Document of

The World Bank

FOR OFCIAL USE ONLY

MICROFICHE COPY

Report No. 10540-MAG Type: (PCR)N.AMISATO, / X31678 / T9105/ OEDD2

PROJECT COMPLETION REPORT

MADAGASCAR

INDUSTRY AND TRADE POLICY ADJUSTMENT CREDIT(CREDITS 1834-MAG AND A-32-MAG)

APRIL 15, 1992

Industry and Energy Operations DivisionSouth Central and Indian Ocean DepartmentAfrica Region

This document has a restricted distribution and may be used by recipients only (a the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit: Malagasy franc

1987 US$1 = FMG 1,069.2 1990 US$1 = FMG 1,494.11988 US$1 = FMG 1,407.1 1991 US$1 = FMG 1,835.41989 US$1 = FMG 1,603.4

GLOSSARY OF ABBREVIATIONS

ASAC = Agricultural Sector Adjustment CreditBFV = National Bank for TradeBMOI = Malagasy Bank of the Indian OceanBNI = National Bank for IndustryBTM = National Bank for AgricultureIDA = International Development AssociationISAC = Industrial Sector Adjustment CreditITPAC = Industry and Trade Adjustment CreditLIR = Liberalized Import RegimeOECP = Overseas Economic Cooperation Fund of JapanOGL = Open General LicensePCR = Project Completion ReportPIP = Public Investment ProgramPSAC = Public Sector Adjustment CreditSFA = Special Facility for Africa

FOR OFFICIAL USE ONLYTHE WORlD HANK

Washington. D C 20433US A

OffKC of Dafectot-GenwaIOpetatnsn EValute4bn

April 15. 1992

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on Madagascar - Industry and TradePolicy Adjustment Credit (Credits 1834-MAG and A-32-MAG)

Attached, for information, is a copy of a report entitled "ProjectCompletion Report on Madagascar - Industry and Trade Policy Adjustment Credit(Credits 1834-MAG and A-32-MAG)," prepared by the Industry and Energy OperationsDivision. Country Department III of the Africa Region. No audit of this projecthas been made by the Operations Evaluation Department at this time.

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Attachment

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

FOR OFFICIAL USE ONLY

PROJECT COMPLE-TION REPORT

MADAGASCARINDUSTRY AND TRADE POLICY ADJUSTMENT CREDIT

(CREDITS 1834-MAG and A-32-MAG)

Table of Contents

Page No.

PREFACE ...................................................EVALUATION SUMMARY ......... ........................... i

PART I. PROJECT REVIEW FROM BANK'S PERSPECTIVE 1......

A. Introduction ...................... 1..................... Adjustment Context ................................. 1Country Background and Performance .................... 3

B. Credit Genesis ............. ............................ 4C. Credit Objectives and Description ........................... 5D. Credit Component Performance .................. 6E. Project Formulation and Organization ........................ 8F. Project Implementation ................................... 9G. Impact of Adjustment .................................... 10

Aggregate Supply Response ........................... 10Supply Response in the Industrial Subsectors ..... ......... 11The Results in Public Enterprise Reform ..... ............ 13

H. Conclusions ............................................ 13

PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE 16

PART III. STATISTICAL INFORMATION ...................... 17

Credit Data . .............................................. 17Mission Data ............................................... 18

Tables1. Selected Economic Indicators, 1965-90 ....................... 192. Summary Balance of Payments, 1980 and 1985-90 ..... ......... 203. Exports and Imports by Major Category, 1987-90 ..... .......... 214. Merchandise Imports, 1980-90 ............................. 225. Merchandise Exports, 1980-90 ............................. 236. Nominal Protection Rates (%), 1988-89 ...................... 247. Consumer Price Developments, 1980, 1985-90 ..... ............ 258. Government Revenue and Expenditure, 1980, 1985-90 .... ....... 269. Comparison of Projected versus Actual Economic Indicators, 1988-90 27

Figures1. Real and Nominal Exchange Rates, 1982-89 ................... 282. Saving and Investment, 1960-89 ............................ 29

This document has a restricted distribution and may be used by recipients only in the performanceOf their official duties. Its contents may not otherwise be discloseti without World Bank authorization.

PROJECT COMPLETION REPORT

MADAGASCARINDUSTRY AND TRADE POLICY ADJUSTMENT CREDIT

(CREDITS 1834-MAG and A-32-MAG)

PREFACE

This is the Project Completien Report (PCR) for the Industry and TradePolicy Adjustment Credit (ITPAC) to Madagascar. The Credit was approved by the Boardon June 30, 1987 and comprised of: IDA Credit 1834-MAG for SDR 12.5 million, SpecialFacility for Africa (SFA) Credit A-32 MAG for SDR 52.2 million, a Government of SaudiArabia Credit for Saudi Rials 12 million. a Government of Japan Credit for Yen 1 billion anda Government of Japan Grant for Yen 1 billion. ITPAC was closed on March 31, 1991 andfully disbursed on February 6, 1991.

This PCR was prepared by the Industry and Energy Operations Division,Country Department III of the Africa Region (Preface, Evaluation Summaqy, Parts I and HI).In September 1991, the Bank sent the Borrower Parts I and III with the request to preparePart II by November 1991, but no reply was received.

Preparation of this PCR is based, inter ala on the project brief, tne InitiatingMemorandum, the President's report, the Credit Agreements, supervision reports, a specialreport titled Mada,ascar - Adiustment in the Industrial Sector and Agenda Lbr FurtherReforms (No 7784-MAG) and correspondence between the Bank, cofinanciers and theBorrower.

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PROJECT COMPLETION REPORT

MADAGASCARINDUSTRY AND TRADE POLICY ADJUSTMENT CREDIT

(CREDITS 1834-MAG and A-32-MAG&

EVALUATION SUMMARY

Introduction

i. Four adjustment Credits have been extended to Madagascar since 1985.Initially, the Government and the Bank adopted a cautious strategy and agreed to beginaddressing the many structural distortions affecting the economy sector by sector. Thisapproach was supported by two IDA sectoral Credits, beginning with the Industrial SectorAdjustment Credit (ISAC) in 1985 and followed by the Agricultural Sector Adjustment Credit(ASAC) in 1986. Building on these two operations, the adjustment process gainedmomentum. As it became increasingly evident that sectoral policy improvements bythemselves were unlikely to lead to a significant and rapid supply response, the Governmentmoved decisively to a broader agenda of far-reaching refc'rms supported successively by theIndustrial and Trade Policy Adjustment Credit (ITPAC% .ni 1987 and the Public SectorAdjustment Credit (PSAC) in 1988.

ii. The ITPAC thus marked the second phase of an adjustment policy, initiatedby the Government of Madagascar with support from IDA and the IMF, to reorient theMalagasy economy towards a free market system. It comprised of IDA Credit 1834-MAG forSDR 12.5 million and SFA Credit A-32 MAG for SDR 52.2 million along with a JapaneseGrant for Yen I biiiion, an OECF Credit for Yen 1 billion and a Saudi Arabian Credit forSaudi Rials 12 million. Approximately ninety-nine percent of the proceeds were quick-disbursing, providing an immediate source of foreign exchange to expand Madagascar's importpotential. The remaining one percent funded consultant services for an action program torehabilitate public sector enterprises, portfolio audits of the three state controlled commercialbanks, and, subsequently, for follow-up recommendations for commercial bank rehabilitationand Central Bank supervision. Board approval was granted on June 30, 1987 and the Creditbecame effective on September, 21 1987 with the Japanese components becoming effectiveon April 19, 1988. The closinig date, originally set for December 31, 1989, was extendedtwice, ultimately occurring on March 31, 1991.

Objectives

iii. The objective of ITPAC's package of policy reforms was to deepen the policyturnaround process initiated under ISAC, thereby assisting recovery and growth. Thesereforms were designed to increase competition through liberalization of the international anddomestic trade, thus fostering a market-based resource allocation system in Madagascar. Toconsolidate the gains made under ISAC, and aided by the growing consensus in favor ofopening up the economy, significant additional reforms were introduced. The cornerstone ofthe reform program was a substantial modification of the exchange rate system in support ofextensive trade liberalization. Complementary reforms were also pursued to liberalizedomestic markets and reduce the role of Government. Components of the ITPAC policy

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reform package fell into fve categcries: (a) liberalization of the trade and exchange rateregimes; (b) import tariff reform; (c) price decontrol; (d) public investment programrationalization; (e) restructuring and privatization of public enterprises; and (f) reforms in thebankdng system.

Implementation Exnerience

iv. InPAC was disbursed in three tranches. The first two phases of theadjustment program were implemented as planned, although a three-month delay in releasingthe second tranche was necessary to allow for a waiver on specific project conditions.Conditions for third tranche release were met thirty months after the originally s Neduleddate. The delays were caused by difficulties in the privatization and/or liquidation oI the tentargeted public enterprises. These comprised ten ill-conceived industrial firms chosen becauseof the burden they imposed on the budget and on the financial system, that clearly presentedlittle immediate interest to the private sector. The program design lesson from thisexperience is that when multiple objectives are to be achieved, the pace is dictated by theslower actions to be implemenited. Public enterprise reform, although an important objective,had an impact on trade reform which was advancing on a faster track. Lapses inmacroeconomic management and lower than expected export expansion, together with thedelay in tranche release, contributed to the reemergence of foreign exchange constraints andthreatened the sustainability of the program.

