy and food school closures have significantly impacted learning prices should be targeted on the poor and be fiscally outcome. Moreover, a tourism-dependent economy like responsible. Blanket energy subsidies are socially Madagascar might not regain its attractiveness unless regressive as they mostly benefit the top quintile of travelers are confident that COVID risks are minimized. the population while state interventions in competitive Operational capabilities, vaccines and financing are markets are itself of source of distortions and welfare available to support an acceleration of the vaccination losses over time. Moreover, as the government is campaign. A One Government Approach is needed, with expected to offset the increase in liabilities towards a clear strategy to speed-up vaccination in targeted oil distributors with levies supporting the Road Fund, areas (urban, tourist areas and vulnerable groups) and the capacity to maintain the road network could also stronger engagement to win over vaccine hesitancy. be negatively affected. Upward fuel price adjustments are overdue, but should be accompanied by measures Strengthen the response to recent climate shocks to to mitigate the impact on the most vulnerable, as avoid long-term damages. Addressing the ongoing well as reforms supporting more affordable public food security crisis and building the resilience of food transport, reducing fuel storage and transport costs, systems are critical to save lives in the short term and and promoting greater market competition. A strong safeguard livelihoods of vulnerable populations over communication campaign is needed to explain how time. In the South, adverse impacts from a multi-year current energy prices are calculated and the need for drought are now exacerbated by the proliferation of a fuel pricing reforms in the current context. Social safety pest invasion that threatens to substantially reduce net programs could also be adjusted to support the food production in the affected areas. Nationwide, an urban poor confronted by rising costs of imported food increase in food prices has been observed, jeopardizing products. More generally, effective market regulation and the food and nutrition security of both rural poor (due supervision and measures to lower barriers to market to challenging harvest conditions) and urban poor entry should be favored over direct sate interventions. (due to rising imported food costs). Priority actions to Trade restrictions such as export bans should also be 3 The SCD serves as a basis for the preparation of the next Country Partnership Framework with Madagascar. 20 MADAGASCAR ECONOMIC UPDATE | NAVIGATING THROUGH THE STORM avoided, as these interventions have proven in the past FDTIC-funded activities for greater transparency. In the to amplify food crises rather than alleviate their impacts. transport sector, the government should accelerate reforms to stimulate further private sector investments Accelerate energy, digital and transport sector reforms in railway, air transport and maritime sectors and develop to leverage new investments. Attracting much-needed more efficient modes of transport and multi-modality. The investment in the power sector will require significant selection of priority investments in the road sector should strengthening of the performance and financial viability also follow a well-developed road asset management of the national utilities company JIRAMA, a stronger system and be supported by a stronger Road Agency. role for the private sector in service delivery, and an improved legal and institutional framework for PPPs. This Increase transparency and accountability to reinforce requires (a) an overhaul of JIRAMA’s management; (b) trust in public policies. Priorities include giving greater rationalization of power purchase and rental agreements; autonomy and resources to the court of accounts and (c) restructuring of arrears; (d) further tariff optimization anti-corruption institutions and strengthen the capacity (mainly the OPTIMA business), (e) finalization of large of the judiciary to hold public officials accountable. renewable energy projects, (f) development of solar Regarding to the Court of Accounts’ audit of COVID projects and hybridization of thermal power plants while spending, the government should engage openly with all waiting for the big hydro, (g) legal reforms. Regarding the relevant stakeholders to implement the recommendations digital sector, the government should take immediate of the court. It will also be critical to improve the quality action to foster greater market competition and promote of transparency and participation mechanisms by affordability of services, including by (i) promoting open disclosing more data (e.g., crisis information, safety access in the national