For the last two years (2007 and 2008), Madagascar has made tremendous efforts to make its economy progress. The relevant aggregates pertaining to the period of 2007 and 2008 express this positive dynamism of the Malagasy economy. The main reason, revealed by international consultants, of such development is that the whole state policy has been purposely driven towards a real opening to International investments. For the sake of its economic development, Madagascar has always tried to attract foreign investors. In fact, since 2003, the Republic of Madagascar has made significant efforts to gain the interest of international investors: the new investment act (act 2007-036 dated January 14th, 2008) has been promulgated; the EDBM (Economic Development Board of Madagascar) has been created, most of administrative procedures to incorporate companies and to obtain operative licenses have been eased, new incentive legal texts ruling “economic key sectors” have been created,…. The core of the State’s policy for a “fast and sustainable” development lies on the promotion of direct private investment. The act 2007 – 036 has been especially drafted for such purpose. How does this new investment act affect the climate of investment in Madagascar? What is the role of the EDBM in terms of attractive and transparent climate of investment? These three questions appear to be crucial to understand in order to analyse the effects of the current political turmoil on Malagasy climate of investments. Nevertheless, we already can admit that the current political crisis is a real and unexpected disaster for the Malagasy economy. It is obvious that most of Madagascar economic indicators were positive for the period of 2007 – 2008 until the crisis occurred in the beginning of this year. Most of economic analysts and, especially, Malagasy company leaders, agree to say that the surplus value collected for the said period (2007 and 2008) has been completely lost within the length of the crisis (from January 2009 till present day).
Climate of investments
The concept of climate of investment can be defined as all factors that can be analyzed as the environment in which investment is realized, namely political history, economic situation, the social climate and the legal system.
The investment climate is formed by a body of evidence of cumulative nature which shall include the following areas: equal treatment, the intangibility of rules on investment, rule of law, and respect for property.
The climate of investments is the main criterion which is used by the World Bank to rank a country in its annual review “Doing Business”.
According to many experts, the current climate of investments has come to a point in which Madagascar is not anymore an interesting prospect for International investors. All of the consequences triggered by the crisis, and especially the expression of the crisis itself, led to a growing disinterest for the “economic Madagascar destination”. Before the 2009 political turmoil, the Madagascar climate of investments was positively appreciated by most of our institutional supporters as improving, open and innovating. After the crisis (we mean here, after the violent upheaval of the crisis), Madagascar has tremendously regressed on the International ranking of countries with added investment values. The most important fact which has worsened the situation is that during the crisis, there was a huge spirit of rejection of all foreign interests, publicly expressed by the leaders of the movement. During the crisis, there were many foreign companies which were victim if the rioters. The most important element of the climate of investments is the political stability, Madagascar does not have it.
The new investment act: 2007- 036 of January 14th, 2008
This act is among the most tangible sign of willingness from the former Malagasy leaders for opening Madagascar to the world economy. This act was not only drafted to be a simple legal text among so many others; this act is considered as the “constitution” of all the legal texts with economic trend.
The main purposes of an investment act (code) are the following:
- Attracting investors through legal guarantees and tax benefits;
- Defining conditions for admission and determining the legal status of approved companies.
The investment act should not operate discrimination between foreign and domestic investment. It must contain measures to attract investment, provide the procedure and the sanctions and dispute resolution.
The Malagasy new investment Act has been drafted in order to improve the climate of investments in Madagascar. In its articles 2; 3; 4; 5; 6 the new investment Act provides the main conditions of a good climate of investment:
– Freedom of investment (Article 2);
– Equality of treatment (Article 3);
– Protection of patent rights (Article 4);
– Freedom of transfers (Article 5);
– Stability (Article 6)
1) The Freedom of investment:
The article 2 of the new Investment act states that any natural or legal entity, Malagasy or foreign, is free to invest in Madagascar, in accordance with the laws and regulations in force, subject to provisions applicable to some activity sectors which are themselves subject to specific rules. These concern mining, oil and gas, banking, insurance, telecommunications, medical activities. It means that any investors can operate in Madagascar as long as they respect the Malagasy legislation.
2) The equality of Treatment:
The article 3 of the new investment act states that foreign and Malagasy investors are equally treated. They are free to hold up to 100% of shares or stocks of the company in which they carry out their activities. It means that, a foreign investor can set up a wholly owned Malagasy company. Consequently, the foreign investor is not obliged to share with a Malagasy citizen for the setting-up of a Malagasy company.
3) The protection of patent rights:
The new investment act in its article 4 provides “The Malagasy state guarantees that the individual or collective patent rights are respected. The investors are guarded against any privatisation, expropriation or requisition measures with the exception of a public interest. Failing this, the investor will be granted a fair and preliminary compensation in accordance with the appropriate laws and regulations.” According to this provision, the protection of the investor’s patent right is guaranteed by the Malagasy authorities.
4) The freedom of transfers:
The new investment act in its article 5 states that foreign or local investors are allowed to freely transfer abroad without prior authorisation all profits after full payment of taxes, dividends, miscellaneous payments and repayments including refunds of advances on the partners’ current account and their income.
5) The stability:
The article 6 of the new investment act provides that the Malagasy state commits to establish and maintain a favourable climate for investment by granting tax, customs, financial and social incentives to investors within the context of carrying out their investment projects.
II) The Economic Development Board of Madagascar (EDBM)
An organisation called Economic Development Board of Madagascar was created in order to introduce and maintain a favourable investment climate in Madagascar.