V. Beyond the Government's hesitancy in defining the role of public enterprisesin the economy and in taking decisive action thereof, several unforeseen factors caused theimplementation of the program to suffer. Private sector capital available for the purchase ofpublic enterprises was scarce and Government's receptivity to foreign investment for thispurpose was less than complete. Rising energy import costs became a substantially greaterburden on the economy. Due to changing economic conditions, many provisions of theinvestment code, which was in cffect at the inception of the adjustment effort, were notparticularly effective and a broader version was only announced in December 1989, relativelylate in the implementation of this particular program.

Project Impact

vi. The core objective of ITPAC - to implement trade policy reforms increasingcompetition and efficiency of the industrial sector and enhancing its contribution to theeconomy - was substantially realized. Industrial capacity increased in many of the morecompetitive sectors, with the largest gains achieved in the garment industry. Product linerationalization was a result of lower protection from imported goods and increasedcompetition from abroad. This required a significant adjustment in production patterns andthe response from parts of the sector was quite positive. Pricing policies increasinglyincorporated market signals. The reorientation of the industrial sector came not only fromrationalizing production of existing plant but also from new investment responding toincentives favoring exports. A feasibility study on free trade zone policy environmen., anddevelopment was completed with promising prospects for Madagascar. The comparative laboradvantages offered by Madagascar, coupled with a liberalized access to foreign exchange anda more positive Government attitude towards foreign investment, have already inducedforeigners to consider and undertake foreign direct investments.

vii. As expected, the impact of reforms on specific industrial subsectors varied inline with the subsectors' cnmparative advantage, relative labor and capital intensity and importrequirements. Textile production ha. enefitted from pressure by exporting garmentmanufacturers foc quality and consistency improvements. New entries in the sector aregearing then.Aclves to sell directly into export markets. Existing specialized garmentmanufacturers are also becoming increasingly export oriented. The structure of the footwearsubsector hes changed from a quasi-monopoly, prior to the adjustment process, to a multi-enterprise activity in which many small individual enterprises are subcontractors to the majorproducer. The seafood processing subsector has felt the greatest impact and the shrimpindustry has grown to represent seven percent of the total exports of Madagascar. Verticalintegration of shrimp fishing and farming has led to aquaculture pilot projects, which couldfurther enhance export prospects.

Sustainability and Conclusions

viii. Project-supported reforms, togetherwith parallel Bank adjustment operations,had a major impact on reversing the economic decline and laying the foundation for therecovery of the Malagasy economy. Specific gains were made in GDP growth levels: startingin 1988 GDP per capita has grown in real terms for three consecutive years for the first timein almost two decades. Despite the encouraging progress noted in the previous section, thesustainability of the recent recovery will depend on the expansion of private sector investmentand exports. The objective is to reduce the excessive dependence on external aid flows, whichthreatens the viability of Madagascar's external position and, in turn, could lead tocomopacency in t.e reform process. ITPAC, and other adjustment programs, representsi nificant steps in this direction but a sustaineA diversification and expansion of Madagascar'sexport require additional efforts to improve the environment for private investment. TheGovernment's reform agenda and Bank lending strategy are focussing on this objective.

ix. ITPAC was successful in carrying forward the reform effort in Madagascarand setting the stage for renewed interest in Madagascar by domestic and foreign privateinvestors. This achievement was helped by the following features of the operation:

(a) the implementation of trade reforms was conditioned on a credible fiscalprogram that achieved and maintained internal balance;

(b) currency devaluation made the elimination of quantitative restrictions consistentwith tne balance of payments objectives;

(c) the tariff reduction stage was phased to come after stabilization and wascoordinated with the stabilization program;

(d) accompanying domestic regulatory/institutional reform, which focussed onreducing Government discretion and facilitating business entry and exit,increased the effectiveness of the reforms;

(e) implementation and monitoring of the trade reform was facilitated by thespecificity of conditionality in terms of removal of quantitative restrictions andof reduction of both maximum and average nominal tariffs and the dispersionaround the average;

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x. Neverthelcss, recent developments (such as continuing concern with the weakperformance of domestic taxes and heavy reliance on foreign aid, lack of currencyconvertibility for non-trade current account transactions and lack of momentum for furtherreform in the trade of services), suggest that the adjustment could have been more effectiveif:

(a) trade reform had been directly linked to domestic tax reform, in particular exciseand value added taxation. Poor revenue performance is generating pressures toraise revenue from trade taxes;

(b) consideration had been given to whether the large amount of financing wassustaining the real exchange rate at an artificially high level (thereby perhapshindering a better export performance), especially given that free access toforeign exchange was essentially limited to trade in goods;

(c) a timetable had been agreed at an early stage for achieving full convertibility ofthe Malagasy franc for all current account tr3iisactions--this would have givenmore incentives for private investment and facilitated the privatization processthat hindered disbursements under the Credit;

(d) the eventual end-point of trade reform had been discussed explicitly: is thecurrent 35 percent average tariff with 15 percent dispersion adequate whenindustrialized countries have tariffs of about 5 percent and high performingdeveloping countries now have average tariffs of about 10 percent; and

(e) during implementation more emphasis had been placed on the need for rapidreform in regulations controlling private investment and incentives to privateinvestors, including foreigners, so as to get the full supply response andefficiency gains generated by the trade reforms.

Xi. These design improvements, with the lenefit of hindsight, would probably haveincreased MAC's effectiveness. More generally, it is Possible to argue that the authoritiescould have managed the program better by implementing reforms in a more determined andless gradual manner. Their hesitancy, particularly with respect tu defining the role the theState and of PEs in the economy, sent mixed signals to the private sector and caused it toadopt a wait and see attitude. With hindsight, it is clear that actual results, in the form ofsupply response, could have been much more impressive if the reform program had beencarried out with greater vigor. As noted in this report, however, the Madagascar reformprogram is generally considered as a relatively successful adjustment experience in Sub-Saharan Africa and ITPAC had an important contribution to this achievement.

PROJECT COMPLETION REPORT

MADAGASCARINDUSTRY AND TRADE POLICY ADJUSTMENT CREDIT

(REDITS 1834-MAG and A-32-MAGj

PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE

A. Introduction

Adjustment Context

1. The Industry and Trade Policy Adjustment Credit (ITPAC), was the third in a seriesof adjustment operations attempting to increase efficiency in resource allocation throughliberalization of product and factor markets. These operations laid the foundation for therecovery of the Malagasy economy, which had been deteriorating rapidly since the early19P.'s. The ITPAC Credits provided balance of payments support of approximnately US$100million, in three equal tranches, disbursed in accordance with a pre-established schedule ofeconomic reforms undertaken by the Government of Madagascar in the context of an ongoingdialogue with IDA and the IMF.

2. Four IDA adjustment Credits have been extended to Madagascar since 1985. Initially,the Government was not ready to implement a broad based structural adjustment effort.Instead, it adopted a cautious sector-by-sector strategy to address the many structuraldistortions in the economy. This approach was supported by two IDA sector Credits,beginnine with the Industrial Sector Adjustment Credit (ISAC) in 1985 and followed by theAgricultural Sector Adjustment Credit (ASAC) in 1986. Building on these two operations,the adjustment process gained momentum and, the Government, recognizing that sectoralpolicy improvements by themselves were unlikely to lead to significant and rapid slipplyresponse, moved decisively to a broader agenda of far-reaching reforms supported successivelyby the Industrial and Trade Policy Adjustment Credit (ITPAC) in 1987 and the Public SectorAdjustment Credit (PSAC) in 1988.

3. The ISAC (US$60 million) became effective in July 1985. This operation wasct nceived as a first step U1 reducing distortions in the industrial sector and the economy asa whole. Specifically. ASAC focused on (a) freeing most ex-factory industrial prices; (b)eliminating export taxes on manufactured prod ucts; (c) removing some merchandise importprohibitions, thereby initiating import liberqlization; (d) improving the quality of the industrialpublic investment program; and (e) promu.,ating a more private sector-oriented investmentcode. A PCR' for this project has already been prepared, and it concludes that thisoperation, although perhaps modest in its specific conditionality, played a key role in settingthe political economy stage for a comprehensive reform program.

4. The ASAC (US$100 million, including cofinancing) became effective in September1986. Its objective was to increase the market orientation of the agricultural sector.

' PPAR on Industrial Assistance Project (Credits 1541-MAG and A-7-MAG), Report No.10405, February 27, 1992.

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Specifically, it focused on: (a) progressively reducing e need for Government rice importsby eliminating direct Government intervention in the rice market; (b) reforming the pricingsystem for major export crops and rice; (c) gradually reducing subsidies paid to agriculturaltrading companies and eliminating subsidie's on agricultural inputs; (d) transferring theresponsibility for input supply to private comniercial interests; and (e) improving the qualityof public investment in the agricultural sector. The implementation of ASAC has generallybeen satisfactory, and early results, particularly in the rice sector, have been encouraging.The second tranche was released in April 1989. The credit was closed in June 1990.

5. The ITPAC (US$100 million, including cofinancing) became effective in September1987. Its objective was to increase the openness and efficiencv of the economy. The policypackage supported by this ope-ation focused on: (a) . lizaEion of the foreign trade andforeign exchange allocation regimes; (b) tariff reform; kc) fw-r'.er price decontrol; (d)restructuring of public enterorises; (e) initiating reforms of tile banking system; and (f)improvine, the quality of the national public investment program (PIP). Analysis ofexperience with the implementation of this Credit and of its impact on the economy is thesubject of this report.