backbone and reducing wholesale nets, fiscal spending, policy responses) and promote prices, (ii) strengthening regulation of market dominance participatory budgeting. The modernization and and competition, (iii) removing remaining constraints on digitization of public financial management, procurement, the construction and commercialization of fiber to ensure and payment systems should also be accelerated, a level playing field for all operators, and (iv) ensuring a including by integrating open contracting data standards strong, effective, and independent telecom/ICT regulator into the government’s e-procurement platform. Finally, capable of working without political interference. Reform establishing a formal framework for the appraisal of of the Universal Access Fund (FDTIC) should also be public investment projects based on objective and undertaken to ensure more effective investment in transparent criteria is critical to improve development underserved areas, beginning with public reporting on outcomes and reduce fiscal risks. 21 CHAPTER 1: NEW HEADWINDS, RISING RISKS TABLE 1.1 Macroeconomic Projections 2018 2019 2020e 2021e 2022f 2023f 2024f Real Economy (Annual percent change, unless otherwise indicated) Real GDP 3.2 4.4 -7.1 4.4 2.6 4.2 4.6 GDP per capita (USD, constant 2015) 480.9 488.9 442.2 449.7 449.5 456.5 465.4 GDP deflator 7.1 8.3 5.1 7.4 6.7 6.6 5.2 CPI annual average 8.6 7.9 4.2 6.2 7.5 6.6 6.2 Exports volume 2.4 10.9 -22.6 11.6 4.4 5.4 6.4 Imports volume 11.1 4.6 -13.8 7.4 4.5 5.4 6.1 Fiscal account (Percent of GDP unless otherwise indicated) Total Revenues and Grants 13.0 13.9 12.4 12.5 13.0 13.3 13.4 Taxes Revenues 10.3 10.6 9.5 10.4 10.5 11.2 11.8 Non-Tax Revenues 0.3 0.3 0.4 0.4 0.4 0.1 0.4 Grants 2.5 3.1 2.5 1.7 2.1 2.0 1.2 Public debt 39.5 38.5 49.0 53.1 55.6 58.0 58.7 Total expenditures 14.4 15.4 16.3 18.8 20.2 20.2 18.4 Current expenditures 9.4 9.5 9.6 11.4 12.2 11.9 10.6 Wages and Compensation 5.1 4.9 5.6 5.6 6.2 6.6 6.5 Interest Payments 0.8 0.7 0.7 0.9 1.1 1.1 1.0 Transfers and subsidies 2.3 3.1 3.8 3.4 3.4 2.7 2.5 Others 1.2 0.8 -0.6 1.5 1.6 1.5 0.6 Capital Expenditures 5.0 5.8 6.8 7.4 8.0 8.3 7.8 General Government balance (commitment basis) -1.3 -1.4 -4.0 -6.3 -7.2 -6.9 -5.0 Balance of payments (Percent of GDP unless otherwise indicated) Current account balance (including grants) 0.7 -2.3 -5.4 -5.3 -7.0 -7.0 -7.0 Imports, Goods and Services 37.8 35.0 30.4 31.0 34.2 34.4 35.2 Exports, Good and Services 34.7 30.8 23.4 24.4 25.9 26.2 26.9 FDI 3.6 2.6 1.9 1.5 1.9 2.1 2.5 Terms of Trade (percent change) 5.0 -9.7 -2.7 -1.4 -3.8 0.4 0.5 Memorandum items GDP nominal in MGA (billions) 45401 51351 50095 56169 61522 68371 75235 22 CHAPTER 2 Boosting School Performance 23 CHAPTER 2: BOOSTING SCHOOL PERFORMANCE Improving school performance will be critical to revert the recent deterioration in learning outcomes and improve development prospects. Findings from a new survey illustrate weaknesses across various dimensions that are known to impact pupils learning: recruitment and selection of staff, teacher incentives, and school management. The teacher recruitment and selection process is particularly vulnerable to corruption, which is concerning given the Government’s plan to recruit 10,000 new civil servant teachers by end-2022. Recurrent delays in wage payments and school grant transfers combined with the perception of low wages and poor working conditions negatively impact teacher motivation and performance and increase the likelihood of unethical behavior. The latter is also tightly connected to the absence of accountability mechanism with the lack financial audits and limited community involvement contributing significantly to corruption risks. These findings suggest the need for a new approach to performance enhancement that includes measures reinforcing transparency and effectiveness of teachers’ selection and evaluation, salary and school grant management, redress mechanism and citizen engagement. Introduction in French, just 7 percent having foundational numeric skills, and test scores declining below most comparator Learning outcomes have deteriorated over the last countries (Figure 2.1 and 2.2). As a result, learning decade. School closures during the pandemic have poverty in Madagascar is 10 percentage points worse intensified a more structural deterioration in learning than the average for the Sub-Saharan Africa region and outcomes in previous years, with 97 percent of students 6.8 percentage points worse than the average for low- at age 10 not able to read and comprehend a simple text income countries. FIGURE 2.1 Harmonized Test Scores for pupils FIGURE 2.2 Harmonized Test Scores for pupils Score Score 450 600 434 500 452 414 397 388 368 358 351 400 400 396 371 371 370 300 200 350 351 351 351 100 0 Cambodia