CONTENTS Acronyms iii Foreword iv Acknowledgements v Part One: Recent Economic Developments 1 A Economic Activity and Poverty 2 B Trade and Balance of Payment 6 C Inflation, Credit, and Monetary Policy 8 D Public Finances 8 Part Two: Outlook and Risks 11 A Economic Outlook 12 B Risks and Policy Challenges 14 Part Three: Strengthening Competition to Stimulate Growth and Job Creation 21 A Introduction 22 B Market Concentration and Anti-Competitive Practices 22 C Policy Options and Reforms to Address Anti-Competitive Behaviors 29 D Conclusion 31 References 32 Database 32 FIGURES Part One: Recent Economic Developments Figure 1 GDP growth and sectoral contributions 2 Figure 2 Government’s budget execution rate 2 Figure 3 Business expectations 3 Figure 4 Contribution to GDP growth 3 Figure 5 GDP growth 3 Figure 6 Paddy production 4 Figure 7 Export growth in 2019 4 Figure 8 Agricultural production per capita 4 i Figure 9 Employment and working age population growth 5 Figure 10 Poverty rate and headcount 5 Figure 11 Growth in global goods trade and industrial production 6 Figure 12 Sales and order book changes 6 Figure 13 Current account balance and financing 7 Figure 14 Consumer price inflation 7 Figure 15 Government revenues 9 Figure 16 JIRAMA’s arrears 9 Figure 17 Public capital expenditures by source 9 Part Two: Outlook and Risks Figure 18 Potential growth estimates 12 Figure 19 Sectoral contribution to growth, average 2020-21 12 Figure 20 Government budget and current account balance 13 Figure 21 Cumulative population and real GDP growth 14 Figure 22 GDP per capita in 1960 and today 14 Figure 23 Vanilla prices and export earnings 15 Figure 24 Present value of public debt, baseline and stress scenario 15 Figure 25 Gross official reserves 15 Figure 26 Estimates of the direct losses from natural disasters 16 Figure 27 Projected operating losses of JIRAMA in 2023 16 Figure B1.1 Distribution of tax expenditures in 2018, by objective 17 Figure B1.2 Distribution of tax expenditures in 2018, by agents 17 Figure B1.3 Size of tax expenditures 18 Figure B1.4 Sources of attractiveness for investment in the textiles sector 19 Figure B1.5 Sources of attractiveness for investment in the IT-BPO sector 19 Part Three: Strengthening Competition to Stimulate Growth and Job Creation Figure 1 Intensity of competition 22 Figure 2 Price of fixed broadband 24 Figure 3 Penetration of cellular and internet services 24 Figure 4 Operators in various segments of broadband value chain 25 Figure 5 Value chain for lychee export 26 Figure 6 Value chain for vanilla export 28 BOXES Box 1 Tax expenditures: the benefits of greater transparency and cost-benefit analyses 17 Box 2 Good practice in agribusiness: The Consortium of Cocoa Actors 30 ii ACRONYMS ARTEC Regulatory Authority for Communication Technologies for Madagascar (Autorité de Régulation des Technologies de Communication) CNaPS Private Social Security Fund (Caisse Nationale de Prévoyance Sociale) EU European Union FAO Food and Agriculture Organization FDI Foreign Direct Investment GACM Association of stakeholders in the cacao sector in Madagascar – (Groupement des acteurs du cacao de Madagascar) GDP Gross Domestic Product GEL Association of Lychee exporters (Groupement des Exportateurs de Litchi) ICCO International Cocoa Organization ICT Information and Communication Technology ILO International Labor Organization IMF International Monetary Fund INSTAT National Institute of Statistics (Institut National des Statistiques) IP Investment production IT- BPO Information technology – Business Processing Outsourcing ITU International Telecommunication Union JIRAMA State-owned utilities company (Jiro sy Rano Malagasy) LDCs Least Developed Countries MCPAT Markets and Competition Policy Assessment Toolkit MGA Malagasy Ariary NGO Non-Governmental Organization OECD Organisation for Economic Co-operation and Development PPP Public Private Partnership R&D Research and Development SMS Short Message Service SSA Sub Saharan Africa SWIORAFI Southwest Indian Ocean Risk Assessment and Financing Initiative TFP Total Factor Productivity TPP Taxes on Petroleum Products USD Unites States Dollar VAT Value Added Taxes WDI World Development Indicator WEFGCR World Economic Forum Global Competitiveness Report iii FOREWORD The successful conclusion of the Presidential election in January 2019 represents a historic window of opportunity for Madagascar to break cycles of political instability that abruptly interrupted its development in the past and to leapfrog its economic and social revitalization. Following a prolonged period of economic stagnation, growth accelerated over the last five years to reach 5.1 percent in 2018, its fastest pace in over a decade. The return to constitutional order in 2014 was instrumental to this economic revival, as it contributed to restore investor confidence, re-open access to key export markets, reinstate flows of concessional financing, and encourage structural reforms. Growth continued apace in 2019, although moderating slightly to an estimated 4.7 percent, amid weakening external demand and a slow execution of public spending following the presidential and parliamentary elections. A post-election rebound in public and private investments is expected to result in growth averaging 5.4 percent in 2020-21. This Economic Update suggests however that the country remains vulnerable to shocks. International risks include the possible intensification of the trade war between main trading partners, or the rise in international oil prices in a context of geopolitical tensions. The risk of natural disasters or of a sharp drop in the price of vanilla also need due consideration. The government must take advantage of the successful political transition to accelerate growth-enhancing reforms and develop the necessary fiscal buffers to support priority investments and be ready to face unexpected circumstances. In this context, measures to increase domestic revenue mobilization and improve public sector efficiency are particularly important. In this report, for instance, we highlight the opportunity to review different tax abatements and preferential tax regimes, which reduce government revenues by nearly a quarter. For lack of clear impact assessments, the net benefit of these tax expenditures is often unclear and revenue losses are compounded by opportunities for fraud or abuse. A more systematic and transparent cost-benefit analysis could help identify measures that are ineffective and absorb resources that could be better used in priority investments and social spending. In parallel, creating a more transparent and predictable business environment would help foster new investments and boost productivity. In this regard, the special focus section of this report analyses regulatory and non-regulatory barriers to competition in key sectors of the economy and ways to overcome them, with the ultimate objective of spurring higher growth and job creation. This includes reinforcing competition laws and strengthening their enforcement by independent regulators as well as encouraging best governance practices for incumbent firms and private sector associations. Finally, boosting productivity in agriculture and investing more in human capital will be essential to tackle extreme poverty and ensure shared prosperity. With an estimated 75 percent of the population still living with less than $1.90 a day this year and 80 percent living in rural areas, the World Bank is actively working with the government to accelerate human capital development, strengthening resilience and access to basic infrastructure services and foster private sector investments. This includes the growth pole approach, which stimulates private sector-led growth in sectors such agribusiness and tourism, and whose lessons Madagascar is sharing with the rest of the continent. Marie-Chantal Uwanyiligira Country Manager, Madagascar iv ACKNOWLEDGEMENTS This edition of the Madagascar Economic Update was prepared by a team led by Marc Stocker (Senior Economist, EA1M2). The team included Faniry Razafimanantsoa (Economist, EA1M2), Cyril Desponts (Young Professional, EA1M2), and Minosoa Lalaina (Consultant, EA1M2). The special focus on competition was prepared by a team consisting of Sara Nyman (Senior Economist, GMTCI), Natasha Sharma (Senior Economist, EA1M1), Maciej Adam Drozd (Young Professional, GMTCI), Neelam Verjee (Social Development Specialist, GTFSA), Marc Stocker (Senior Economist, EA1M2) and Ivan Crouzel (Political Economy Consultant). Valuable comments were received from Eneida Fernandes (Senior Private Sector Specialist / Tourism, GFCAS). The report was prepared under the overall guidance and supervision of Mark Lundell (Country Director, AFCS2), Marie- Chantal Uwanyiligira (Country Manager, AFCS2), Mathew Verghis (Practice Manager, EA1M2), and Carolin Geginat (Program Leader, AFCS2). The team would also like to express gratitude to our counterparts from the government for sharing the data used for the analysis, Litera for translation services, Cybil Maradza for design work, Diana Styvanley (Communications Officer, AFREC) for communications support, and Rondro Rajaobelison (Program Assistant, AFMMG) for logistics support. v PART ONE RECENT ECONOMIC DEVELOPMENTS 1 A ECONOMIC ACTIVITY AND POVERTY 1. Economic growth in Madagascar has been robust in to a combination of weakening external demand from 2018 but lost some momentum in 2019. Growth reached key trading partners and the slow execution of public 5.1 percent in 2018, its fastest pace since the return to spending, as the new government took office following Constitutional order in 2014,1 driven by robust activity in the presidential election end-2018. In particular, the export-oriented sectors and in services such as transport, nomination of new cabinet members, the reconfiguration telecommunications, and finance. Improved weather of some ministries, the designation of new budget conditions also drove a recovery in agricultural production authorizing officers, and the revision of the 2019 budget following a weak harvest in 2017 (Figure 1). In the first were associated with slower disbursements compared to half of 2019, however, economic activity moderated due previous years (Figure 2).2 Figure 1: GDP growth and sectoral contributions Figure 2: Government’s budget execution rate Percentage point Percent 6.0 50 5.0 40 4.0 3.0 30 2.0 20 1.0 10 0.0 (1.00) 0 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 Agriculture Industry Budget execution rate Services Growth Expenditures on capital execution rate Source: World Bank, INSTAT Source: Ministry of Economy and Finance Note: Contribution of sectors to GDP growth at factor costs. Based Note: The execution rate is the share of expenditures committed on national accounts at 1984 prices. as of end-July over the revised annual budget. The underlying data is from the Treasury’s Global Operations table. 