6. The PSAC (US$180 million, including cofinancing) became effective in December1988. This operation was geared to support additional actions aimed at reducing the heavydirect involvement of the state in the economy and improving public sector management. Itfocused on: (a) eliminating administrative export restrictions and the state stabilization funds'monopoly on pepper, cloves and coffee; (b) restructuring the banking sector; (c) restructuringand privatization of public enterprises; (d) introducing a new public sector budgeting system;(e) extending the annual public investment program into a rolling three-year PIP process andpreparation of annual public expenditure programs; and (f) initiating a comprehensive civilservice reform. After substantial upfront actions, implementation slowed in the publicenterprise and budgetary reform areas, but since late 1990, the pace has quickened, allowingthe second tranche release to occur in March 1991.

7. In addition to these adjustment Credits, financial sector and business environmentreforms designed to stimulate bank competition, facilitate the conduct of monetary policy, andencourage private sector investment were puki.led under the APEX I Credit which wasapproved in March 1990. This project provides a line of credit through the banking systemto support private sector investments necessary for the supply response envisaged under thepolicy framework fostered by the adjistment Credits.

8. Overall, ,c pite slower than expected progress in policy areas dependent onMadagascar's limited administrative capacity (i.e., budgetary and public enterprise reforms),the cumulative implementation of the package of sectoral and macroeconomic reformsenacted since 1985 has been satisfactory and has contributed to the r-sumption of growth.In response to the liberalization measures in agriculture for example, both the 1986 and 1987crop seasons yielded substantial production increases in the rice secto? As a result, despitebad weather in 1988 and 1990, Madagascar has now significantly reduced its dependency onimported foodstuffs. For the economy as a whole, it was not realistic to expect a supplyresponse much before 1989 because most of the crucial struc.ural adjustment reforms (pricedecontrol, exchange regime, external trade, restructuring of the banking sector and improvedallocation of public expenditures) took place on;y beginning in 1987. Nonetheless, initial

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indicatioios of the positive impact on the industrial aector are encouraging, as summari7z inSection 0 belowY

Country Background and Performance

9. Madagascar, a large islanu off the southeastern coast of Africa in the Indian Ocean,has a vast range of natural resources and a wide assortment of ecological and climaticvariations. Madagascar's 570,000 sq km is home to a popAliation of about 11 million with adensity of 20 people per sq km. While most of the island is rural, the widely dispersed urbancenters have a unique multi-cultural and ethnic configuration. The country enjoys a blendof traditional values rr.ixed with an emerging modern outlook.

10. With a per capita income of US$230 in 1989, Mauagascar is one of the 15 poorestcountries in the world. The agricultural sector accounts for about 41 percent of GDP, andemploys approximately 90 percent of the work force. Coffee, vanilla and cloves aretraditional exports and account for 28 percent of total exports. The industrial sectoraccounted for 13 percent of GDP in 1989. Rice, Madagascar's main staple, is grown in thecentral high!and plateau by small and medium-sized producers.

11. At the time of independence in 1960, Madagascar was a net exporter of rice and hada thriving private sector which operated in a relatively liberal economic environment.Depressed rice prices, as a result of Government interventions in the rice market,substantially reduced production incentives. As a result, the country has become a netimporter of this commodity. More generally, the country's economic record is one of modestgrowth to 1970, stagnation from 1970 to 1980, sharp deterioration between 1980 and 1982,and financial stabilization with limited economic growth from 1983 through 1987. Since 1988,economic results have been encouraging.

12. The disappointing growth performance of the 1970s stemmed largely frominappropriate economic policies. These emphasized a much increased public sector role, withimport substitution in industry as the central objective and agriculture in a support role, andpervasive controls on private economic activity. Between 1978 and 1980, the Governmentembarked on an "all-out" public investment policy which included large and economically non-viable projects. These policies, combined with declning terms of trade, led to an 11 percentdecline in real GDP from 1980 to 1982 and a large external debt burden, which still severelyconstrains economic growth.

13. During the 1980s, the focus of economic managemen. moved from the urgent needof financial stabilization with IMF assistance in the first part of the decade to supply-orientedmeasures supported by the Bank and the Fund in the second part. Between 1983 and 1987,the economic decline of the preceding three years was arrested, and the economy grew at amodest average rate of 1.4 percent per annum. The improved policy environment contributedto an acceleration of economic growth starting in 1988, when GDP grew faster thanpopulation at 3.4 percent. The economy continued to grow by another 4.1 percent in 1989

' A detailed analysis of the initial supply response to reforms in the industrial sector iscontained in a gray-cover report "Adjustment in the Industrial Sector and an Agenda forFurther Reforms" dated October 29, 1990. The economy-wide impact of the overalladjustment effort is assessed in the 1991 Country Economic Memorandum.

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and by 3.5 percent in 1990. Investment has also begun to recover. The composition of publicinvestment has been slowly shifting towards activities which support rather than replacepri-ate economic efforts and its quality improved markedly. The recent investment recoverywas largely associated with some initial pick-up of private investment, from a trivial amountuntil 1987 to around 5 percent of GDP in 1988 and 1989.

B. Credit Genesis

14. Sector Dev lopment Objectives. The Government's strategy for the industrial sectorwas to continue the adjustment process that was initiated under the first adjustment operationin Madagascar, the Industrial Sector Adjustment Credit (ISAC). The reforms introduced withsupport fromr ITPAC were conceived to increase the productivity and efficiency of theindustrial sector and of the econor. as a whole, and to gradually increase its capacity togenerate foreign exchange and expand output, reversing the contraction of the past decade.These objectives would be achieved through the liberalization of product and factor markets.Free movement of relative prices would induce the reallocation of resources to moreproductive sectors, the greater use of domestic inputs and the transformation of the moreefficient industrial units towards export-oriented production. The cornerstone of this policypackage was the continuation and full implementation of international trade liberalizationmeasures, supported by domestic deregulation. The quick-disbursing proceeds of the Creditwere to increase the amount of foreign exchange available to finance imports by all economicagents under a liberalized import regime, thereby supporting the movement towards a market-determined exchange rate.

15. Policy Context. ITPAC was the third in a series of economic adjustment programsaimed at reversing previous policies. These policies emphasized state control of the economyand the allocation of resources by the Government rather than in response to market signals.This gave rise to inward-looking policies protecting domestic enterprises through anadministered foreign exchang-.. allocation system, import licensing requirements, quantitativerestrictions and high import tariffs. Stabilization efforts to correct the resulting internal andexternal imbalances were proving unsustainable and increasingly painful without a reversal ofthe policies of the previous decade. The Government, reluctant to venture into the unknown,was initially not inclined to inaugurate across-the-board corrections, although it was, inprinciple, committed to the process of reform. The positive results obtained under ISAChelped convince the Govemment that it was on the right road, opening the door for MACand other reform programs.

16. Credit Design. ITPAC was designed to cover many problem areas with decisive actionwhere half measures would not do (exchange rate, foreign exchange allocation and pricecontrols) and with caution where a gradual approach seemed more appropriate (tariffprotection and public enterprise reform). The policy reforms under MAC were to achieveincreased competition in the domestic market. By quickly liberalizing foreign trade and theallocation of scarce foreign exchange resources, the economy moved a long way towards thisobjective. In order not to subject the local industry too abruptly to foreign competition, someprotection was maintained through the system of ad valorem tariffs. Tariff protection wasrationalized but was designed to remain high in the first year of the reform period whenquantitative restrictions were eliminated for almost all products. Nominal protection wasgradually decreased in the course of a four year reform program.

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17. Domestic cost-plus pricing controls were removed in parallel with increasedcompetition from abroad. Price controls were formally maintained for five basic necessities.These, too, became redundant in practice soon after the implementation of the tradeliberalization, and were removed shortly after the elimination of quantitative restrictions.In order to reduce pressures for increased trade protection to public enterprises and tomoderate the burden on public finances, ITPAC called for the privatization/liquidation of tenmajor industrial public enterprises. Also included in the Credit was agreement on measuresfor dealing with several public projects of doubtful economic merit and on the PublicInvestment Program (PIP) for 1987, 1988 and 1989. Finally, the ITPAC program alsoenvisaged increased competition in the financial sector. Policy measures to this end includedreform of the banking law and plans for liberalizing entry in the domestic banking sector fornew institutions drawing their equity base from the private sector, local or foreign.

C Credit Objectives and Description

18. Credit Objectives. The Credit contained a policy package to remove barriers toefficient allocation of scarce resources. Its main features were expected to result in economy-wide benefits. With respect to the industrial sector, the objective against which success wouldbe judged was to stimulate the revival of its more efficient segments and to provide strongincentives for the creation of efficient enterprises able to compete effectively in the domesticand foreign markets.

19. Credit comoonents. lTPAC included the following components:

(a) Trade and Exchange Regime. To ensure the efficient allocation of foreignexchange, the Government agreed to establish a non-discriminating foreignexchange allocation regime and to introduce an Open General License (OGL)system covering all goods imported to Madagascar. This was supported by a realexchange rate adjustment which was expected to be followed by an activeexchange policy to reestablish and maintain Madagascar's competitiveness.

(b) Tariff Reform. So as to increase the outward orientation, competitiveness andefficiency of the industrial sector, the Government agreed to elinminatequantitative restrictions and to simplify the tariff system, finishing with allproduct-specific tariffs and tariff treatment by end use, and reducing tariffbrackets to a maximum of ten. Tariff ceilings were immediately brought downto 80 percent and floors were set at 5 percent. Under a four-year program,average nominal protection would be reduced to 35 percent and the dispersionaround the average to 15 percent. The program would also eliminate allexemptions and required that nominal and effective tariffs (revenues divided byimports) not deviate by more than 10 percent.