World median Uganda Tanzania Bangladesh Rwanda Madagascar 300 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Madagascar SSA median Source: Human Capital Index Source: Human Capital Index Note: Measured in TIMMS-equivalent units, where 300 is minimal Note: Measured in TIMMS-equivalent units, where 300 is minimal attainment and 625 is advanced attainment. attainment and 625 is advanced attainment. The poor performance of the education system is tightly school management systems do not provide adequate connected to teacher effectiveness, job satisfaction support to teachers or accountability in case of poor and school management. Teachers generally have low performance or unethical behavior. Job satisfaction among academic qualifications, particularly community teachers, public school personnel is very low, reflecting difficulties in as 80 percent of them have no formal credentials. getting paid, job insecurity, lack of in-service training, high The situation is particularly challenging in poor rural pupil-teacher ratios, and lack of basic infrastructure and communities, intensifying regional disparities. In addition, teaching materials (Lassibile and Buron 2016). 24 MADAGASCAR ECONOMIC UPDATE | NAVIGATING THROUGH THE STORM Reform strategies that combine measures boosting of corruption, higher citizen satisfaction and trust, and transparency, citizen engagement, school management, greater performance, motivation, and satisfaction among and teacher incentives can lead to better learning civil servants (Cingolani, Thomsson, and de Crombrugghe outcomes. In Brazil, the Parana state school report card 2015; Meyer-Sahling et al. 2018). A World Bank study of provided both parents and school personnel information teacher recruitment in India highlighted the importance about school performance which had positive effects of ensuring a streamlined and transparent recruitment in terms of increasing parental voice and driving wider process to improve learning outcomes (World Bank, education reforms.4 In Uganda, public impact evaluations 2015). The analysis of survey data underlined the need for and increased citizen engagement helped improve test competency-based testing of candidates and transparent scores and reduce teacher absenteeism.5 In a similar procedures to minimize non-merit-based considerations. vein, increasing transparency at the communal level in Vietnam led to significant improvement in the provision of Recruitment processes and promotion lack transparency educational services.6 In Madagascar, anecdotal evidence in the public education sector. There are four categories suggests that transparency and community-based school of primary school teachers in Madagascar: civil servants, monitoring arrangements improve school performance. contract teachers, community teachers paid by the parents only, and community teachers paid by the parents Three dimensions impacting learning outcomes are and receiving subsidies from the Government (community analyzed in this chapter. These dimensions are (i) teacher hired teachers known as FRAM). According to survey recruitment and selection, (ii) teacher incentives, and (iii) results, more than 40 percent of civil servant teachers and school management. The examination of transparency more than 65 percent of community-hired teachers have and accountability issues are dealt with in a transversal not participated in a competitive recruitment process manner across these dimensions. The analysis is based (Figure 2.3)8 and close to half of teachers consider that mainly on the results of a large-scale phone survey recruitment lacks transparency (Figure 2.4). In addition, designed jointly by the World Bank and the Ministry of a sizeable share of respondents finds it difficult to obtain Education in Madagascar. The survey includes responses information on staffing decision and allocations. There are from 1,195 public officials, 624 teachers, and 206 school no clear rules that govern the recruitment and management directors in 14 districts covering 8 regions.7 of FRAM teachers by parents’ associations or communities, which have led to the hiring of poorly qualified teachers, Teacher Recruitment, especially in more remote rural areas. Typically, FRAM Selection and Performance teachers are initially hired by the community then tend to be recruited as contract teachers for a 6-year period Merit-based recruitment is key to school performance with the government before getting recruited into the civil and learning outcomes. Research shows that transparent service stream. There are no adequate quality screenings and merit-based recruitment is associated with lower levels or controls during the whole process. 4 Winkler, Donald. 2005. “Increasing Accountability in Education in Paraná State, Brazil.” EQUIP2 Policy Brief, U.S. Agency for International Development, Washington, DC. Winkler, Donald, and Maribel Sevilla. 