2. The peaceful political transition and government’s plan inflation in the first half of the year. By contrast, the to ramp up public investments have been accompanied by contribution of net exports to growth has turned negative, rising business confidence in the course of 2019. Following reflecting a deteriorating global economic environment, a wait-and-see position of the private sector at the start which dampened exports (Figure 4). On balance, growth is of the year, business confidence and demand expectations projected to moderate slightly in 2019 to 4.7 percent, about recovered in the second and third quarters, particularly ½ percentage point below the last projections, released in the manufacturing sector, which bodes well for private in April.3 In per capita terms, growth is expected to reach investment (Figure 3). Private consumption growth was 2 percent this year, still significantly outpacing the Sub- supported by robust job creation, rising wages and moderate Saharan average of 0.3 percent (Figure 5).4 1 Real GDP measured at 1984 prices, consistent with data used by the government for its amended 2019 budget. The government will shift to new national accounts data using 2007 prices from the publication of its 2020 draft budget. 2 As of August, only 44 percent of public expenditures has been committed, a significantly lower rate than prior years. 3 World bank (April 2019). Madagascar Economic Update. Managing Fuel Pricing. 4 These projections take into account new data from the 2018 census, which shows population growth over the period 1993- 2018 to have been 3.01 percent, higher than the previously assumed rate of 2.68. 2 Figure 3: Business expectations Figure 4: Contribution to GDP growth Percent Percent 60 15 40 10 20 5 0 0 -20 -5 -40 -10 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2 2014 2015 2016 2017 2018 2019 Sales Orders Investment Private cons. Gov. cons. Exports Imports GDP growth Source: Central Bank of Madagascar. Source: World Bank, INSTAT Note: Business expectations are measured as the balance of Note: Based on national accounts at 1984 prices. Numbers for opinions on business trend, in percent of overall responses. A 2018 are estimates and those for 2019 are forecasts. Imports are positive value means that the number of respondents indicating subtracted from final demand, therefore contributing negatively an expansion in their activities exceeds that of those indicating to real GDP growth. Private cons. stands for private consumption a contraction. and Gov. cons. for government consumption. Figure 5: GDP growth Percent 8 6 4 2 0 -2 -4 -6 -8 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 GDP per capita growth GDP growth Source: World Bank Note: Based on national accounts at 1984 prices. Numbers for 2018 are estimates and those for 2019 are forecasts. 3. Rice paddy production maintained a positive production – occupying 56 percent of agricultural land and momentum in 2019 but activity in the primary sector as a employing 83 percent of households in the sector5 - is whole contracted at the start of the year. Domestic paddy estimated to reach 4.2 million tons in 2019, about 209,000 5 World Bank (2017). Madagascar Household and Spatial Analysis. Data computed from the 2012 surveys on the Monitoring of the Millennium Development Goals. 3 tons above the 2018 harvest, due to favorable weather during the first semester (Figure 7). On average, growth in conditions (Figure 6).6 The price of paddy at the husker primary sector activity is estimated to have slowed to 2.5 level has also remained above its 2018 level until the main percent in 2019, down from 3.1 percent in 2018, and slightly harvesting season in 2019.7 On the other hand, the volume below population growth. Therefore, agriculture output per of exports of the main cash crops and fishery products, capita remains stagnant and still significantly below the including vanilla, cloves, shrimps, and grains has slowed level observed a decade ago (Figure 8). Figure 6: Paddy production Figure 7: Export growth in 2019 Million tons Percent 5.0 Fruit, vegetable, other spices Vanilla 4.5 Essential oils Nickel, cobalt 4.0 Seafood Food industry 3.5 Others Garments Mineral products 3.0 -60 -40 -20 0 20 40 60 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Ministry of Agriculture Source: Malagasy authorities, WB staff calculation Note: Data is estimated based on the 2004/2005 agricultural Note: Percent change between the first semester of 2018 and census, pluviometry data, regional reports on the agricultural that of 2019. campaign, and surveys on harvest assessment when available. Figure 8: Agricultural production per capita Percent Constant LCU 6.00 10,000 4.00 9,500 2.00 0.00 9,000 -2.00 8,500 -4.00 8,000 -6.00 7,500 -8.00 -10.00 7,000 2004 2006 2008 2010 2012 2014 2016 2018 Production per capita growth Production per capita (RHS) Note: Based on national accounts at 1984 prices. Numbers for 2018 are estimates and 2019 are forecasts. 6 Estimates from the Rice Observatory and the Ministry of Agriculture, Livestock and Fishing. 7 For example, the main harvest season starts in April in Marovoay and June in Amparafaravola. 4 4. Progress in poverty reduction is supported by progress in alleviating extreme poverty is slowed down by improving labor market conditions but is hindered by low and declining labor productivity in agriculture.9 This low and falling labor productivity in agriculture. Strong decline has been associated with the inability of other economic performance over the last five years has sectors to absorb a rapidly growing population, as well supported job creation, with private employment recorded as low rural connectivity, limited access to inputs, and at the main private social security fund expanding on a lack of organized value chains in the main staple and average by 6.8 percent per year over the period 2016- cash crops. From 2012, the last year for which poverty data 18, more than twice the growth rate of the working age are available, to 2019, the percentage of the population population (Figure 9).8 Sectors contributing most to the living below the international poverty line of USD 1.90 (2011 increase in contractual employment over that period PPP) per day has only slightly decreased, from 77.6 to 74.1 include retail and wholesale trade, textiles, agriculture, percent, and remains significantly higher than the regional services to companies, and public administration. However, average of 41.5 percent (Figure 10).10 Figure 9: Employment and working age Figure 10: Poverty rate and headcount population growth Percent Percent Millions 9 79 21 8 78 20 7 77 19 6 76 18 5 75 17 4 74 16 3 73 15 2 72 14 1 71 13 0 70 12 2015 2016 2017 2018 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Formal Working age Poverty rate Headcount (RHS) employment growth population growth Source : Caisse Nationale de Prévoyance Sociale, United Nations, Source: World Bank World Bank Note: Poverty measured at USD 1.90 per day PPP. Last available Note: Formal employment is measured by the number of employees poverty headcounts are from 2012. Data for 2013-18 are estimates registered at the CNAPS, the main social security fund for private and 2019-21 are forecasts. employees in Madagascar. The working age population is made of males and females aged 15 to 64. 8 Source: CNaPs 2019 9 As measured by value added per worker (source: WDI). 10 Latest data available for the SSA region covers 2015. Data from World bank PovcalNet 5 B TRADE AND BALANCE OF PAYMENT 5. The Malagasy economy has been negatively impacted one quarter of stagnant or negative growth in 2019 and by slowing global demand. Export revenues and industrial during the first half of this year global trade in goods activity were adversely affected by a significant economic registered its weakest performance since the global deceleration in major export markets in the first half of the financial crisis (Figure 11). This has put downward pressure year, which coincided with the flare-up of trade tensions on both the demand and price of Madagascar’s key export between the United States and China. These two countries goods and was associated with a dip in industrial sales and absorb 25 percent of Malagasy exports and are a major order books at the start of the year (Figure 12). Demand source of global spillovers, including on trade-dependent conditions in industry started improving in the second economies in Europe and Asia. In this context, many major quarter, but only partially recovering from the dismal advanced and emerging economies experienced at least performance of the first quarter. Figure 11: Growth in global goods trade and Figure 12: Sales and order book changes industrial production Percent Percent 6 60 5 40 4 3 20 2 0 1 -20 0 -1 -40 -2 -60 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2 Jan '16 Apr '16 Jul '16 Oct'16 Jan '17 Apr '17 Jul '17 Oct'17 Jan '18 Apr '18 Jul '18 Oct'18 Jan '19 Apr '19 Jul '19 Trade growth IP growth Industry - balance of opinion Total - balance of opinion Source: World Bank, CPB. Source: Central Bank of Madagascar. Note: Growth in global goods trade and industrial production are A positive value means that the number of respondents indicating measured in volume. an expansion in their activities exceeds that of those indicating a contraction. 6. Weakening export revenues and sustained imports exporters, rather than to smallholders (see Chapter 3). were reflected in a deteriorating current account Nickel is the second largest source of export revenues, balance. In the first semester, the current account and while export volumes continued to grow in the first recorded a deficit of US$220.4 million, compared to a semester, lower international prices on expectations of surplus of US$213.9 million in the first semester of 2018. slowing demand from China and other major industrial The shift mainly stems from a deceleration of export economies have reduced export revenues there as well. revenues, including from cash crops and nickel. In Imports of intermediate goods remain sustained whereas recent years, vanilla has been the main source of export fuel imports are supported by ongoing demand from receipts, supported by exceptionally high prices and electricity generation and transport. The balance of robust demand. Both export quantities and unit prices, incomes, while remaining positive, dropped by a third however, shrank in the first half of 2019. Despite vanilla compared to the first semester of 2018, reflecting being a key source of foreign exchange and income for important dividend payments and lower inflow of public Madagascar, gains are accruing to intermediaries and and private transfers. For the whole year, the current 6 account balance is expected to shift from a surplus of increase to 3.9 percent of GDP in 2019 and foreign direct 0.8 percent of GDP in 2018 to a deficit of 0.8 percent investments forecasted at 3.2 percent of GDP in 2019, of GDP in 2019. With net official transfers projected to external financing flows remain robust (Figure 13). Figure 13: Current account balance and financing Figure 14: Consumer price inflation Million US dollar Percent, y-o-y 2,000 16 1,500 14 1,000 500 12 0 -500 10 -1,000 8 -1,500 -2,000 6 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 4 Jan '17 Mar '17 May '17 Jul '17 Sep '17 Nov '17 Jan '18 Mar '18 May '18 Jul '18 Sep '18 Nov '18 Jan '19 Mar '19 May '19 Jul '19 Others Government borrowing FDI and portfolio investment CPI inflation Government projects grants Food prices inflation Current account balance Source: Central Bank of Madagascar, International Monetary Fund Source: INSTAT Note: The current account measures net flows of goods, services Note: Consumer price inflation is measured by the annual variation and income between the residents of a country and non-residents. of the Consumer Price Index (base average 2016 = 100) at end of A negative figure means that payments to non-residents exceed period. The Food price index includes food and soft drinks. receipts. The current data was adapted from balance of payment data available. FDI stands for Foreign Direct Investment. The “Others” category includes banks, monetary authority, private sector loans and unrepatriated export revenues. 