(c) Price Decontrol. To make the Malagasy economy more responsive to increasedcompetition, and in line with the international trade Lberalization, the gradualremoval of price controls and cost-plus pricing was agreed.

(d) Public Investment Program (PIP). To rationalize the PIP process and toimprove the quality of public p.ojects, an agreement on the 1987 PIP at the

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national level (not limited to just the industrial sector), was achieved duringproject preparation. This was to be followed up with agreements on the 1988PIP and 1989 PIP.

(e) Public Enterprise Reform. To reduce the Grovernment's role in productiveactivities, the Government identified ten public, sector manufacturing enterprisesto be privatized, rehabilitated or liquidated (making a total of 26 since inceptionof public enterprise reform under ISAC). The preparation of an action programfor these public enterprises was agreed.

(f) Financial Sector Reform. A two-stage approach would be adopted. Initially,portfolio audits of the three state-owned banks would take place. Thereafter,portfolio restructuring plans would be formulated and implemented. Banksupervision would also be strengthened while a study would provide theanalytical underpinnings for further financial sector reforms.

D. Credit Component Performance

20. Trade and Exchange Regime. The import liberalization phase of the Creditintroduced and developed a market-based system of foreign exchange allocation. In January1988, a law eliminating quantitative restrictions on imports and import licenses was enacted.The list of prohibited items was left only with items that could present a risk to nationalsecurity and health. A temporary surcharge of 30 percent was applied on previouslyprohibited items, while agreement was reached on a schedule to eliminate this surcharge inthree years. In July 1988, foreign exchange policy reforms were widened with theintroduction of a full-fledged Open General License System (OGL). This meant thatunlimited foreign exchange became available at the prevailing exchange rate for import ofgoods by any economic agent. The 1987-88 overhaul of the foreign exchange regime wasmade possible by a cumulative 53 percent depreciation of the Malagasy franc in trade-weighted foreign currency terms. As a result of these actions, the overvaluation of theexchange rate was largely corrected by end-1988 and the OGL system could operatesatisfactorily.

21. Before the initiation of the adjustment program, Madagascar had in place an extensivesystem of export controls, that included prior authorization to export, export price controls,minigum value requirements and trial periods for exporters. In September 1988, all exportcontrols, with the exception of those applicable to vanilla and coffee, were eliminated.Beginning with the 1988/89 crop year, coffee producers were also allowed to negotiate andexecute export contracts freely. With the exception of the foreign exchange repatriationobligation that still remains in force and the case of vanilla, virtualiy all other export controlshave been eliminated.

22. Tariff Reform. The elimination of quantitative restrictions, import prohibitions andcumbersome licensing requirements pursued under ITPAC, coupled with the establishmentand thereafter maintenance of competitive exchange rates, still left in place a high anddispersed level of tariff protection. A program of tariff rationalization was introduced inJanuary 1988, when specific tariffs were substituted by ad valorem rates; tariff categories werereduced from 69 to 21, with a minimum rate of 5 percent scaling up to a maximum of 110

-7-

percent. The maximum tariff rate has been gradually reduced and reached 60 percent in the1991 Budget Law, leaving only 12 categories. The surcharge introduced for the previouslyprohibited products was phased out a year earlier than originally envisaged, in January 1990.in February of 1988 the Government also eliminated "end-use' taxation applicable toapproximately 500 products. The 1989, 1990 and 1991 tariff reforms went a long way towardsreducing the dispersion of the tariff distribution, eliminating cascading to a very large extent.The unweighted mean tariff rate reached 32 percent in 1990 and is expected to go down toabout 29 percent in 1991, while the dispersion was 20 percent in 1990 and would be about17 percent in 1991. This in turn had a major impact towards reducing effective protection.(see table 1)

23. Price Decontrol. Under ISAC, the decontrol of the ex-factory price of allmanufactured goods was initiated. By late 1986, the number of goods under price control wasfurther reduced to ten. The Government had nevertheless maintained controls on profitmargins between ex-factory and retail prices for all industrial products. These controls weremaintained in an effort to curb inflationary pressures resulting from the protection ofmonopolistic local industry existing in an environment of import-substitution. To meetITPAC's conditions of effectiveness, the Government eliminated all profit margin controls.However, maximum price guidelines remained on all but 16 industrial goods. Decree No.989/89 of the Ministry of Commerce, dated February 20, 1989, removed all price controls andrecognized a free market system for the production and sale of all goods.

24. Public Investment Program. The Government of Madagascar sought to rationalizethe public investment program which had reached unsustainable levels due to the uneconomicnature of the projects undertaken prior to 1982. Under ISAC, the quality of industrialprojects had improved and the size of the program had been trimmed back. Project appraisalcapabilitik, were also improved at the Ministry oF Industry level. In 1986 an agreement wasalso reached on an agricultural sector investment program. Under ITPAC, the overall PIPprocess was improved and agreement was reached for the 1987 national PIP during projectpreparation, followed by agreements on the 1988 PIP before second tranch disbursement.Agreement on the 1989 and 1990 PIP was reached in the course of reviewing theimplementation progress on ITPAC and PSAC.

25. Public Enterprise Reform. Prior to ISAC the Govermment controlled about 170companies or 97 percent of domestic industrial output. The majority of these receivedsubsidies from the Government and suffered from managerial, technical and financialproblems. The 1983 IMF stabilization program sharply reduced these subsidies. Followingthis reduction, the fully Government-owned banking sector continued to keep theseenterprises alive. ITPAC's objective was to liquidate or privatize a definite number of publicenterprises. At appraisal, a list of ten enterprises was identified for the preparation ofdiagnostic studies, but there was a three-month delay by the Govemment in presenting theBank with the result of these studies. At second tranche release, it was agreed thatcompletion of the divestiture or liquidation phase was to occur by December 1988 In factthis was only partially achieved by December 1990. By this date six companies had beenliquidated, three were sold to private sector investors and the sole remaining company wasgiven an extension for its sale or liquidation until May 1991. The ITPAC conditions weresubstantially met only after considerable delays. Indeed, difficulties linked to implementationof the privatization/liquidation of the ten public enterprises largely explain the delays in therelease of the third tranche of the credit.

26. The public enterprise reform program has been cxpanded and continued within thePublic Sector Adjustment Credit (Cr. 1941-MAG) approved on July 18, 1988. Acomprehensive multi-year program has been formulated and is being implemented, withdissolution or divestiture actions having been initiated for about 50 public enterprises. Anindefinite moratorium on the creation of new public enterprises was established in 1988, aceiling on total credit to the parastatal sector has been included in the monetary programssince 1985, new credit to 'high risk" public enterprises has been prohibited and theGovernment has frozen at the 1987 level the budgetary transfers to all these publicenterprises. The most important recent measure has been the c- ation in late 1990 by theGovernment of a single autonomous Special Unit reporting to the Prime Minister's Officewith the responsibility to manage in its entirety the parastatal reform program. The Bank willcontinue the monitoring of the public enterprise reform program under the Public SectorAdjustment Credit and subsequent adjustment operations.

27. Financial Sector Reform. The financial sector was highly inefficient and unable tomeet the challenges of a liberalized economy. ITPAC aimed at introducing the basis forliberalizing the banking sector and paving the way for private sector participation. Theportfolios of the three state-owned banks were in need of major write-offs, mainly as aconsequence of the previous public enterprise funding policy. The restoration of soundportfolios ind improvements in credit decision formulation seemed urgent and were includedas conditions in ITPAC. As a consequence of the portfolio audits initiated in 1986, loans inthe high risk category were immediately written down to the maximum allowable underaccumulated provisions. Additional provisions for the rehabilitation of the portfolios wereundertaken in April 1988 and again in February 1989. The Central Bank ensured that theprescribed provisioning and write-offs were fully implemented. The Banking Law of May1988, enacted in the context of the negotiations for the PSAC and APEX credits, furtherestablished supervisory guidelines for the Central Bank and also allowed, for the first time,the participation of private capital in existing banks and provided for the creation of newprivate financial institutions. A new private bank called Banque Malgache de l'Oc6an Indien(BMOI), with 75 percent foreign and 25 percent local ownership started operations in mid-1989. Cr6dit Lyonnais, a French bank, now owns a majority share in BNI, and an Italianbank, Banco de San Paolo, owns a minority share in BFV. Although the wording of thespecific conditionality on the IPAC credit was ambiguous, staff interpretation duringimplementation was restrictive in the sense that tangible progress in the privatization processhad to be achieved for tranche release.

E. Project Formulation and Organization

28. The conceptual foundation for this project was jointly established by the Governmentand the Bank with the full support of the Fund. The Government of Madagascar,encouiaged by progress under the IMF-supported stabilization efforts and the Bank sectoradjustment programs, requested IDA's help to continue and broaden the adjustment processthrough measures partly based on the findings and recommendations outlined in the studiesinitiated under ISAC. During the three supervisory missions of ISAC, a package of policyreforms was developed and thereafter discussed with the Govemment both during apreparatory mission in July 1986 as well as at the 1986 Annual Meetings. MAC was thusthe logical progression as the second phase in the structural adjustment process. The projectwas designed to channel approximately 99 percent of the quick-disbursing proceeds of theCredit to increasing foreign exchange availability for imports, thereby supporting the opening

- 9 -

up of the economy. The remaining proceeds were allocated to funding a study for therestructuring of 10 pre-identified public sector enterprises and to develop audits of theportfolios of the three state-owned banks (BNI, BFV and BTM).