2004. “Report Cards and Accountability in Decentralized Education Systems.” EQUIP2 Policy Brief, U.S. Agency for International Development, Washington, DC. 5 Barr, A., Mugisha, F., Serneels, P., & Zeitlin, A. (2012). Information and collective action in community-based monitoring of schools: Field and lab experimental evidence from Uganda. Unpubl. Pap. 6 Bauhr, M., & Carlitz, R. (2020). When does transparency improve public services? Street‐level discretion, information, and targeting. Public Administration. 7 Districts, schools, and individual respondents were selected using a stratified random sampling technique. The data was collected over the phone in Malagasy and by highly trained enumerators hired by a consortium led by an international firm and supported by a local firm. 8 Out of the 466 teachers surveyed, 239 (51 percent) were FRAM teachers. FRAM teachers are hired directly by the community. 25 CHAPTER 2: BOOSTING SCHOOL PERFORMANCE FIGURE 2.3 Share of teachers recruited FIGURE 2.4 Share of respondents agreeing through competition that recruitment is transparent Percent Percent 100 100 80 75 80 59 61 60 60 54 48 40 34 40 20 20 0 0 Civil-Servant FRAM Office School Civil-Servant Office Teachers Teachers Agents Directors Teachers Agents Source: World Bank survey Source: World Bank survey Note: Measured in TIMMS-equivalent units, where 300 is minimal attainment Note: Measured in TIMMS-equivalent units, where 300 is minimal attainment and 625 is advanced attainment. and 625 is advanced attainment. FIGURE 2.5 Area most at risk of corruption Percent Recruitment 83 Integration of non-civil servant teachers into the public sectors 36 Assignment 24 Exam notes (tampering) 23 Career advancement 19 Management of the school fund (caisse-école) 19 Management of subsidies for non-civil servant teachers 19 Exam subject (sale) 19 Diploma (falsification) 17 Reclassification 14 Procurement 13 School registrations 10 0 20 40 60 80 100 Source: World Bank survey. Note: Sum exceeds 100 percent since respondents were free to select multiple options. Recruitment is considered the most vulnerable process to corruption. An overwhelming majority of respondents (83 percent) believe that recruitment presents the greatest risk of corruption (Figure 2.5). A third of respondents (36 percent) believed the same regarding the process of integration of FRAM teachers into the civil service stream. This is an important finding given that the government plans to recruit 10,000 new civil servant teachers from among the existing population of community teachers by end-2022. Since 2014, approximately 30 percent of FRAM teachers have become contract teachers without any specific quality controls, highlighting the magnitude of the challenge in improving qualifications. 26 MADAGASCAR ECONOMIC UPDATE | NAVIGATING THROUGH THE STORM FIGURE 2.6 Reporting of corruption cases Share of yes answers Are you aware of Anti-corruption Units (CAC)? 60 Do you feel safe enough to report corruption cases? 35 Have you ever seen a case where a co-worker behaved unethically? 31 Have you ever reported a colleague 5 for unethical behavior? 0 20 40 60 80 100 Source: World Bank survey. Note: Sum exceeds 100 percent since respondents were free to select multiple options. Channels to report cases of corruption are not widely basic infrastructure and teaching materials. The high used. The awareness of the existence, or role, of anti- rates of teacher and school director absenteeism also corruption systems does not seem widespread; over 40 suggest low job satisfaction, as well as weak systems of percent of respondents are not aware of the mission accountability for attendance and performance (World and role of Anti-Corruption Units in the education sector Bank 2020, Lassibille and Buron 2016). (Figure 2.6). These units have a monitoring and reporting role on corrupt practices, particularly on issues regarding The lack of on-the-job resources (e.g. teaching management of FRAM teachers. Moreover, the majority materials) and perception of low wages contribute to of respondents (64 percent) do not feel comfortable low job satisfaction. The majority of school directors reporting cases of corruption through official channels. and teachers (over 75 percent) mention that a lack of Interestingly, similar patterns emerge in other citizen resources is the greatest obstacle to job effectiveness. surveys showing that the vast majority of respondents, And a large number of respondents report that their regardless of gender, place of residence, education, income is not sufficient to meet their needs and report standard of living and age, are afraid to report corruption having another source of income (67 percent and 33 because of