7. International reserves remain at an adequate level. foreign exchange linked to the production cycles of key cash International reserves remain at a healthy level, amounting crops. Reflecting the balance of international transactions, to a record 4.6 months of imports in September. he central the nominal effective exchange rate depreciated at a bank continued to implement targeted interventions to moderate pace during most of 2019, while the real effective smooth seasonal changes in the demand and supply of exchange rate remained broadly stable. 7 C INFLATION, CREDIT, AND MONETARY POLICY 8. Consumer price inflation moderated in 2019 and fluctuation in banks’ excess reserves through targeted monetary policy remains on a steady course. Consumer liquidity interventions. price inflation eased during 2018 amid diminishing food price inflation. The downward trend continued up to the 9. Madagascar’s banking sector exhibits strong third quarter of 2019, despite upward price adjustments fundamentals. All banks fulfill the minimum capital of some staple goods such as edible oils since mid-2019. adequacy requirement, with an average capital to risk- The price hike in edible oil followed the announcement weighted assets ratio of 13 percent in 2018, well above of additional import duties to safeguard domestic the required minimum of 8 percent. Non-performing industries. In contrast, rice price inflation continued to loans remain low, at 8.5 percent of total credit to the moderate in 2019, thanks to robust domestic production economy, and below the regional average of 10.1 percent. and favorable weather conditions. The downward revision Subject to seasonal fluctuations, bank liquidity is ample of gas prices at the pump negotiated by the government in aggregate, with overall deposits exceeding loans. Banks in June 2019, together with declining international oil are on average highly profitable, mostly due to very high prices earlier in the year, were reflected in energy spreads between loan and deposit rates. Credit growth to inflation decelerating up to the third quarter of 2019. companies remained robust in the first half of the year, A flaring up of geopolitical tensions in the Middle East while bank lending rates declined somewhat. Private during the fourth quarter have made international oil credit-to-GDP ratio increased from 12.9 percent in 2016 prices more volatile but have not led to a sustained to 13.4 percent in July 2019. These levels are well below uptick. Overall, inflation is expected to moderate to the regional average of 24.4 percent and signal limited 6.3 percent on average in 2019, down from 8.6 percent financial intermediation by banks. The share of population in 2018, and remain consistent with the central bank’s with access to savings account in commercial banks and price stability objective. The Monetary Policy Committee mobile money accounts remains low by regional standards has maintained the policy rate unchanged from its but increased in recent years to reach 11 and 7 percent in end-2017 level and continued to manage intra-year 2018, respectively. D PUBLIC FINANCES 10. The tax-to-GDP ratio is on an upward trend, but tax structure, with a flat 20 percent income tax rate revenue mobilization remains among the lowest in Sub- and a 20 percent VAT rate, which arguably makes tax Saharan Africa. Total government revenues excluding collection and compliance easier. However, limited grants increased to 12 percent of GDP in 2018, up from effectiveness and coordination of tax administrations, 10.1 percent in 2014.11 Tax collection in the first half of 2019 numerous exemptions and loopholes, as well as pervasive has slightly exceeded the target set in the budget, and tax evasion and corruption are constraining revenue overall revenues are expected to increase to 12.2 percent collection. Over the past 3 years, tax expenditures of GDP in 2019 (Figure 15). Despite some improvement, the amounted to 1.9 percent of GDP on average, with an tax-to-GDP ratio is well below the average of 16 percent in administrative review of their effectiveness still pending Sub-Saharan Africa.12 Madagascar has a simple domestic (see Box B1). 11 Based on national accounts data at 1984 prices. 12 Data for 2016 for SSA. Source: WDI. 8 Figure 15: Government revenues Percent of GDP 16 15 14 13 12 11 10 9 8 2015 2016 2017 2018 2019 Total revenue and grants o/w: Tax Revenues Source: Malagasy authorities, IMF and WB staff calculations, September 2019 11. The composition of government spending is improving utilities company, JIRAMA. The financial situation of JIRAMA, gradually. Public expenditures (excluding interest however, remains precarious with operating losses and payments) declined to 16.3 percent of GDP in 2018, mainly arrears towards suppliers increasing in 2019 (Figure 16). due to the under-execution of public investments. The new Social spending is projected to stabilize at 1 percent of government approved the revised 2019 budget in May to GDP in 2019, similar to the execution rate in 2018.13 Overall reflect changes in the government structure and its new expenditures (excluding interest payments) are expected priorities but it remained committed to key objectives such to rebound to 16.6 percent in 2019, reflecting a scaling as the reduction of accumulated liabilities to petroleum up of public investments in the second half of the year companies and reduced transfers to the state-owned (Figure 17). Figure 16: JIRAMA’s arrears Figure 17: Public capital expenditures by source Billion MGA Percent of GDP 1,800 10 1,500 8 1,200 6 900 4 600 2 300 0 0 2013 2014 2015 2016 2017 2018 Jun '19 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Private suppliers Government Domestic financing External financing Source: Ministry of Economy and Finance, World Bank, JIRAMA Source: Ministry of Economy and Finance, International Monetary Fund Note: Data as of June 30 for 2019. Data compiled from the financial Note: Ratio of commitments to GDP at the end of the year on an accounts of JIRAMA. accrual basis. Projections start in 2019. 13 Spending of social ministries, excluding salaries and externally financed investments. 9 12. Budget deficits remain low and are largely externally- at 2.1 percent of GDP in 2019, compared to 1.7 percent in financed. The budget deficit widened marginally in 2018, to 2018. External financing has been largely on concessional 2.5 percent of GDP, while public debt slightly declined to 45.7 terms, accounting for 95 percent of external public debt. percent of GDP. The deficit is expected to remain broadly On the domestic side, appetite for treasury bills continued stable in 2019, while the debt-to-GDP ratio is expected to be determined by seasonal variations in bank liquidity, but slightly increase to 46 percent of GDP.14 The deficit is mainly was positively affected by the smooth political transition externally-financed, with external borrowing projected after the presidential election end-2018. 14 Social spending defined using an administrative and programmatic classification. 10 PART TWO OUTLOOK AND RISKS 11 A ECONOMIC OUTLOOK 1. A positive short-term outlook is supported by further to 5.4 percent, as the upturn in public and private ambitious public investment plans. Growth is projected capital spending continues. Over the medium term, the to increase to 5.3 percent in 2020, on expectations of growth potential of Madagascar continues to be held a scaling up of public investment, including in road, back by inadequate infrastructures, low human capital, a health and education infrastructures, and a post-election lack of competition in key sectors, and poor governance. rebound of private investment as confidence returns. While this is expected to continue constraining activity Rising public and private capital spending should more through subdued productivity trends in the base case than offset a slowdown in export growth, as economic scenario, accelerated reforms by the new government activity in China, Europe, and the United States remains could result in better outcomes, and hence represent a soft. In 2021, growth is expected to increase slightly upside risks to the outlook (Figure 18). Figure 18: Potential growth estimates Figure 19: Sectoral contribution to growth, average 2020-21 Percentage point Percentage point Percent 5 3.0 8 4 2.5 7 3 6 2.0 5 2 1.5 4 1 1.0 3 0 2 -1 0.5 1 -2 0.0 0 Agriculture Industry Services 2011 2012 2013 2014 2015 2016 2017 2018 2019 TFP Labor Capital Potential GDP Contribution Growth rate (RHS) Source: World Bank Source: World Bank Note: TFP stands for Total Factor Productivity. Note: The data presents the simple average of growth rate and percentage point contribution over 2020-2021. 2. The service sector is projected to remain the main outpacing that of the overall population growth, assuming engine of growth, despite the rapid expansion of the the absence of severe natural disasters. However, manufacturing sector. Growth in the manufacturing labor productivity trends in agriculture are expected sector is projected to average 6.9 percent in 2020- to remain weak and production mainly geared towards 21, underpinned by robust investments and projected self-subsistence, reducing its contribution to aggregate improvements in electricity generation. Activity in the income generation and food security. Tellingly, only 20 tertiary sector is expected to grow at a somewhat slower percent of rice production nationwide is being marketed. pace, but its contribution to overall GDP growth should Technological absorption is low, as farmers have limited be greater, given its larger size (Figure 19). Services access to inputs, finance, and markets and as they face sector activity will also benefit from the government’s price uncertainty, which reduces the incentive to invest infrastructure investment plan, including enabling in higher-yielding production systems. Addressing this services such as transport and finance. The agriculture constraints remain a key challenge to increase the growth sector is expected to expand at a modest pace, slightly potential of the Malagasy economy. 