29. The public enterprise reform component of the MAC was in retrospect not welldesigned. Almost all the enterprises included in the program were unprofitable andeconomically non-viable and did not attract foreign interest. Private sector interest was, ingeneral, minimal. The Government was reluctant to liquidate them and feared that theprivatization would benefit the local Indo-Pakistanis. Delays in the implementation of thepublic enterprise reform program cast doubt on the Government's commitment toliberalization and discouraged private investors.

30 ITPAC was jointly financed by IDA (Credit 1834-MAG, for SDR 12.5 million), theSpecial Facility for Sub-Saharan Africa (Credit A-32-MAG, for SDR 52.2 million), the SaudiFund (Credit for Rials 12 million), and the Japanese Government (OECF Credit for Yen 1billion and Grant for Yen 1 billion). Disbursements were made directly to the Governmentand administered through the Central Bank. Three tranches were foreseen for the IDA andspecial facility credit, while the OECF Grant and Credit and the Saudi Fund Credit had notranching.

F. Project Implementation

31. The operation was declared effective on September 21, 1987 as scheduled. Thesecond tranche, released on 18 April 1988, was three months behind schedule, partly due todelays in import tariff reforms, but mainly because of serious difficulties on the privatizationand liquidation of public enterprises. A waiver was requested and the rel ase was done onlyafter three enterprises were liquidated and an action plan for the privatization or liquidationof the other seven by December 1988 was agreed.

32. Satisfactory implementation for the release of the third tranche in a timely mannerwas achieved in five out of six areas of reform: (a) adoption of a four-year program of tariffreform; (b) implementation of rules and procedures to be applied by the Central Bank insupervising the banking sector; (c) imrnlementation of the portfolio restructuring plans for thethree fully Government-owned commercial banks (BNI, BTM and BFV); (d) introduction ofan open general licensing system for imports; and (e) elimination of all restrictions on profitmargins. However, actions taken on behalf of the ten targeted public enterprises forprivatization and/or liquidation encountered significant delays, in spite of the agreements forsecond tranche release. The target date of July 1988 was extended to December 27, 1990.By that time, six of the public enterprises have been liquidated, three were sold to the privatesector, and the remaining enterprise was granted a postponement of 3 months for its sale orliquidation.

33. The Malagasy legal environment was not favorable to privatization and/or foreignownership. Foreign ownership definition, dividend payment provisions, capital repatriation,foreign currency denominated local bank accounts and employee retention provisions wereserious obstacles to privatization. The original investment code, enacted in 1973, providedfor some fiscal and other incentives but proved to be ineffective in its implementation. TheNational Assembly approved a new code in 1985, but this was not very helpful. Theinvestment code was further discussed under PSAC and a broader version, more in tune with

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the Government's reform efforts, was published in December 1989. However, theimplementing decrees have reestablished some of the cumbersome bureaucratic procedures.The absence of a well functioning capital market, including private placements, issuance anddispersal of stock and an orderly secondary market, was also a serious drawback to anefficient dispersal of public assets.

G. Impact of Adjustment

Aggreiate Supply Response 2'

34. The overall impact of the turnaround of the Malagasy policy environment has notbeen spectacular in terms of per capita growth and supply response has been neitherunexpectedly slow nor uniformally sluggish. In the rice sector, for example, the response tothe 1986 liberalization measures was practically immediate, with the 1987 season showing asubstantial production increase. The increase was slowed in 1988 by bad weather, butresumed at an accelerated pace in 1989. Helped by liberalization and good weather, thecountry has moved away from heavy import dependence in this key staple. In themanufacturing sector, investment for export production is beginning to gather momentum, butthis is not yet reflected in aggregate export statistics. With regard to the timing of theresponse in the economy as a whole, it was not realistic to expect much before 1989 becausethe fundamental structural adjustment changes did not begin in earnest until 1987-88 with thereforms in the tariff and exchange regime. But around mid-1988 a response started to appear.

35. The twelve months between the large devaluation of June 1987 and the introductionof the Open General License (OGL) import system on July 1, 1988 was a key transitionperiod to the beginning of recovery. For the first half of 1987, the tight administrative importregime required by the overvalued exchange rate continued to be an obstacle to sustainedeconomic expansion, but it provided short-term insulation against sharp reductions in importsof intermediate goods. The June 1987 devaluation was an essential prerequisite for movingthe economy to a higher growth path, but it temporarily reduced domestic absorption, andthe economic situation consequently did not improve through early 1988. Indeed, exports andimports continued their decline through the middle of 1988, along with private sector creditand GDP.

36. The impact of the devaluation, both on prices and on domestic demand, was absorbedrelatively quickly. In April 1988, inflation began to decelerate rapidly and economic activitybegan to recover. Real GDP grew by 3.4 percent for 1988 and by 4.1 percent in 1989.Growth in 1990 continued at a slower pace (3.5 percent), yielding the third consecutive yearof per capita GDP increase. Thes.e changes in the level of major aggregates gain addedcredibility from concomitant improvements in their composition, with imports of capital goodsand long-term credit growing especially fast. Employment data in Madagascar cover less than10 percent of labor force and show some stagnation. However, partial information suggeststhat the informal sector has been an important and growing source of employmentopportunities.

? This section draws from the 1991 Country Economic Memorandum

- 11 -

37. Since 1984, the poor performance of total exports has mainly reflected the price andvolume declines of the "traditional" export crops of Madagascar, namely, coffee, cloves andvanilla. The relative share of these three products in the Malagasy exports declined from amaximum of 68 percent in 1984 to 48 percent in 1989. Because of the decline in aggregateexports, it would be misleading to call this "diversification". Actually, in value terms, exportsother than coffee, cloves and vanilla collapsed from US$171 million in 1980 to US$114million in 1987. In 1988 and 1989, however, non-traditional exports picked up markedly,spurred by the liberalization measures and by the devaluation. (see table 2)

38. Overall, the impact of the exchange rate devaluation on Malagasy exports wasdisappointing. For the 1980-89 period, the elasticity of exports with respect to the realeffective exchange rate was very low. However, this low elasticity does not diminish theimportance of maintaining a competitive exchange rate to develop and diversify exports. First,the low elasticity of total exports reflects the inelasticity of traditional Malagasy exports. Inturn, this is partially explained by the Government policy of severing farmgate prices fromborder prices, thereby preventing a pass-through of the exchange rate adjustment. Second,the supply response to exchange rate variations was better for non-traditional exports.

39. Given the stagnation of exports, merchandise imports bore the brunt of the externaladjustment in the 1980s. At constant prices, Malagasy imports fell by more than 60 percentbetween 1980 and 1989. Over the decade, the major instrument used to compress importsshifted from quantitative restrictions to exchange rate policy. The major devaluation of 1987enabled the dismantling of the quantitative restrictions, the implementation of the tariffreform, and the move to a free foreign exchange allocation system for imports. Quickdisbursing resources from external assistance, including ITPAC, made possible a substantialincrease in imports, especially in 1989 and 1990. (see table 2)

Supplv ResRonse in the Industriai Subsectors

40. The core objective of this project was to implement trade policy reforms which wouldin turn stimulate increased efficiency in resource allocation. Because the long-term natureof the liberalization process, it is too early for a full assessment of the project's impact.However, certain trends are manifesting themselves and support the hypothesis that theprivate industrial sector in particular is responding positively. The most satisfactory changein the economy that resulted from the ongoing reforms in the increased outward orientationof the historically import-substituting industry. The successful macroeconomic stabilizationand, in particular, the devaluations and liberalization of the import and export procedures,have stimulated private sector development of the garment, knitwear and food processingindustries.

41. Until 1986, firms operated well below capacity, at rates averaging 45 percent andnever exceeding 60 percent, owing primarily to the uncertain and discriminatory allocation ofscarce foreign exchange. Since 1987, industrial capacity utilization has gradually risen byabout 15 percentage points to 60 percent on average, even in the face of weak domesticdemand. The increasing profitability of exports due to the 1987 devaluation, and the non-discriminatory allocation of the increased foreign exchange supply since the adoption of theLiberalized Import Regime, are major contributors to the rising capacity utilization. Thegarment subsector, which is driven by export demand, made the most impressive gains inindustrial capacity utilization, reaching a rate of 85 percent in 1988, from a 1986 utilization

- 12 -

rate of 50 percent. So rapid was the expansion that some firms had to bring into productiveuse for the first time idle equipment that had been in storage for ten years.

42. The liberalization of imports and the increased access to foreign exchange also createda new pattern of stock management. Heretofore importers maintained a six-month to a year'ssupply of imported spare parts and inputs so as to sustain current production requirements.This has been cut back by half, generating savings of between six and eight percent of totalproauction cost. The reduction in aggregate import demand was temporary because theadditional capacity utilization and expansion required increased imported inputs.

43. A trend towards rationalization in production was another significant behavioraladjustment which resulted from having an increased availability of imported goods in thedomestic market. Market forces have required firms to rethink their production patterns aswell as their pricing policies. This rationalization has, however, not taken place in sectorswhere distribution is restricted, such as tobacco and pharmaceuticals. Significant gains havebeen achieved in raising the level of quality control and reducing production costs. Productquality levels in the export sector are still lagging behind international standards, even thoughsubstantial progress has been made. Specific subsectors, such as the garment industry, havemet the stringent international requirements and are producing high quality labor-intensivegoods.