the risk of reprisals or other negative percent respectively). Overall, 30 percent of teachers consequences (Afrobarometer 2018). The Ministry of and 21 percent of school directors consider that they Education has established a new grievance redress are poorly motivated. mechanism to handle the 2020-2021 recruitment process but delineation of responsibilities between national and Delays in salary payment are hampering motivation district level does not seem clear and the complaints and job satisfaction. More than 80 percent of FRAM register is also not accessible to the public. teachers have received their salary late more than once in the past two years, compared to more than 40 percent Teacher Motivation for civil servant teachers. This is particularly the case for teachers in rural areas; and for FRAM teachers who Job satisfaction appears low among public education receive state-subsidies with delays that can spread over sector staff, particularly among FRAM teachers. In several months. In addition, bonuses and allowances Madagascar, existing research shows that primary are sometimes not paid to teachers, especially those school teachers tend to have low job satisfaction for working in rural areas. Lastly, due to lack of use of the following reasons: (i) low wages and problems digital and mobile payment channels, teacher working getting paid; (ii) job insecurity; (iii) lack of in-service in remote areas regularly travel long distances to collect training; (iv) high pupil-teacher ratios; and (v) lack of their salary which contributed to absenteeism rates. 27 CHAPTER 2: BOOSTING SCHOOL PERFORMANCE School management that improving school management could significantly boost teachers’ performance. Poor organization, control and leadership reduce teachers’ accountability. The management capacity of Financial management arrangements of school grants school principals correlates with student performance— also appear inadequate. The vast majority of respondents even after controlling for a variety of student and school (78 percent) said that the school grants are not sufficient; characteristics (WDR 2018). The lack of accountability at including 73 percent of school directors. In terms of the school level manifests in teacher absenteeism, which information gaps, while most school directors (90 percent) can reach nearly 50 percent when the school director is have knowledge about how school grants are allocated, also absent (which is 37 percent of the time).9 According more than 40 percent teachers do not. In terms of delays to the survey, factors adversely impacting teachers’ in transfers, about 40 percent of respondents said that ability to complete tasks are poor communication and schools did not receive funds on time and experienced teamwork (17 percent), a lack of organization (13 percent), delays. Respondents also identified the absence of financial inadequate leadership (9 percent), and the absence of monitoring or audit of the fund, lack of clear regulations, clearly defined deadlines (8 percent). All these indicate lack of training, and lack of community involvement as major sources of corruption risks (Figure 2.7). FIGURE 2.7 Corruption risks and school fund management Determinants of Unethical Behavior and Motivation Percent There is no financial monitoring or audit 45 Weaknesses in school management systems encourage Texts governing the use of the school fund are not clear enough 43 unethical behavior and reduce motivation. To assess factors determining unethical behavior10 and motivation,11 Managers are not trained on the application of the regulatory text 32 a panel regression was estimated, controlling for various There is lack of community involvement demographic characteristics including age, gender, 28 in monitoring experience, education, and salary satisfaction. Results Texts governing the use of the school 5 indicate that the quality of performance evaluations, fund are right delays in salary payments and merit-based recruitment all Other 2 significantly influence the probability of unethical behavior. 0 20 40 60 80 100 The impact of salary delays on the likelihood of unethical Source: World Bank survey. behavior has a particularly significant impact, notably 9 World Bank 2020, Lassibille and Buron 2016. 