12 3. Consumer price inflation is predicted to continue hovering 4. The current account deficit is expected to gradually around 6 percent in 2020-21. Stable inflation is predicated on expand, reflecting the prospects of decelerating export favorable weather patterns keeping food prices in check, as revenues and scaled up investments. Softening external well as broad stability in oil prices, and a continued modest demand and moderating vanilla prices should result in pace of nominal effective exchange rate depreciation and weaker export revenues in 2020 and 2021. At the same time, credit growth. Under baseline assumptions, policy interest rising public and private investments will support strong rates are expected to remain around current levels, with the import demand which, together with lower net current credible commitment of the central bank to price stability and transfers, will contribute to a rising current account an improved operational framework contributing positively deficit. The latter is projected to reach 2.4 percent of GDP to anchor inflation and exchange rate expectations. Central in 2020 and 3.5 percent of GDP in 2021 (Figure 20). Growing bank liquidity management and the recent enhancement external deficits, combined with an increasing share of of foreign exchange market operations are expected to non-concessional financing at higher interest rates should continue smoothing seasonal fluctuations in banks’ excess result in a gradual increase in public external debt, albeit reserves and the exchange rate.15 from low levels. Figure 20: Government budget and current account balance Percent of GDP 1 0 -1 -2 -3 -4 2016 2017 2018 2019 2020 2021 Current account balance Budget balance Source: Malagasy authorities, World Bank Note: The current account measures net flows of goods, services and income between the residents of a country and non-residents. Budget balance presents the difference between government revenues and government expenditures, including interest payments. A negative budget balance indicates that the government spends more than it earns. 5. Government deficits are on an upward trajectory. transfers to JIRAMA assumes that the utility’s operational The central government budget deficit is expected to performance improves and that its plans to clean up arrears widen to 3.7 percent of GDP by 2021, up from 2.5 percent are effectively implemented. The government’s ability to in 2018. This rise is mainly driven by accelerated public finance priority spending is hampered by low domestic investments, from an estimated 6.1 percent for GDP in 2018 revenue mobilization, with a tax-to-GDP ratio among the to 9.5 percent in 2021. This projected increase assumes an lowest in Sub-Saharan Africa. Efforts to increase this improved absorptive capacity and reduced implementation ratio are expected to continue, by targeting delinquent constraints. Increased public investments will more than taxpayers, accelerating the digitalization of tax declaration offset the government’s planned reductions in transfers and and improving the efficiency of the tax administration, but subsidies to State-Owned Enterprises (from 2.6 percent of are expected to fall somewhat short of the planned rise of 1 GDP in 2018 to 2.1 percent in 2021). In particular, the fall in percentage point of GDP per year absent a stronger revenue 15 Madagascar officially maintains a flexible exchange rate regime. The exchange rate is determined by the market and the central bank only intervenes to smooth episodes of high volatility, based on an automatic algorithm applied on a limited scale. 13 mobilization strategy. Over the medium term, increases in 6. Poverty rates are projected to gradually decline. With non-tax revenues and rationalization of proliferating tax per capita income growth averaging around 2½ percent in exemptions and loopholes are among the key options to 2020-21, poverty rates are projected to continue declining increase revenues without hampering activity and create in coming years, to reach 71.4 percent in 2021. Meanwhile, fiscal space to finance priority investments. Box B1 discusses the number of poor people should further increase, with the use of tax expenditures in Madagascar, assesses their an estimated 20.4 million people living on less than USD efficiency and calls for some rationalization based on 1.90 per day by 2021, up from 19.9 million in 2019 due to transparent cost-benefit analysis. rapid population growth. B RISKS AND POLICY CHALLENGES 7. Accelerated reforms could lead to stronger-than- a strong institutional commitment to macroeconomic expected growth, but downside risks loom as well. The stability could yield better than expected outcomes. Malagasy economy has proven highly vulnerable to both However, important downside risks also loom on the domestic and external shocks, as a history of stop-and- horizon. These include a sharp economic slowdown of go growth episodes illustrates (Figure 21). A successful major trading partners, a sudden drop in vanilla prices transition of power after the 2018 presidential election from their current highs, or a hike in oil prices amid substantially reduced the prospects of political instability, escalating geopolitical tensions. For instance, a sudden while repeated political crises used to be a major re-alignment of vanilla prices with their pre-boom factor behind the underperformance of the Malagasy (2012-15) average could curtail overall export revenues economy (Figure 22). Moreover, baseline projections by more than 20 percent at constant vanilla export assume gradual improvements in governance and volumes, increasing the current account deficit above reform implementation, whereas faster delivery of well- 8 percent of GDP in the absence of mitigating effects targeted and confidence-building policies combined with on the import side (Figure 23). Figure 21: Cumulative population and real GDP growth Figure 22: GDP per capita in 1960 and today Percent GDP per capita (2018) 200 1,000,000 160 120 10,000 80 40 1,000 0 MDG 100 -40 100 1,000 10,000 1,000,000 -80 GDP per capita (1960) 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 Source: World Bank Cumulative real growth Cumulative population growth Note: Sample of all countries with WDI data, GDP per capita in constant Cumulative economic growth gap 2010 USD, scales logged to the base 10 (GDP p.c. increase 10x with each Source: World Bank equal-spaced interval.). 14 Figure 23: Vanilla prices and export earnings Index - 1 in 2010 20 15 10 5 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 Unit prices Export revenues Average 2012-15 Source: Malagasy authorities, World Bank Note: Data derived from balance of payments export statistics. Unit prices are computed from value of exports and export quantity information as declared at Malagasy Customs. 8. Contingent liabilities need monitoring. Fiscal risks restructuring of Air Madagascar are also potential sources include those associated with prospects of rising of risks. This said, the risk of public debt distress is assessed government deficits amid low domestic revenue to be moderate over the medium term. Unchecked liabilities mobilization, contingent liabilities towards state-owned towards petroleum companies and commercial debt companies, and a proliferation of unsolicited PPP projects. breaching stress thresholds only in scenarios implying Continued operating losses at JIRAMA and delays in the substantial liability growth or terms-of-trade shocks (Figure implementation of a viable financial recovery plan could 24). The risk of external debt distress is currently low, increase public transfers in the short term and heighten reflecting a low starting point, an improved debt carrying risks of financial distress over the medium term. capacity in recent years, and ample foreign exchange Commercial debt obligations associated with the financial reserves compared with regional peers (Figure 25). Figure 24: Present value of public debt, baseline Figure 25: Gross official reserves and stress scenario Percent of GDP Months of imports 60 6.0 55 50 5.0 45 40 4.0 35 30 3.0 2019 2020 2021 2022 2023 2024 2025 Baseline Most extreme shock 2.0 Stress threshold 1.0 Source: International Monetary Fund and World Bank. Debt 2014 2015 2016 2017 2018 2019 Sustainability Analysis (July 2019). Note: The most extreme shock consists in a shock on GDP growth SSA interquantile range Madagascar where the rate in 2020 and 2021 is one standard deviation lower than historical average or the forecast. The threshold is that of a Source: International Monetary Fund, World Bank medium debt carrying capacity. Baseline presents the most likely Note: SSA refers to Sub Saharan Africa. The interquartile range scenario based on current available information. uses data from and 29 other SSA countries. 15 9. Natural disasters are an ongoing threat that require 9 percent of GDP, with the largest impact stemming from contingency planning. The lack of fiscal space could exceptionally strong cyclones (Figure 26).16 Planning for significantly constrain the government’s ability to respond future costs could involve the implementation a contingency to unexpected shocks, including severe natural disasters. fund, as well as contingent credit and sovereign insurance. While the cost of such disasters is estimated at about Unmitigated impacts of climate change affect the security 1 percent of GDP on average, it can spike in the face of of rural livelihoods due to a high dependence on rain-fed particularly severe events. For instance, losses from events agriculture, chronic food insecurity, physical isolation and occurring every century are estimated to cost more than a lack of access to social safety nets. Figure 26: Estimates of the direct losses from Figure 27: Projected operating losses of JIRAMA in 2023 natural disasters Percent of GDP Billion MGA 10.00 500 8.00 0 6.00 -500 4.00 -1,000 2.00 -1,500 - -2,000 Average annual losses 100-year Without Tariff All return period losses reforms optimization reforms only Earthquakes Floods Cyclones Source: World Bank. Source: GFDRR and World Bank (2016). Madagascar Disaster Risk Note : The horizontal orange line indicates estimated results in 2019. Profile, SWIO-RAFI. All reforms include fight against technical losses, energy efficiency, Note: The figures are modelled estimates of the total impact of refinancing of arrears, optimization of fuel purchases, fight against hazards. It is assumed that a larger return period is associated non-technical, losses, optimization of production in isolated centers, with less likely occurrence but a greater intensity of disasters. increase in collection rates, contract renegotiation, tariff optimization and investment in hydro in line with Least Cost Development Plan. 10. Fiscal space is needed to strengthen resilience and 11. Improving the business environment, agricultural support priority investments. Measures to increase productivity, and human capital are key to sustainable revenue mobilization and public sector efficiency will create and inclusive growth. Opening key markets to competition, the necessary fiscal space to support priority actions as creating a more transparent and predictable business well as room for maneuver if economic shocks materialize. environment, and avoiding distortionary measures would Efforts to increase the tax-to-GDP ratio can be accelerated foster sustainable private sector development. Given the through the digitalization of tax declaration and payments, prevalence of regulatory and non-regulatory barriers to improvement in tax and customs administration, as well as competition in Madagascar, Chapter 3 suggests ways of identification and removal of ineffective tax expenditures strengthening competition to stimulate investment and (see Box B.1). A transparent and objective selection of public job creation. Boosting productivity in agriculture through investments and an ambitious recovery plan for JIRAMA will improved access to markets, better organized value chains as also support fiscal sustainability while untapping the growth well as enhanced human capital through improved education potential of other sectors. Priority actions for this recovery and health services delivery remain particularly important plan include the renegotiation of contracts with suppliers, to tackle extreme poverty and ensure shared prosperity. reduction of technical and non-technical losses, responsible Strengthening early interventions and social safety nets in tariff increases for industrial users, and carefully selected cases of natural disasters is also essential to mitigate risks investments in hydropower and solar energy (Figure 27). associated with climate change. 