According to the article 9 of the new investment act, the EDBM is in charge of promoting, facilitating and speeding up the approval of all investments projects. In fact, before the promulgation of the new investment act, the relationship between the Malagasy authorities and the private sector was complicated. In order to improve this relationship, the EDBM has been created. The main goal of the EDBM is to facilitate, and promote the approval of investment projects in Madagascar. For that purpose, according to the article 8 of the new investment act, the procedures related to the carrying out of investments in projects in Madagascar are gathered at the EDBM:
- Entrance visa application;
- Long stay visa application;
- Professional visa application;
- Approval for all companies which plan to operate in Madagascar as a “Free zone”;
- Issuing of “Authorisation of land acquisition”;
- Registration, amendment registration, and cancellation of company;
- Issuing of “build authorization”.
Apart from these previous missions, the EDBM can help the Malagasy authorities for the drafting of any laws which may have an impact on the climate of investment in Madagascar.
“Companies life”
It is widely known that the so called private sector is the main engine of the economic development of Madagascar; such assertion has been used as among the leading principles of the national economic plan: the M.A.P. (Madagascar Action Plan). In this road map, the private sector and the public sector (mainly the state) were scheduled to partner for the implementation of public works necessary for the “fast and sustainable” of Madagascar. Obviously, the private sector is wholly and exclusively composed by private companies (regardless of their legal form), all incorporated in Madagascar according to Malagasy law. With the occurrence of the political crisis, these companies faced a lot of difficulties which prevented them from investing, and from “normally” running their businesses.
This critical situation of Malagasy companies has triggered a tremendous economic and especially social crisis. The winding-up or the suspension of activities of most of competitive companies led to a general feeling of social instability which prevented people to consume. As a loop-hole, this global reluctance to consume and to invest, put many companies in a situation of bankruptcy and / or financial uncertainty.
The government of former President Marc Ravalomanana was aggressively seeking foreign investment and had planned to tackle many of the obstacles to such investment, including combating corruption, reforming land-ownership laws, encouraging study of American and European business techniques, and active pursuit of foreign investors. President Ravalomanana rose to prominence through his agro-foods TIKO company, and is known for attempting to apply many of the lessons learned in the world of business to running the government. Prior to Ravalomanana’s resignation, concerns had arisen about the conflict of interest between his policies and the activities of his firms. Most notable among them the preferential treatment for rice imports initiated by the government in late 2004 when responding to a production shortfall in the country.
Madagascar’s appeal to investors stems from its competitive, trainable work force. More than 200 investors, particularly garment manufacturers, were organized under the country’s export processing zone (EPZ) system since it was established in 1989. The absence of quota limits on textile imports to the European market under the Lome Convention helped stimulate this growth.
Since the mid-1980s, Madagascar has run sizeable balance-of-payment deficits. The current account deficit as a percentage of GDP averaged in excess of 6% during much of the 1990s and registered nearly 4 percent in 1999. Madagascar’s debt ratio, which had reached 46 percent in 1996, was estimated at 15.4% in 2000. Within an overall framework of poverty reduction, the HIPC Initiative was expected to enable the country to reduce its debt service ratio to 5.5% in 2003, and remain at around 5% throughout the projection period 2000-19.
From more than 60% in 1994, the inflation rate dropped to 6.4% in 1998, before rising again to 14.4% in 1999 and 8.7% in 2000.
During a period of solid growth from 1997 to 2001, poverty levels remained stubbornly high, especially in rural areas. A six-month political crisis triggered by a dispute over the outcome of the presidential elections held in December 2001 virtually halted economic activity in much of the country in the first half of 2002. Real GDP dropped 12.7 percent in 2002, inflows of foreign investment dropped sharply, and the crisis tarnished Madagascar’s budding reputation as an AGOA standout and a promising place to invest. After the crisis, the economy rebounded with GDP growth of over 10% in 2003. Currency depreciation and rising inflation in 2004 hampered economic performance, but growth for the year reached 5.3%, with inflation reaching around 25% at the end of the year. In 2005 inflation was brought under control by tight monetary policy of raising the Taux Directeur (central bank rate) to 16% and tightening reserve requirements for banks. Thus growth was expected to reach around 6.5% in 2005.
Following the 2002 political crisis, the government attempted to set a new course and build confidence, in coordination with international financial institutions and donors. Madagascar developed a recovery plan in collaboration with the private sector and donors and presented it at a “Friends of Madagascar” conference organized by the World Bank in Paris in July 2002. Donor countries demonstrated their confidence in the new government by pledging $1 billion in assistance over five years. The Malagasy Government identified road infrastructure as its principle priority and underlined its commitment to public-private partnership by establishing a joint public-private sector steering committee.
The Madagascar-U.S. Business Council was formed as collaboration between the United States Agency for International Development (USAID) and Malagasy artisan producers in Madagascar in 2002. The U.S.-Madagascar Business Council was formed in the United States in May 2003, and the two organizations continue to explore ways to work for the benefit of both groups.
Nowadays, the Ravalomanana’s administration has come to an end with the unconstitutional takeover of Andry Rajoelina. Ravalomanana has left a heavy legacy: the moral obligation for any of his successor to reach a better climate of investments than he did. Andry Rajoelina has to convince to have the investors’ confidence back. His greatest weakness is actually his global image which has been promoted throughout the world: an image of a young nationalist who came to power in an illegal way.