44. Smaller private sector enterprises have been reacting more rapidly to therationalization process. This is primarily due to lingering attitudes prevalent under pastmonopolistic and protectionist practices that the large capital-intensive firms enjoyed for manyyears. In some areas, adjustment is also slower due to the built-in financial inefficiencies, theprevailing but outmoded employee retention schemes, and the continued use of inefficientcapital-intensive technologies. In some areas adjustment has now firmly taken hold, as isillustrated by the shoe manufacturing subsector, which trimmed its work force through normalattrition and streamlined its product line by reducing from two thousand to two hundred thestyles it is producing. The shoe industry has also increased the use of locally producedintermediate inputs by 50 percent.

45. Enterprises that rely on labor rather than fLxed assets are more flexible in adjustingto the Malagasy reform measures. Although labor is almost a fixed production cost becauseof the strict regulations regarding lay-offs, labor is more easily adjusted than technology, andit is cheaper than capital. Averaging only 5-8 percent of production costs (15 percent forsmaller enterprises), Madagascar clearly has had a competitive edge over the Asian miraclecountries by a factor of five, in terms of hourly compensation rates for workers, since the1987 devaluation. This margin is considered sufficient to compensate for the skilldifferentials.

46. A 1988 study on free trade zones, financed under MAC, concluded that such zonescould bring positive results in the near term. Encouraged by the economic success thatMauritius has had in the past decade with the establishment of the free trade zones, theMalagasy Government established the legal framework with Law 89-027 of 1989. Recentlyan agreement was signed with a group of Chinese investors, where the Government granteda free trade zone clearance for the port of Toamasina and delivered a fifty-year renewablelease. The investors have agreed to make a US$650 million investment in the Zone overfifteen years and it is estimated that 78,000 jobs will be created over this period.

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47. Madagascar has been able to exploit its comparative labor advantage in the garmentand knitwear subsectors. Firms in these subsectors can be identiried as pre-liberalization,mostly import-substituting, and the post-liberalization, export oriented entrepreneurs cateringto the "higher volume--lower price" segment of the international market. An interestingexception to this pattern is the export oriented producer of hand crafted, high qualitychildren's wear. The footwear subsector had traditionally been quasi-monopolistic, with onefirm controlling 64 percent of the domestic mark-et and the remaining 36 percent covered byartisanal small producers. In 1988, sixty-three percent of primary materials had to beimported by the main producer, but by 1989 this had fallen to 50 percent. Reliance onsubcontracts for some of the production also became more cost effective for the majorproducer. The subcontracting aspect had a very stabilizing effect on smaller producers whowere beginning to face severe competition from imports. New entries in this subsector arepositioning themselves as exporters.

48. The seafood processing subsector has a high capacity utilization rate and ninetypercent of production is exported. Offshore fishing is a growing industry and specificagreements have been signed with Japan and the European Community. Major gains, since1987, have been noted in shrimp fishing and farming. Aquaculture pilot projects have beenestablished in the coastal regions for shrimp and oyster farming. Shrimps now account forapproximately seven percent of total exports and the farming operations could substantiallyraise that figure as they near full capacity.

The Results in Public Enterprise Reform

49. A "score card" of public enterprise reform from 1988 through mid-1991 shows thefollowing: (i) credit to parastatals fell from 47 percent of total non-government credit at end1987 to 30 percent at end 1990; (ii) dissolution or divestiture actions have been initiated for70 public enterprises (out of the total of 170) and fully completed for 34 of them; (iii) theimportant textile industry, in particular, is in the process of going from almost entirely state-owned to fully privatized; (iv) restructuring plans have been formulated for the six largestagricultural and commercial parastatals; (v) encouraging improvements have been made in thefinancial situation and management of certain important public utilities, particularly theelectricity and water company (JIRAMA) and the national railroad; and, as noted inparagraph 26, (vi) a single entity to manage the reform process has been established. Becauseof the heterogeneity of the parastatal sector in Madagascar, it is impossible tco "measure" ona precise uniform yardstick the economic importance of the actions taken. Nonetheless, acombination of criteria (value added, employment, invested capital, etc.) leads to theconclusion that the reform actions already completed or underway affect about one third ofthe parastatal sector as a whole.

H. Conclusions

50. Madagascar has made significant progress in its shift from a command economy, withalmost two decades of economic decline, to a market oriented economy. From 1988 to 1990,economic recovery continued at a reasonable pace, although Madagascar still remains highlydependent on external aid. Efforts must be made to stimulate private savings and investmentamong both households and enterprises and to expand exports.

14 -

51. IT.PAC was successful in carrying forward the reform effort in Madagascar and settingthe stage for renewed interest in Madagascar by domestic and foreign private investors. Thisachievement was helped by the following features of the operation:

(a) the implementation of trade reforms was conditioned on a credible fiscalprogram that achieved and maintained internal balance;

(b) currency devaluation made the elimination of quantitative restrictions consistentwith the balance of payments objectives;

(c) the tariff reduction stage was phased to come after stabilization and wascoordinated with the stabilization program;

(d) accompanying domestic regulatory/institutional reform, which focussed onreducing Government discretion and facilitating business entry and exit,increased the effectiveness of the reforms;

(e) implementation and monitoring of the trade reform was facilitated by thespecificity of conditionality in terms of removal of quantitative restrictions andof reduction of both maximum and average nominal tariffs and the dispersionaround the average;

52. Under IITAC, Madagascar built on the first tentative steps under previous operationsto firmly put Madagascar on the path to becoming an open market oriented economy.Nevertheless, ITPAC was not able, on its own, to underpin such a radical transformation.Parallel and successor operations addressed imbalances in the public sector (PSAC), mitigatedthe social costs of adjustment (PASAGE) and provided resources to encourage privateproductive investment (APEX). Furthermore, remaining distortions in the labor market, inrestrictions on currency convertibility for current account transactions and civil service reformare expected to be tackled in future adjustment operations.

53. Nevertheless, recent developments (such as continuing concern with the weakperformance of domestic taxes and heavy reliance on foreign aid, lack of currencyconvertibility for non-trade current account transactions and lack of momentum for furtherreform in the trade of services), suggest that the adjustment could have been more effectiveif:

(a) trade reform had been directly linked to domestic tax reform, in particular exciseand value added taxation. Poor revenue performance is gerAerating pressures toraise revenue from trade taxes;

(b) consideration had been given to whether the large amount of financing wassustaining the real exchange rate at an artificially high level (thereby perhapshindering a better export performance), especially given that free access toforeign exchange was essentially limited to trade in goods;

(c) a timetable had been agreed at an early stage for achieving full convertibility ofthe Malagasy Lranc for all current account transactions--this would have given

- 15 -

more incentives for private investment and facilitated the privatization processthat hindered disbursements under the Credit;

(d) the eventual end-point of trade reform had been discussed explicitVy is thecurrent 35 percent average tariff with 15 percent dispersion adequate whenindustrialized countries have tariffs of about 5 percent and high performingdeveloping countries now have average tariffs of about 10 percent; and

(e) during implementation more emphasis had been placed on the need for rapidreform in regulations controlling private investment and incentives to privateinvestors, including foreigners, so as to get the fuli supply response andefficiency gains generated by the trade reforms.

54. These design improvements, with the benefit of hindsight. would probably haveincreased ITPAC's effectiveness. More generally, it is possible to argue that the authoritiescould have managed the program better by implementing reforms in a more determined andless gradual manner. Their hesitancy, particularly with respect to defining the role the theState and of PEs in the economy, sent mixed signals to the private sector and caused it toadopt a wait and see attitude. With hindsight, it is clear that actual results, in the form ofsupply response, could have been much more impressive if the reform program had beencarried out with greater vigor. As noted in this report, however, the Madagascar reformprogram is generally considered as a relatively successful adjustment experience in Sub-Saharan Africa and ITPAC had an important contribution to this achievement.

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PROJECT COMPLETION REPORT

MADAGASCARINDUSTRY AND TRADE POLICY ADJUSTMENT CREDIT

(CREDIT 1834-MAG and A-32-MAG)

PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE

The Government of Madagascar typically comments on PCRs. Indeed, it hadprovided extensive comments on the PCR for the Industrial Sector Adjustment Credit, thefirst adjustment operation in Madagascar, which was sent to OED in June 1991. Due to thecurrent political transition, the Government was not able to comment on this PCR by the endof November 1991, as we had requested in September 1991. We do not believe that theGovernment will be able to comment in the near future and we, therefore, decided not todelay the processing of the PCR.

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PROJECT COMPLETION REPORT

MADAGASCARINDUSTRY AND TRADE POLICY ADJUSTMENT CREDIT

(CREDIT 1834-MAG and A-32-MAG)

PART III. STATISTICAL INFORMATION

CREDIT DATA

Amounts (SDR million)As of June 30, 1991

Original Disbursed Canceled Repa&d Outstanding

IDA 1834-MAG (SDR) 12.5 12.5 0.00 0.00 12.5SFA A-32-MAG (SDR) 52.2 52.2 0.00 0.00 52.2SUB-TOTAL (SDR) 64.7 64.7 0.00 0.00 64.7

SALIDI LOAN (RIALS) 12.0 12.0 0.00 0.00 12.0

OECF LOAN (YEN) 1,000.0 1,000.0 0.00 0.00 1,000.0JAPAN GRANT (YEN) 1,000.0 1,000.0 0.00 0.00 0.0SU-B-TOTAL (YEN) 2,000.0 2,000.0 0.00 0.00 1,000.0

Original Credit Dates Revised

Initiating NMeorandum. 30 October 1986Letter of Development Policy 5 June 1987Negotiations April/May 1987Board Approval 30 June 1987Signature: IDA, SFA, Saudi Loan 10 July 1987

Japanese Loan/Grant 10 July 1987 20 October 1987Credit Effectiveness: IDA, SFA, Saudi Loan 21 September 1987

Japanese Loan/Grant 19 April 1988First Tranche Release 21 September 1987Second Tranche Release January 1988 18 April 1988Third Tranche Release Juty 1988 27 December 1990Closing Date 31 December 1989 31 March 1991

CUWUIATIVE CREDIT DISBURSEMENT

FY87 FY88 FY89 FY90 FY91

IDA 1834-NAG (SDR) Planned 4.17 12.50 12.50 12.50 12.50

Actual 2.78 8.50 8.51 8.51 12.50

SFA A-32-MAG (SDR) Planned 17.40 52.20 52.20 52.20 52.20

Actual 12.50 29.68 29.85 29.85 52.20

TOTAL (SDR) 15.28 38.18 38.36 38.36 64.70

Actual Total as Planned Total 71 59 59 59 100

OECF CREDIT (YEN) N.A. N.A. 250.25 475.77 1,000.00

JAPAN GRANT (YEN) N.A. N.A. 1,000.00 N.A. N.A.