16 Madagascar Disaster Risk Profile, SWIO-RAFI, GFDRR and World Bank (2016). 16 Box B1: Tax expenditures: the benefits of greater transparency and cost-benefit analyses Tax expenditures are defined as the transfer of public funds through a targeted reduction of business or individual tax liabilities.17 Similar to direct public expenditures, they affect the government’s budget balance and are used to achieve certain economic or social objectives. However, unlike direct expenditures, tax expenditures do not have a pre-established cap and their execution is not monitored throughout the year, which makes them significantly less transparent. Tax expenditures are often used to keep essential goods affordable or promote investment. In the case of Madagascar tax expenditures are, for the most part, intended to improve nutritional security, decrease health costs, and support investments (Figure B1.1).18 Tax expenditures include exemption from the payment of taxes and duties, abatement of the tax rate applicable to some taxpayers, preferential tax regimes for specific sectors, or deferred payments. In 2018, tax expenditures mostly consisted of exemptions on Value Added Tax (VAT) and customs duties payable by various importers (Figure B1.2). Exemptions on local sales and importations of rice made up 45.3 percent of tax expenditures in 2018, followed by drug sales and imports (13.2 percent), and exemptions granted to mining activities (12.8 percent). Figure B1.1: Distribution of tax expenditures in Figure B1.2: Distribution of tax expenditures in 2018, 2018, by objective by agents Billion MGA 800 Social - others 2% 2% 700 Support 13% nutritional security 600 Reduce health costs 21% 61% 500 400 Economic - others 300 Develop the agriculture sector 200 Various importers Free processing zones 100 Support economic development Households, enterprises Other beneficiaries 0 Economic Social Support to Mining enterprises investment Source: Ministry of Economy and Finance, World Bank Source: Ministry of Economy and Finance, World Bank 17 Definition by OECD. 18 This structure was noted across year 2016 through 2018. 17 Tax expenditures in Madagascar are highly persistent Efficiency could be improved by objective assessments and rarely overturned. One of the most noteworthy and robust monitoring. Tax expenditure decisions would tax expenditures derives from the free zone scheme require a prior analysis of their relevance or potential introduced in the late 1990s to attract investments impacts, as well as comparative analysis of whether in the manufacturing sector. This notably supported direct public expenditures or regulatory measures would the establishment of a thriving textile sector in be more appropriate. Additionally, the monitoring of tax Madagascar. The scheme’s fiscal incentives include expenditures is undermined by the unavailability of data VAT exemption on imports and exports, as well as and limited technical expertise. When the inefficiencies of corporate income tax exemptions for the first years certain tax expenditures are uncovered, attempts to modify of operation. In addition, tax breaks were included in or remove exemptions are often met with resistance, from the 2002 Act on large mining investments to attract beneficiary groups or for political reasons. investments in the mining sector. Since 2008, following a sharp rise in the price of foodstuffs on international Currently, direct losses in tax revenues are significant. In markets, rice transactions have also been exempted 2018, 448 tax expenditures were inventoried in Madagascar from VAT and customs duties to reduce retail prices and entailed a reduction in tax revenues amounting to MGA and complement local production with imports. More 1,099.3 billion, i.e. 2.7 percent of GDP or 23.4 percent of the recently, new measures were introduced to promote tax revenues collected that year (Figure B1.3).19 For a country access to renewable energy. The list of tax expenditures such as Madagascar, whose tax revenue collection capacity also includes many ad hoc exemptions to privileged ranks among the lowest in the world, this is a very large beneficiaries. Tax expenditures have rarely been undone, concession. More exemptions were introduced in 2018 for irrespective of changes in economic circumstances and the importation of hemodialysis instruments and devices, policy priorities. ready-to-use therapeutic foods, and wheat seeds.20 Figure B1.3: Size of tax expenditures Percent 25 20 15 10 5 0 2015 2016 2017 2018 Percent of GDP Percent of tax revenues Source : Ministry of Economy and Finance, World Bank Weak control mechanisms open the door to fraud and investments, and their VAT-free imports unfairly compete abuse of tax expenditures. For instance, some enterprises with domestic industries. The exemption on rice imports are created as free export processing enterprises and yet is also abused by some importers who make fraudulent omit to submit any activity report as required by the Act on declarations to benefit from the exemption. VAT losses free export processing enterprises. Some in fact benefit resulting from fraudulent rice import declarations are from tax exemptions without creating jobs or making estimated at about 0.1 percent of GDP. 19 The tax expenditure assessment is conducted by the Ministry of Economy and Finance and the relating report is publicly accessible on the Ministry’s website and is annexed to the Finance Act. In 2018, the assessment did not address excise duties. 20 Tax expenditure data cannot be compared across years because of differences in scopes of analysis. 18 The net benefit of tax expenditures needs to be well ahead of tax incentives (Figure B1.4 & B1.5).22 established. For lack of cost-benefit assessments, it cannot be established that tax expenditures achieve Tax-exempt imports can have detrimental effects on their intended socio-economic objectives. Moreover, local producers. In some cases, duty free imports make international experience shows that tax incentives are it harder for local production to compete with more not a major factor behind attracting investments and capital- or skill-intensive processes abroad, as is the are effective only under broader reforms of the business case with the rice sector. Rice production in Madagascar climate, as observed in successful cases like Korea and is mainly intended for the self-consumption of small Singapore. The failure of similar initiatives in other producers. Only 20 percent of this production is sold developing countries is attributable to the weakness on markets and it is complemented with imported, tax- of the business environment in general, such as exempt rice. Because consumers prefer locally produced persistent political instability and lack of infrastructure, rice, imported rice is generally sold at a lower price, which cannot be compensated by tax incentives alone. except during the lean period. Cheap imported rice Furthermore, as different countries compete to attract compels local producers to adjust prices and margins investments, those with a weak business climate will downwards, adding to the pressure from market need to make substantial concessions to domestic intermediaries who take advantage of the remoteness of resource mobilization to achieve competitiveness. producers. Promoting a higher market price, on the other Businesses operating in exports sectors in Madagascar21 hand, could incentivize local producers to increase their mention the availability and affordability of inputs, as commercial supplies and invest in production methods well as preferential access to export markets as the that are more effective, provided market access and determining factors for doing business in Madagascar, value chains are improved concurrently. Figure B1.4: Sources of attractiveness for Figure B1.5: Sources of attractiveness for investment in the textiles sector investment in the IT-BPO sector Other reduced costs 9 Follow our competitors 8 Access to Input 14 Other reduced costs 13 Access to Land 23 Access to fiscal incentives 21 Access to Fiscal Incentives 23 Access to competences 25 Access to a pool of labor Work environment 27 fluent in French 38 Preferential Access to 41 Access to a broadband Export Markets connection 46 Reduced labor costs 64 Reduced labor costs 54 0 20 40 60 80 0 20 40 60 Source: World Bank. Interview conducted in 2019. Source: World Bank. Interview conducted in 2019. Note: Figures present the percentage of firms citing each factor Note: Figures present the percentage of firms citing each factor as comparative strength as comparative strength 21 Including agribusiness, textile, and subcontracting activities in business outsourcing services. 22 World Bank (forthcoming). Country Economic Memorandum. 19 Over the past years, the administration made progress tax administration, reducing the opportunities for fraud in reinforcing the management of tax expenditures. and abuse, and promoting an equitable treatment of Reforms mainly aimed to reinforce the transparency of private operators. tax expenditures and included: (i) publishing and updating the list of enterprises benefiting from the free export Simplicity. The tax policy should remain simple, with all tax processing zones and enterprises scheme on a monthly regulations integrated into the general tax code. basis, on the website of the Economic Development Board of Madagascar, (ii) publishing the amounts and names Cost-benefit analysis. Any new decision to grant an exemption of beneficiaries of exemptions of customs tax and VAT should be supported by a positive cost-benefit analysis. on imports, on the website of the Directorate General of Additionally, periodic reviews to assess the achievement Customs, (iii) publishing the assessment of the amount of the original objectives should be conducted. of tax expenditure in Finance Acts, and (iv) publishing the tax expenditure report on the website of the Directorate Transparency. Any tax expenditure should be legally grounded General of Taxes. in the tax legislation, costs and benefits should be assessed, and communicated ex ante and ex post. The eligibility For tax expenditures to be effective and to prevent criteria and granting process should be clearly defined. the diversion of important fiscal revenues away from priority investments, key principles must be abided Time limit. Temporary tax expenditures should be preferred to. These principles offer the advantage of facilitating to permanent ones. 20 PART THREE STRENGTHENING COMPETITION TO STIMULATE GROWTH AND JOB CREATION 21 A INTRODUCTION 1. This special focus section assesses the competitive competition (Figure 1). This reflects weaknesses in landscape in key sectors of the economy and the legal framework for competition policies, limited suggests a series of priority actions to reinforce enforcement of existing laws, and political capture. This it. Market competition is a