10 The variable unethical behavior score measures the extent to which unethical behavior is acceptable to a person (or a person’s tendency to behave unethically). To construct the unethical behavior score, we use responses from two survey questions. The first question provides a list of questionable actions and asks respondents to indicate if they think any of them are acceptable for public officials. The more options that an individual selects, the higher score he or she gets. Thus, someone who checks none of these would have a score of 0, whereas someone who checks all six would have a score of 6. The second question B asks respondents how they feel about reporting unethical behavior. Those who are discouraged are given a higher score. Specifically, everyone is assigned a value that corresponds to their response. Someone who strongly feels that unethical behavior should be reported is assigned a value of 0, while someone who strongly disagrees with that is assigned a value of 4. This value is added to their score, resulting in a final score that can take a minimum value of 0 and a maximum value of 10. No one received a score of 10. The mean score was 2.33, and the highest observed score was 8. 11 The variable motivation measures the intrinsic motivation of an individual. To construct the motivation variable, we used a survey question which asks school directors and teachers to mark three factors, in order of importance, that most encouraged them to pursue a career in public education. Some of these factors are intrinsic, while others are extrinsic. The greater the number of intrinsic factors chosen, the more intrinsically motivated that person is. Someone whose most crucial reason was intrinsic is given a motivation score of 3, someone whose second-most important reason was intrinsic is given a score of 2, and someone whose third-most important reason was intrinsic is given a score of 1. Therefore, the maximum score a person can get is six, while the minimum score is 0. 28 MADAGASCAR ECONOMIC UPDATE | NAVIGATING THROUGH THE STORM for school directors and teachers (Figure 2.7), while grant transfers and quality of performance evaluations the lack of merit-based assessment has a detrimental influence motivation of teachers and school directors effect on school directors and FRAM teachers (Figure while the lack of merit-based recruitment tends to have 2.8). In addition, results indicate that delays in school a significant impact on motivation of FRAM teachers. FIGURE 2.8 Impact of delayed salary payment on FIGURE 2.9 Impact of merit-based assessments the likelihood of unethical behavior on unethical behavior Elasticity Elasticity 0.5 0 0.4 -0.1 0.3 -0.2 0.2 -0.3 0.1 -0.4 0 -0.5 School Civil-Servant FRAM Office School Civil-Servant FRAM Office Directors Teachers Teachers Agents Directors Teachers Teachers Agents Source: World Bank Source: World Bank Note: results from OLS regression with the dependent variable being the Note: results from OLS regression with the dependent variable being the indicator of unethical behavior derived from the survey. indicator of unethical behavior derived from the survey. Policy recommendations who can exert pressure to improve performance, particular attention should be given to data provided An overall lack of transparency and merit-based at the school level. The results of the latest national recruitment, weak management quality, and delays evaluation have already been shared through in salary payment and school grant transfers have newspapers and the website of the Ministry of adverse effects on education service delivery and Education and should be disseminated to school school performance. Findings from the survey, combined committees and parents, and through multiple with the existing literature, suggest the adoption of a channels, including local radios and mobile-phone strategic approach that combines transparency, citizen message campaigns. In order to make transparency engagement, and public sector reforms to bolster the actionable, content must be accompanied by performance of the education sector. Recommendations guidance on potential actions that can be taken, to strengthen transparency, teacher recruitment and including information on school committee selection, teacher incentives, and school management attendance or safe channels to anonymously report are identified over short- and medium-term horizons. incidents of corruption. Short term objectives: Establish transparent and merit-based recruitment procedures and advertise all vacant staffing positions • Develop and implement a national package of through multiple channels. The government recently transparency policies for the education sector. adopted a national teacher job and skills framework which These policies should support the disclosure of establishes and specifies the professional competencies, information for both inputs (e.g., budgets) and qualifications and duties of the teacher. In addition to outputs (e.g., performance) in the education sector. this, the government may consider additional elements Given the proximity of citizens to local leaders in the design of the recruitment procedures to increase 29 CHAPTER 2: BOOSTING SCHOOL PERFORMANCE the number and quality of candidate teachers that apply these should be complemented by comprehensive into the civil