SAUDI LOAN (RIALS) N.A. N.A. N.A. N.A. N.A.

- 18 -

MISSION DATA

Month/Year No. of Weeks No. of Persons Staff Weeks Report Date

Preparation June 1986 10/30/86

AppraisaL Nov/Dec 1986 3 8 16 12/16/86

Post-Appraisal February 1987 1 3 3 03/02/87March 1987 2/3 2 5 04/03/87

Supervision September 1987 2 2 4 10/07/87January 19°8 2 2 4 02/05/88February 1988 2 3 6 03/01/88June/JuLy 1988 4 3 12 07/20/88October 1988 1 1 1 10/88Jan/reb 1989 2 3 4 02/13/89June 1989 1 1 3 07/17/89Oct/Nov 1989 2 3 6 11/14/89JuLy 1990 1 1 2 08/02/90September 1990 1 1 1 09/22/90

Completion Feb\March 1991 1 1 1 03/91

FOLLTW-ON ADJUSTMENT OPERATIONS

Public Sector Adjustment Credit (Cr. 1941-MAG) approved on June 29, 1988.

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Table 1 Socected economic indicators, 19865-90

Annual averages

1966-73 1973-80 1980-84 1986 1986 1987 1988 1989 1990

Percentage Growth

Cross Domestic Product 3.6 1.2 -2.3 1.1 2.0 1.2 3.4 4.1 3.5Primary sector ... -0.4 1.6 1.2. 3.1 2.3 2.4 6.2 1.i

Secondary sector 1.6 -8.8 1.3 3.8 4.S 1.9 0.9 8.3

Tertiary sector 1.8 -3.3 1.0 0.8 -0.8 4.6 4.1 4.3

Exports ... 1.9 -10.8 -3.3 -1.9 29.2 -4.9 28.0 0.7

Impcrts 2.7 -16.1 -1.4 -3.7 -8.2 -1.6 0.9 20.0

Percentage of GDP */

Total consumption ... 97.9 99.0 99.7 95.6 96.3 93.4 90.9 91.8

Private consumption ... 85.7 88.5 90.0 86.8 86.2 86.2 82.1 83.2

Public consumption ... 12.2 10.6 9.8 8.8 9.1 8.1 8.9 8.6

Domestic saving ... 2.1 1.0 0.3 4.4 4.7 6.6 9.1 8.2

Gross investment ... 12.6 9.8 8.6 9.0 10.1 13.3 13.6 16.9

Resource balance -10.6 -8.8 -8.2 -4.8 -6.4 -8.7 -4.4 -8.7

Memorandum items:

Annual X change in CPr 3.4 9.0 21.1 10.8 14.6 16.C 26.3 9.0 11.8

Gross national saving ... -1.0 -3.1 -1.0 0.3 -0.8 1.2 3.3 5.2

(as % of GDP)

a/ Based on current prices.

Source: Government of Madagascar; and Bank staff estimates.

- ?fl -

Table 2 Summary balance of payments, 1980 and 1986-90

(millions of dollars)

1980 1985 1986 1987 1988 1989 1990

Exports of goods (fob) 438 282 329 311 280 319 302

Imports of goods (fob) 784 334 331 31F 312 314 468

Trade balance -327 -62 -2 -4 -32 -6 -158

Exports of NFS 79 59 76 97 118 132 169

Imports of NFS 320 187 208 229 249 246 284

Resource balance -se8 -160 -133 -138 -183 -109 -271

Net factor income -45 -129 -165 -174 -169 -189 -159Net current transfers -21 32 34 53 69 81 6s

Current account balance -834 -267 -264 -267 -263 -217 -382

Official transfers 87 67 118 102 138 129 170

Long term capital flow

(not) 358 152 229 248 209 179 101

Other -18 30 -17 -11 12 -24 -13

Overall balance -229 -8 76 82 88 80 104

Changes in reserves -106 20 -70 -77 -40 -17 L16

other financing 334 -12 -8 -6 -46 -43 -62

Uemorandum items:rurrent account as % of GOP -15.7 -8.9 -7.7 -9.9 -10.8 -8.8 -11.7

Exchange rate (FUG/USS) 211.3 682.6 876.3 1069.2 1407.1 1603.4 1494.1

Source: Government of Madagascar and Bank staff estimates.

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Table 3: Exports and Imports by Major Category, 1987-90(millions of dollars, and percentages)

1987 1988 1989 1990

Total Exports 311.0 280.0 319.0 302.0(fob, USSm.)As X of total:

Traditional 60.4 48.9 47.0 39.4Coffee 31.5 27.1 23.8 13.9Vanilla 25.7 16.1 13.2 18.9Cloves 3.2 5.7 10.0 6.6

Other 39.6 51.1 53.0 60.6

Total imports 382.0 379.0 381.0 556.0(cif, USSm.)

As X of total:

Food 12.8 4.5 10.2 7.2Other consumer goods 15.4 15.8 17.1 17.6Erwigy 14.4 17.4 13.4 16.4Other intermediates 29.8 25.9 23.9 23.7Capital goods 27.6 36.4 35.4 35.1

Source: Goverrment of Madagascar and Bank staff estimates.

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Table 4

AASCR: @erchanIse Imports 1980I 90(US oil lion)

aiaauu__mauuauuuuu -

1980 198i 1962 19 196 1985 19M 1967 1966 19 1990....................................... .................................. !..........

Food 88.5 99.0 127.5 r:.6 50.3 46.0 51.8 49.1 17.2 39.0 60.0o/v Race I5.4 67.9 105.0 54.0 29.4 30.4 36.2 30.6 11.3 26.0 17.6

Energy 159.2 126.9 133.9 90.2 99.3 65.2 58.5 53.3 65.5 51.5 90.7

Capital Goods 332.6 190.6 116.8 90.0 96.6 99.9 109.1 105.4 138.9 134.2 194.7

Intrmediate Goods 206.4 111.2 108.0 109.6 110.3 108.9 119.1 113.7 97.6 91.1 131.7

Conutr Goods 104.2 58.8 50.8 43.4 49.2 52.4 55.5 58.5 59.6 65.3 97.7

Other 46.1 21.6 15.3 23.7 .. .. .. .. ..

TOTAL (c.i.f) 939.1 608.1 552.3 437.5 405.7 392.4 394.1 382.0 378.8 381.1 554.8

Coaposftion of imports CI).........................

Food 9.4 16.3 23.1 16.6 12.4 11.7 13.1 12.6 6.5 10.2 7.2a/u RICe 5.9 11.2 19.0 12.3 7.3 7.7 9.2 8.0 3.0 6.8 3.2

Enerwy 17.0 20.9 24.2 22.5 24.5 21.7 14.8 14.5 17.3 13.5 16.3

Capitel Goods 35.4 31.3 21.1 20.6 23.8 25.5 27.7 27.6 36.7 35.2 35.1

Intermediate Goods 22.0 16.3 19.5 25.0 27.2 27.6 30.2 29.8 25.8 23.9 23.7

Constr Goods 11.1 9.7 9.2 9.9 12.1 13.4 14.1 15.3 15.7 17.1 17.6

Other 5.1 3.5 2.8 5.4 .. .. .. .. ..

TOTAL Cc.i.f) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0............. ................ .... ...... .... ...... .... ...... .... ...... .... ......... ............ ............ ......

Source: Nepaasy authoritis Ke 1991.

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Table 5MADAGASCAR: Nerchadise Exports, 1960.90

(mitlion of I, volume In mtric tons, unit prices fn S/kg)

1980 1961 1962 1983 196 1965 19S6 1967 1966 199 1990........................................................................................................