key driver of productivity, special focus analyses business practices in key sectors export competitiveness and innovation, while it benefits of the economy and offers solutions to improve policy consumers through lower prices and better paying jobs. frameworks and promote a level playing field in order However, Madagascar’s key sectors are characterized to stimulate higher and more inclusive growth in the by a high level of concentration and low levels of coming years. B MARKET CONCENTRATION AND ANTI-COMPETITIVE PRACTICES 2. Key sectors of the Malagasy economy are highly environment and, in some cases, taking advantage of it. concentrated. A wave of privatizations in the 1980s Once established, incumbent firms were able to maintain a and 1990s saw state-led monopolies and oligopolies be first or second mover advantage and preserve their market replaced with privately-owned companies.23 However, dominance, including through political capture. Therefore, private actors that took control of these entities were key sectors of the economy are highly concentrated, and largely drawn from the political elite, and economic power firms often vertically integrate or develop conglomerate remained concentrated in the hands of a few. Over time, structures to further entrench market power. This is the some entrepreneurs have been able to successfully do case in sectors such as telecommunications, petroleum, business in Madagascar, navigating the weak institutional banking, mining, real estate, and high-end agribusinesses. Figure 1: Intensity of competition Index, best rank = 7 6 4.8 5 4 3 2 1 0 Chad Ethiopia Burundi Mozambique Tanzania Mali Zimbabwe Cambodia SSA Nepal Madagascar Cameroon Rwanda Senegal Uganda Mauritius Indonesia Malaysia Kenya Source: WEF GCR 2017/18. Note: Values from 1 (competition not intense at all) to 7 (competition extremely intense) 23 Jütersonke and Kartas 2010. 22 3. This section presents a review of the barriers to improving access and reducing the cost of international market entry and competition in three major sectors.24 bandwidth. More recently, Telma (Telecom Malagasy), has The first one is telecommunications and it supplies a been laying a national fiber backbone connecting major key input to the rest of economy.25 More competition in cities and contributing to the availability of high-speed this sector could generate welfare gains by optimizing internet across urban areas. Madagascar has now one of the use of existing infrastructures, stimulating new the fastest download speeds in sub-Saharan Africa. This has investments, and reducing costs for other sectors. The fostered the emergence of new highly performing sectors, current government is considering reducing regulatory including the IT-BPO, retail and banking sectors, as well as and non-regulatory barriers to entry, including measures other services to enterprises.28 to open up investments in fiber optic infrastructures.26 The other two sectors, vanilla and lychee, are export-oriented 5. Despite improvements, internet connection fees remain agribusinesses that generate significant export revenues high and penetration is low. The cost of fixed broadband and have a large potential for greater productivity internet services is higher than in peer countries (Figure 2).29 and income gains along the value chain if barriers to Penetration rates are also well below those of comparators competition can be addressed. Analysis of the competitive (Figure 3), with a significant proportion of the population landscape of key cash crops is particularly important still unconnected to mobile network (65.9 percent). High now as pipeline roads could contribute to unlock market prices are an important contributor to low penetration and access for key rural areas, generating new opportunities access rates in Madagascar, which constitutes a significant for domestic and international development.27 opportunity cost for the economy. One estimate suggests that if fixed broadband subscriptions were to rise to levels (i) Telecommunications of peers in Rwanda and Cameroon (i.e. from 10 percent currently, to 18 percent), growth could be raised by more 4. Madagascar has one of the fastest internet services than 1 percentage point.30 Over time, it could also stimulate in Sub-Saharan Africa. Investments in the submarine new investments and accelerate the digitalization of the fiber optic cables in 2009 and 2010 ended the country’s economy. Access to backbone infrastructures will need to dependence on satellites for international connectivity, be significantly expanded to achieve such objectives. 24 The assessment is based on the Markets and Competition Policy Assessment Toolkit (MCPAT). The MCPAT methodology allows for the identification of market characteristics that shape dynamics and government interventions that restrict competition by: i) restricting entry; ii) facilitating collusion; or iii) creating an unlevel playing field, and consideration of solutions that can achieve policy objectives and address market failures while minimizing market distortions. 25 The Special Focus of the Spring 2019 Economic Update addressed the lack of competition in the petroleum sector, which is another key input sector. 26 As announced by the Minister of Telecommunication in May 2019. 27 Road rehabilitation pipeline includes for example the NR5 to Soanierana Ivongo, RN6 to Antsiranana, RN13 to Fort-Dauphin, RN43 to Faratsiho, and RN44 to Ambatondrazaka. 28 Telecom Malagasy (Telma) is a former state-owned enterprise. During the privatization phase, Telma was acquired by the Axian Group, with the government maintaining a 19 percent share. 29 The ITU defines a mobile-cellular basket as consisting of 51 minutes of mobile voice call and 100 SMS. 30 This calculation is based on the assumption that in low income countries, an increase of broadband subscriptions by 10 percentage points can lead to up to 1.4 percentage point increase in growth rates, which is the finding of the report: World Development Report (2016), Exploring the relations between the broadband and economic growth. 23 Figure 2: Price of fixed broadband Figure 3: Penetration of cellular and internet services Prices in US$ purchasing power parity Prices in US$ purchasing power parity Fixed-broadband prices 180 160 140 Mobile-broadband 120 prices, 1GB 100 80 60 Mobile-broadband 40 prices, 500MB 20 0 Indonesia Mauritius Malaysia Cote d'Ivoire Nepal Mali Cambodia Senegal Burkina Faso Kenya Zimbabwe Cameroon Zambia Tanzania Uganda Comoros Liberia Chad Malawi Niger Ethiopia Madagascar Mobile-cellular prices 0 100 200 300 Madagascar LDCs World Mobile-cellular subscriptions per 100 inhabitants % of individuals using the internet Source: ITU Source: ITU 6. Investments in the telecommunications sector has been 7. The cost of infrastructure investments in rural areas limited by both regulatory and non-regulatory barriers. are currently exorbitant. In areas without existing There are four major operators in the telecommunications backbone, the cost of a license to lay such infrastructure market: Telma, Orange, Airtel and Gulfsat (Blueline). The is prohibitive, hindering investment in last mile services incumbent firm, Telma, has made significant investments and access of remote areas.31 A Universal Access Fund in backbone infrastructure in the past, including during has been created to finance such network extensions the political transition period when other operators largely where investments would otherwise be unviable, but shied away from making long-term investments (Figure its administration has been opaque. To support a level 4). The government currently maintains 19.9 percent playing field, the Universal Access Fund should have clear shareholdings in Telma. Discussions are ongoing to allow selection criteria on which projects should be financed other operators to invest in areas where Telma already as well as competitive neutrality principles to ensure the has infrastructures in place, which is currently prohibited. operators have been justifiably selected. In practice, it Foreign investment in telecommunication companies is appears that the incumbent has used the Fund to recoup also restricted to two thirds of a company’s shares, with part of the costs for the deployment of the national the further requirement that at least one of the directors backbone network, whereas the process followed by resides in Madagascar, which limits opportunities for ARTEC and the Ministry of Telecommunications for further development. disbursement is unclear. 31 Interviews conducted with operators revealed that mobile operators other than the incumbent were not able to put up their own fiber infrastructure under their current license arrangements. Acquiring permission to construct infrastructure requires obtaining a new license, where costs are relatively high. 24 Figure 4: Operators in various segments of broadband value chain Core network Middle mile Access network International connectivity National Backhaul Last mile backbone EASSy: Telma Fiber optic: Telma Fixed services LION: Orange Copper lines: Telma • Fixed wireline (DSL and fiber): Telma • Fixed wireless (WiM AX, WiFi): Telma, Gulfast (Blueline), other ISPs Mobile services: Market shares as at 2019 Share of 3G Share of 4G Airtel 16.9% 5.7% Orange 19.6% 5.4% Telma 63.5% 2.2% Gulfast (Blueline) - 76.7% Source: Authors’ own elaboration. Market shares only available for mobile services, GSMA 2019 8. Regulation currently in place does not support access 9. Enforcement of competition laws and policies is weak to shared infrastructure or manage interconnection due to governance challenges. Anticompetitive practices charges in a way that could gradually reduce tariffs.32 by firms (such as abuse of dominance and cartelization) Regulation of the telecommunications sector should strive can be prosecuted ex post under the sector-specific to balance the incentives for incumbents to continue regulation and under the competition law.34 However, investing, while also encouraging capital spending by ARTEC has not exercised these provisions and the activities new players. Regulatory lapses include the lack of an of Madagascar’s Competition Council have been limited to enforceable obligation for the Regulatory Authority for date. As the activities of the Competition Council grow, it will Communication Technologies for Madagascar (ARTEC) also be important to manage the concurrency of powers to determine whether operators have Significant Market between ARTEC and the Competition Council to maximize Power (SMP).33 The identification of a SMP would allow the the benefits of ex post competition enforcement. This could regulator to mandate appropriate corrective measures. involve incorporating a collaboration framework between The failure to publish a list of operators considered to the two bodies to facilitate case referrals, investigations, have significant market influence has persisted despite and sanctions. Finally, the governance structure of ARTEC, this requirement being included in its founding statute including selection of board members and accountability, (Law 2005-023) nearly 15 years ago. does not ensure sufficient independence and decision- 32 There are no provisions to implement an essential facilities doctrine. OECD specifies the ‘Essential facilities doctrine’ as when the owner(s) of an “essential” or “bottleneck” facility must provide access to that facility, at a reasonable price. http://www.oecd.org/competition/ abuse/1920021.pdf. 33 A dominant position can be defined as a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of consumers. The dominant has an appreciable influence on the conditions of competition (Source: Official Journal of the European Union L282/14 downloaded at https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2003:282:0001:0024:EN:PDF). 