stream. This may include, for instance, the legislation that address intimidation and retaliation systematic publication of vacancies through an online issues, including national whistleblower protection platform, combined with newspapers and SMS-alerts and effective plea-bargain arrangements at the for job seekers. In a similar vein, the process of the judiciary level. competitive selections should be widely disseminated within the school areas to ensure early community • Strengthen the role of performance evaluation in monitoring and oversight of the hiring process (when the career management of teachers and school done locally). In addition, a competency test, that can directors. The survey findings suggest that be conducted by an independent agency for all types performance of teachers can be enhanced by clearer of teachers, may help to filter the pool of candidates by expression of performance goals and feedback. The establishing a minimum score to award contracts for design of performance evaluations should include teachers entering civil service.12 transparent performance objectives; and should close the feedback loop by providing information • Establish transparent, digital and mobile-based on how to improve individual performance including financial arrangements for teacher salary payments by linking it to the national teacher training strategy and school grants transfers. The government has and regional training plans. recently established a single harmonized school fund with a new distribution formula that takes • Support synergies between top-down and bottom- into account additional criteria such as equity up accountability efforts. Strengthen existing and performance. It also intends to increase the government oversight activities (e.g., audits), amount of school grants to better support basic combining them with grassroots-community school operational needs and improve timeliness monitoring. Opportunities for coordinated oversight of transfers. Introducing digital and mobile involving supreme audit institutions, frontline service payment methods could be particularly effective providers, and citizens should also be explored. at reducing delays, information asymmetries, and petty corruption by making payment data more • Compile and regularly track key performance transparent. Tailored communication campaigns indicators for evidence-based education workforce should be rolled out for teachers in rural areas where management. The survey provides a baseline against mobile payments can significantly reduce travel time which the impact of human resource management and interruption of school where there are no banks and other reforms can be measured through in close vicinity. follow-on surveys. Subsequent surveys should be complemented by administrative data, particularly Medium-term objectives: payroll data, to measure inefficiencies in staffing and inequities and distortions in compensation, and to • Build a functional grievance redress mechanism identify staffing needs and gaps. on the recruitment process. The grievance redress mechanism should have built-in provisions to ensure Effor ts to implement some of the listed follow-up from competent authorities. Specific recommendations are ongoing. The World Bank has campaigns should be carried out to ensure that supported the government in adopting key policy reforms the mechanism is well-known and whistleblower on teacher qualifications through the Investing in Human protection should be put in place. In the medium-term, Capital development policy operation, as well as in 12 The government implemented a quality control filter to improve selection of community teachers in eight pilot districts in 2018- 2019; however expansion of the pilot has not yet taken place. 30 MADAGASCAR ECONOMIC UPDATE | NAVIGATING THROUGH THE STORM financing initiatives such as school grants and digital candidates, increase school grants and implement payments through the Basic Education Support project. key elements of the Education Sector Plan, particularly In order to achieve positive change and outcomes, it will the reform on curriculum, the use of mother tongue be critical that steps are taken to ensure that these initial as a language of instruction at the basic cycle and the reforms are institutionalized and sustained. increase in teaching hours. Challenges pertaining to the management of community hired teachers also presents These recommendations should be accompanied by a somewhat unique predicament to the education sector other reforms aimed at improving learning outcomes. in Madagascar and requires a global approach that The immediate priority is to establish a national merit- encompasses both public finance and human resource based selection process for civil service teacher management improvements. 31