Graphite 6.7 9.1 7.9 5.9 6.2 7.3 8.4 7.9 9.5 9.6 11.2

Voltm 11.5 16.3 14.9 11.7 14.7 16.1 13.7 11.1 13.5 15.3 13.0

Price 0.6 0.6 0.5 0.5 0.4 0.5 0.6 0.7 0.7 0.6 0.9

Other eports 41.3 20.3 22.0 21.2 24.6 19.6 30.8 32.4 51.6 56.9 79.3ofd ich: ... . .. .

gutter ben 2.6 0.2 1.5 3.2 3.4 3.3 2.2 5.4 3.2 2.0

Vqlsu 3.7 0.4 1.9 5.7 5.2 4.9 2.3 2.6 4.3 3.3

Price 0.7 0.5 0.8 0.6 O.7 0.7 1.0 2.1 0.8 0.6

.sether 2.4 1.8 1.6 1.7 2.2 1.6 0.8 2.5 1.8 1.6

vo ue 0.7 0.7 0.6 0.6 0.9 0.5 0.3 0.6 0.5 0.3

Price 3.6 2.5 2.6 2.7 2.5 2.9 3.1 4.1 3.7 4.9

Medicinal ptants 3.9 1.S 1.2 0.9 1.1 1.0 1.2 1.3 0.8 0.7

Votum 1.0 0.9 1.0 0.9 1.2 0.6 0.6 0.9 0.5 0.5

Price 4.1 1.6 1.3 1.1 0.9 1.1 1.4 1.4 1.7 1.4

Corn 0.0 0.0 0.2 0.0 1.6 0.2 0.0 1.5 2.5 3.2YoLume 0.2 0.0 0.9 0.0 7.7 1.1 0.0 7.4 20.0 20.8PrIce 0.1 0.0 0.2 0.0 0.2 0.2 0.0 0.2 0.2 0.2

usertz 0.2 0.1 9.1 0.3 0.4 0.3 0.2 0.6 0.1 0.2

VolLu 0.1 0.2 0.1 0.3 0.5 0.4 0.1 0.5 0.1 0.1

Price 1.2 0.7 1.0 0.9 0.9 0.8 1.4 1.2 2.2 1.5

Canned meat 1.5 0.7 0.6 0.6 0.9 0.0 0.0 0.0 0.0 0.0

Volue 0.5 0.3 0.2 0.2 0.4 0.0 0.0 0.0 0.0 0.0

Price 2.7 2.7 3.2 2.9 2.4 0.0 0.0 0.0 0.0 0.0

Mica 1.5 1.1 0.9 0.5 0.4 0.5 1.1 0.6 0.8 0.5

Voleu 1.6 1.0 1.4 0.9 0.9 0.6 1.9 0.7 1.0 0.6

Price 0.9 1.1 0.6 0.5 0.4 0.7 0.6 0.9 0.8 0.8

Lobsters 0.2 0.1 0.2 0.2 0.3 0.2 0.7 0.6 2.4 2.3

Voltum 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.1 0.2

Price 8.4 6.2 8.1 9.6 10.6 9.6 12.4 15.4 16.9 14.5

Raffia 2.3 1.5 1.2 0.8 0.9 0.6 1.0 2.7 I.7 1.0

Voleu 2.6 2.0 1.6 1.5 1.7 1.1 1.1 2.1 1.3 1.0

Price 0.9 0.8 0.7 0.6 0.5 0.6 0.9 1.3 1.3 1.0

Salt 0.1 0.2 0.1 0.1 0.3 0.4 0.5 0.5 0.4 0.8

volue 1.3 2.2 0.6 2.2 7.6 1.2 9.1 8.3 7.5 11,$

Price 0.1 0.1 0.1 0.1 0.0 0.4 0.1 0.1 0.1 04

Others (blance) 26.8 13.0 14.4 12.9 13.1 11.5 23.0 30.1 36.7 40.0

ReeJports 35.4 16.5 17.0 16.0 5.7 12.6 9.2 0.0 2.9 1.5

Total 435.2 332.0 326.5 309.8 337.1 291.3 329.3 309.8 279.6 319.1 302.0owes:... s.us N M._ 55. . U m.. Sin -m

Source: Nalegasyuthnorities, May 1991.

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Table 6: Nominal Protection Rates (X) 1988-89

As of ApriL 1988 As of JulY 1988 As of January 1989Unweighted Weighted Unweighted Weighted Unweighted Weighted

Whole Econroy 46.0 31.7 45.7 30.9 41.5 28.7Agriculture 53.3 53.3 47.7Mining 20.7 19.6 17.9Manufacturing 46.0 32.9 45.8 32.1 38.8 29.8By Use:Consumption Goods 67.6 72.5 57.7Intermediate Goods 32.2 26.8 27.9Capital Goods 31.5 31.3 31.0By Sector:Food, Beverages & Tobacco 61.1 62.6 62.8 64.4 55.3 55.2Textiles & Leather 69.9 70.8 79.4 77.2 61.9 58.1Wood, Cork & Products 59.7 69.4 59.7 69.4 61.9 70.3Paper & Printing 38.4 37.3 34.0 33.5 35.2 35.1Chemicals, Petroleum & Coal 35.6 34.0 27.0 26.8 22.0 22.8Non-metallic MineraLs 39.4 38.5 39.3 38.6 39.8 42.1Basic Metal Industries 22.7 21.9 19.1 16.7 24.4 27.7Metal Products & Machinery 31.0 32.3 35.5 31.7 34.2 30.4Other Manufacturing 55.0 53.2 54.4 52.7 53.3 41.2

Source: Data provided by Malagasy authorities and World Bank estimates

- 25 -

Table 7 : Consumer price developments, 1980, 1985-90(1972 u 100; traditional households)

Category (weight) 1980 198S 1988 1987 1988 1989 1990

Food (60.35) 238.8 592.0 709.3 766.9 919.5 1003.4 1144.2Fuel and electricity (6.14) 213.1 483.2 499.8 689.5 895.2 986.7 1068.2Domestic services (1.82) 133.3 210.2 223.0 262.9 306.1 338.7 368.3Maintenance, (14.85) 185.1 452.6 604.1 887.0 980.8 1094.7 1168.4Miscellaneous (13.84) 199.2 633.6 667.6 694.8 981.2 100.3 1110.9

General index (100.00) 221.1 S51.3 631.2 728.8 920.6 1003.8 1122.1

Annual changes (%)

Food ... 11.0 19.8 8.1 19.9 8.8 14.0Fuel and electricity ... 8.9 8.4 38.0 29.8 10.1 8.4Domestic services ... 6.9 6.1 17.9 16.4 10.7 8.7Maintenance ... 7.6 11.4 36.3 39.8 14.0 6.7Miscellaneous ... 5.1 6.4 22.4 41.2 2.7 10.3

General Index 10.6 14.5 15.5 26.3 9.0 11.8

Source: C,vernment of Madagascar.

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Table 8 Government revenue and expenditure, 1980, 1985-90

(billions of FUG)

1980 1986 1986 1987 1988 1989 1990

Revenue and grants 128.7 273.1 301.3 468.4 642.2 826.1 749.3Domestic revenues 128.7 244.8 285.4 402.1 449.0 481.0 547.1Grants 0.0 28.6 36.9 68.3 93.2 184.1 202.2

Total expenditure 238.1 346.8 372.8 660.8 666.8 788.0 784.1Current expenditure 142.0 212.8 232.4 299.4 350.1 399.8 418.9Personnel 64.0 109.0 116.6 141.3 168.9 176.9 193, Goods and services 32.8 39.8 35.7 48.0 47.9 66.3 78.3Other 46.2 63.8 80.1 112.1 137.1 156.6 148.3

Capital expenditure 96.1 134.2 140.4 229.3 305.9 388.2 365.2of which: on-lending

Deficit on a commitment basis 109.4 73.7 71.6 92.4 114.7 162.9 34.8Adjustments 12.9 -1.7 1.2 4.4 6.8 3.1 8.4Cash deficit 122.3 72.0 72.7 96.8 120.6 166.0 43.2

Memorandum items: (as % of COP)

Revenue and grants 16.1 14.2 13.6 18.7 16.8 16.8 16.2Totel expenditure 3/ 29.4 18.0 18.8 20.2 19.3 20.0 18.9Budget deficit -14.3 -3.8 -3.3 -3.6 -3.6 -4.2 -0.9

3/ Includes adjustments.

Source: Government of Madagascar and Bank staff estimates.

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Table 9: Coumprison of Projected Versus Actual Ecoro ic Indicators 1988-90

Project Averge Annual Percent Growth Rates

AdJustment AdJustment scenario Actual average Actual Datascenario with 3X with 3.5X growth annual percent (millions FG constant 1984 prices)growth 1988-90 rates 1988-90 growth rates 1988-90

1987 1988 1989 1990

GDP 3.0 3.4 3.7 1769.0 1829.0 1904.0 1971.0Consumption 2.6 3.2 1.2 1625.0 1632.0 1625.0 1685.8Investment 4.3 4.3 21.4 182.0 243.0 255.0 320.7Exports 7.8 7.8 7.9 274.0 260.0 333.0 335.0lImports 2.5 4.7 6.4 312.0 307.0 310.0 371.5

Adjustment scenarios are derived from ITPAC President's Report (June 5, 1987).Actual data are from Government data and Bank staff estimates (see June 1991 CEN).

Figure 1 Real and nominal exchange ratesIgsOA00 1982-89

120

100

80 : . . . @ @ ,, . . . * Real Elf. Ex. Rate \

NomEN. Ex. . Rate60-

40

20 JI I I I I I i I I a I I I I I If I I I I 1 I I I I I I I a I I 1. I. l] IJ..ll I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 1 I I I_Jan Aug Mar Od May D e Ji Feb 8eP Ar Nov Jun Jan

1 82 83 e 84 s 85 86 87 s 69bonth I Year

Figure 2 Saving and Investment,1960489(percentage of GDP)

0.14

0.130.12 t Gross domestc investment

0.11

0.1

0.09

0.080.07 ~~~4 .

0.07

0.05 r

0.03 -~

0.02 / - l \ / 'I0.01 I I

0

-0.02--0.03 Gross domesti saving

-0.04 -

-0.05 1 1 1 1 1 1 1 1 1 1 1982 1 1 1989

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1989