34 The new Madagascan Competition Law No. 2018 – 020 on the recasting of the Competition Law (repeals the Competition Law No. 2005 – 020 of October 17th, 2005) lays out the establishment, functions, and institutional arrangement of the Competition Council. The Competition Council was fully constituted in 2015 but has not been very active in regulation competition, investigating and sanctioning anticompetitive practices. Article 37 of the Act provides for collaboration between the Ministry of Trade, which also has a competition mandate, and other specialized agencies 25 making ability. While individuals appointed to the board Madagascar with most of the potential of the sector cannot be employees of an entity licensed by ARTEC, their stemming from export markets.35 Production of lychees is affiliation can sometimes hinder their independence. Some primarily done by smallholder farmers, bought at farmgate telecom companies are also part of a larger conglomerates by collectors, and sold to exporters who operate sulfur active in sectors that utilize ICT services, such as financial treatment plants (Malagasy lychees are generally treated services, raising the risk of exclusionary behaviors. This with sulfur dioxide to prevent the peel from browning during could be dealt with through proper enforcement of abuse transport) or other processing facilities (see Figure 5). of dominance provisions in the competition law. Exporters are also responsible for the packing, storing and transport of lychees to the airplane or boat. Export revenues (ii) Lychee are estimated to account for more than 80 percent of all revenues from sales of fresh and processed lychees in 10. Lychees are an important source of export revenues Madagascar.36 Around 90 per cent of Malagasy lychees are and income for farmers. Lychees are a source of income exported to Europe, with other export destinations including for more than 100,000 farmers and seasonal workers in Russia, the Middle East, and East Asia. Figure 5: Value chain for lychee export Export of early lychees by air Cash advances Lychee Collection & Export of sulfur-treated production Transport Treatment lychees (by sea) Planet production Export of processed lychee Processing (by sea) Input supply Production Collection Processing & Export Functions Treatment - Collectors/processors - ~30,000 smallholder - Producers for first - Exporters equipped - Exporters ~29 firms Actors (financing) farmers packing with sulfur-treatment - ~25,000 seasonal - Exporters (financing) - Industrial plantations - Approx. 280 collectors in and packing station workers, including - CTHT and tree nurseries - ~45,000 seasonal the region of Tamatave - Processors-exporters processing by exporters (plantlets production) workers for export - Processing industries (pulp, puree, juice) - ~4,000 seasonal workers Source: Authors’ own elaboration. Given the central role of exports, this diagram and analysis in this section focuses on the value chain for exports of fresh and processed lychees. 11. Less than half of the Lychee harvest is commercialized, during this period.37 However, only 30,000-40,000 tons of the partly due to export quotas and limited domestic 70,000-100,000 tons of lychees harvested in Madagascar consumption. Madagascar dominates the international every year are typically commercialized. About half of the market for lychees between December and February in sold produce reaches international consumers and the Europe, representing approximately 80 percent of produce other half domestic consumers.38 35 Lychees are grown by 30,000 smallholders in the Tamatave, Manajary, Manakara and Fort Dauphin regions along the east coast of Madagascar. In addition, 75,000 seasonal workers are involved in the harvesting, collection, processing and packing of lychees. See ILO (2017) Chaîne d’approvisionnement du litchi de Madagascar : Facteurs incitatifs et contraintes pour l’amélioration de la sécurité et de la santé au travail. 36 Assuming a domestic retail price of 500 Ariary per kilogram, an export price of 2000 Ariary per kilogram, and equal sales volume in domestic and international markets. 37 Background report by Henri Michael Tsimisanda. Madagascar’s production is estimated at 70,000-100,000 tons p.a. See also Houbin, Chen, Xuming Hang (2012). Overview of litchi production in the world. 4th International Symposium on Lychee, Longan and other Sapindaceae Fruits. White River, South Africa. Acta Horticulturae, International Society for Horticultural Science. 38 Interviews with lychee exporters in March 2019. 26 12. Export quotas are determined by the exporters’ 15. Going further along the value chain, collectors of association, working with two dominant European lychees face fixed prices, restricting competition in importers. The exporters’ association, Groupement de buying markets. In turn, the collectors of lychees generally Exportateurs de Litchi (GEL), exports over 90 percent work exclusively for one exporter, where a set price is of Madagascar’s lychees (by volume) to two European agreed in advance. All exporters agree the same price for importers, who are meant to be selected by the lychees from the collectors. The collective fixing of buying government in a tendering procedure every two years. prices among exporters is likely to restrict competition However, in practice, a new call for proposals among in buying markets and therefore is to be detrimental European importers has not been initiated since 2013, to farmer incomes. In addition, for the small portion of which prevents competition among importers and lychees that are exported outside of EU markets, the GEL therefore the potential to boost export opportunities. has the autonomy to set reference prices, thereby also The export volume is agreed between GEL and the two limiting price competition. importers (currently capped at 17,500 tonnes), which is divided between GEL members. One of the functions (iii) Vanilla of GEL is to ensure tight coordination with European importers, which is facilitated through enforcing the 16. Vanilla prices have experienced a surge in recent quota on lychee exports. Part of the reason for the years, and Madagascar is the leading exporter. Low labor organizational practices of GEL and its relationship with costs and a well-suited climate have allowed Madagascar the two European importers is related to challenges in to develop a dominant position in the international vanilla maritime transport, which is expensive and requires market, accounting for more than half of global exports advance financing by the importers. since 2014.39 Vanilla exports accounted for 26 percent of Madagascar’s export revenue in 201740 and contributed 13. Market access for new investors is limited by high around 6.8 percent to national GDP. The sector supports barriers to entry. Regulatory barriers include the need more than 80,000 farmer households and over 6,000 for exporters to have a sulphur dioxide treatment facilities intermediaries. Along with seasonal employment, vanilla that meets minimum standards. However, this restriction generates around 200,000 direct jobs, mainly in the Sava prevents entry by exporters who do not need to engage in region (North East coast), which produces 85-90 percent sulfarization or follow alternative postharvest treatments. of Malagasy vanilla.41 Increasing vanilla exports, mainly by Moreover, regulations do not specify minimum standards, improving quality, has been among the priorities of the leaving substantial room for the discretionary granting new government. of licenses. Members who are not part of the GEL, or members that have attempted to exceed their official 17. Smallholder farmers selling unprocessed vanilla are quotas have reportedly been blocked from shipping at squeezed by dominant players collecting, curing, and the port. exporting vanilla. Farmers typically sell their beans to intermediaries before any processing. Unprocessed or 14. Farmers have limited options to negotiate prices. green vanilla cannot be stored without deterioration Lychees are highly perishable, which means that sales in its quality and therefore must be sold shortly after from the farm are constrained to local markets. In many harvest. While most sales occur on an informal spot lychee growing areas, farmers do not have access to market, mostly at farm gate or the street, official local roads, which reduces their negotiating power with wholesale markets are also used for sales. In the case collectors who have the transportation means to reach of green vanilla, collectors (who are often hired and the farmgate. Furthermore, smallholders have limited financed by preparators or exporters) buy vanilla from access to information about prices in other locations, different farmers or from smaller collectors (Figure 6). which constrains their decisions on where and when While reports suggest that some farmers have been to sell lychees. able to benefit from recent high prices, most farmers 39 FAOStat, 2018. 40 Observatory of Economic Complexity, 2017, https://atlas.media.mit.edu/en/profile/country/mdg/ 41 International Labor Organization, 2011. 27 are not involved in value-adding activities downstream, non-perishable product. Barriers to curing by farmers such as curing (drying process which enhances flavor and include technical know-how, space and labor constraints, increases preservation), which could significantly increase cash needs at the beginning of the season, as well as farmers’ selling power by allowing them to store the dried, minimum capacity requirements for curing. Figure 6: Value chain for vanilla export Export of black vanilla Cash advances Vanilla Collection & Export of Production Transport Curing & Packing red vanilla (EU/US) Vanilla seedlings Processing & Export of Farmgate sales Packing vanilla extract Functions Input supply Production Collection Processing Export - Loan provision - Growing (planting, - Collection of green beans - Sorting - Packing Activities - Technical assistance pruning, pollination) from farms - Traditional curing - Transport to port/airport - Vanilla seedlings - Harvesting - Transport to processing (70% or less) - Storage - Vanilla vines and tutor - Curing (20% of plants - Quick curing (20 - 30%) - Brokerage trees producers cure vanilla) - Secondary processing Actors - Exporters (technical - Independent - Collectors (approx. 3,000, - Farmers and - Exporters (123 licensed in assistance to <10,000 smallholder 10% formal) and agents préparateurs 2018, 15 main/trusted) farmers and loans) farmers (60,000+) working with collectors (traditional hand curing) - Symrise has 70% market - Microcredit institutions: - Cooperatives/ (mandataires) - Commission agents share in vanilla extract loans producers' - Commission agents - Collectors - Four export companies - Commission agents/ associations linked - Processors - Exporters (e.g. QCP) acount for about 50% of collectors (flower to exporters - Exporters beans (Somava, contracts) - Industrial plantations Authentic Products - NGO (seedlings) M/CAR, Origines/Symrise, Planifolia - Traders and brokers Source: Authors’ own elaboration. 18. The vanilla chain is highly controlled and regulated, and farmers) raising a possible conflict of interest that reinforcing the power of incumbents and limiting entry may hinder the entry of new operators. for new participants. There are requirements on the minimum and maximum size of operations and other 19. Government interventions have limited options of restrictive entry rules. For instance, preparators wishing producers. The government requires sales of green to buy or sell green vanilla in official markets are required vanilla in official markets (marchés contrôlés) to maintain to demonstrate the capacity to cure at least five tons quality control, protect farmers and limit incentives for of produce. Collectors are not allowed to employ more theft – but these markets may also hinder alternative than five agents. Exporters are required to renew their commercialization options for farmers (such as contract license on an annual basis. All buyers and sellers in official farming). Government prohibited vacuum packaging in markets for green vanilla need to be registered. According 2016 (agreed by the Ministry of Commerce in collaboration to regulation, the Regional Directorate for Trade provides with the National Vanilla Platform which represents the an opinion on the registration of collectors, preparators main exporters) to safeguard against reputational risks and exporters, while the Regional Directorate for Rural given issues with buyers assessing the quality of vacuum- Development opines on registration of planters. Meanwhile, packed vanilla on purchase, as well as to limit premature the registration process is managed by an industry board harvests. However, the ban can limit selling options by that is composed, among others, of representatives of encouraging players to sell produce immediately to incumbents (including collectors, preparators, exporters avoid product deterioration and may prevent volumes 28 from responding to price signals. Overall, the market medium-term would pressure prices down. Vanilla is a very regulations have reduced the price elasticity of supply, labor-intensive commodity, because it requires that vanilla which can exacerbate price volatility.42 plants are pollinated manually. However, at current price levels, Madagascar’ comparative advantage of low labor 20. Facilitating the entry of new players could help costs is eroded, with other countries with higher labor costs Madagascar preserve its global market position while like Uganda are now able to compete. Similarly, the current benefiting a greater share of the population. With vanilla price makes investments in better synthetic alternatives prices high, more farmers are likely to enter the market in attractive. These new players will ultimately drive prices Madagascar as well as competitor destinations, which in the down and will result in Madagascar losing market share. C POLICY OPTIONS AND REFORMS TO ADDRESS ANTI-COMPETITIVE BEHAVIORS 21. Improving the competitive environment in Madagascar importers to undertake value chain audits in line with will require both sector-specific and economy-wide Corporate Social Responsibility requirements. initiatives. Anti-competitive behaviors are not sufficiently deterred by legal and institutional guardrails. Broad- 24. In the vanilla market, reducing barriers to entry and ranging efforts are needed to reinforce both regulation government regulation could result in more farmers and supervision. being able to participate in value addition. Key reforms include: (i) removing an arbitrary ban on vacuum packing (i) Sector-specific reforms in favor of better labelling, traceability and stronger enforcement; (ii) lifting restrictive regulatory barriers such 22. In the telecommunications market, reforms could as the cap on the number of agents that can work with result in lower prices and higher penetration. Key a supplier; (iii) Enhancing price setting monitoring by the reforms include: (i) the regulatory agency releasing a list Competition Council; (iv), encouraging international firms of operators with significant market power; (ii) ensuring to undertake audits of the value chain; and (v) encouraging access to bottleneck facilities by third parties; (iii) allowing contract farming or better organized value chain through competing investments in backbone infrastructure; (iv) effective associations between producers, collectors, and reducing the costs of licenses; (v) ensuring the Universal exporters. Services Fund is objectively used to deliver investments in rural areas; (vi) improving the functionality and 25. Private associations of public interest should help independence of the regulatory agency. improve value chains without encroaching competition. Effective associations can help promote collective quality 23. 2. In the lychee market, reforms to open the control, marketing, research, and technical support for export market could result in higher demand, which could small farmers, and hence offer great opportunities to create jobs and boost income along the value chains. better organize value chains and improve access to tightly Key reforms include: (i) removing the export quota; (ii) regulated international markets. However, they can also streamlining requirements for licenses including removing create unwarranted barriers to entry, exert excessive controls the requirement to own a sulphur treatment plant and over prices and production volumes, and concentrate rents. clarifying minimum standards to avoid discretionary Regulatory improvements could be implemented to make interpretation; (iii) Enhancing price setting monitoring by private associations of public interest more effective in the Competition Council; (iv) encouraging GEL to adopt best organizing their respective value chains while limiting risks practices for private associations with public interest; and of cartelization. The creation of a consortium of stakeholders (v) building coalitions between international organizations, in the cocoa value chain can serve as a good practice for NGOs, civil society and governments to encourage buyers/ other agribusinesses (see Box B2). 42 Potentially due to failure to enforce original regulation of vanillin and moisture content of vacuum-packed vanilla. 29 Box 2: Good practice in agribusiness: The Consortium of Cocoa Actors In the past, the cocoa value chain presented several an independent analysis and control center for export weaknesses, including ageing orchards, low yields, products was also established in Ambanja. The sector is multiplication of inefficient varieties, and a lack of attracting new investments in cocoa processing units coordination of key value chain players. With the aim of and the country is currently presiding the ICCO. The better structuring the sector, the government, private National Cocoa Plan validated in 2018 is now guiding all sector and financial and technical partners started activities targeting value chain sustainability. coming together in 2015 within the framework of a public-private dialogue. This resulted in the creation of For several other high-value products such as vanilla, the Consortium of Cocoa Actors (GACM) in April 2015, which lychee, spices, cloves or essential oils, similar initiatives comprised producers, chocolate makers and operators/ to structure production value chains and develop tight exporters. Madagascar also joined the International Cocoa quality controls could also have positive effects in terms Organization (ICCO) in 2016. Shortly after, its production was of market openings, export volumes, and opportunities labeled 100 percent fine cocoa. to raise income and profitability for smallholder farmers. However, in contrast to the geographically concentrated Since then, with support from the World Bank-financed production of Cocoa, many of these other export-oriented Integrated Growth Poles and Corridor project, several value chains have plantations spread throughout the activities have been undertaken to improve quality, country, complicating dialogue between stakeholders traceability and standards for sustainability in the sector. and the identification of common priorities. For instance, Around 5,000 producers and 200 cocoa preparators lychee or spice producers can face different agronomic have received training and support, a modern facility conditions, logistic challenges, and market opportunities has been developed in Ambanja, the capital of cocoa, across various regions. An additional complication in the to produce certified plants, while R&D activities have lychee value chain is the fact that harvests last at most been coordinated between the private and public sectors two weeks for export markets. Cash-constrained and to improve quality and productivity. Between 2015 and poorly equipped producers have no other option than 2018, export volume increased by almost 60 percent to selling their products as quickly as possible to avoid rots, reach nearly 12,000MT, with more than 90 percent of reducing their bargaining power and limiting their role in the production meeting international standards (from value chains. Common initiatives could be taken to improve 14 percent in 2014). National standards - more stringent production processes, overcome export limitations, and than international ones -have been established and increase the bargaining power of smallholder producers. 30 (ii) Economy-wide reforms also help increase efficiency of enforcement. Some countries have successfully developed a leniency 26. The institutional basis for competition should program to encourage firms to come forward and provide be strengthened by improving the content of the evidence of cartels.43 Ensuring the effectiveness of the competition law. Recent amendments to strengthen Competition Council requires implementing safeguards the law include clarifying considerations in determining for its independence, particularly in sectors dominated by dominance, amending the provision on monopolies few well-connected operators. Going forward, the Council such that the abuse of monopoly power is prohibited, should be provided with enough resources, to enable including penalties for most anticompetitive practices. the institution to undertake independent inquiries and However, there is further scope to strengthen the law investigations. In addition, the Council should collaborate to include the per se prohibition of cartels, which may with regulatory agencies on sector specific issues to merit secondary legislation. interpret the application of the Competition Law. 27. The Competition Council should become a more 28. For regulatory agencies to enhance their effectiveness, effective vehicle to enforce competition laws. There is it is important to improve appointment procedures to scope for the Competition Council to improve monitoring enhance independence. For example, in the case of the and sanctioning of anticompetitive behavior, to estimate telecommunications regulatory agency, while individuals quantitative impacts of a lack of competition, and to appointed to the board cannot be employees of an entity communicate the results to the public and policy- licensed by ARTEC, their affiliation can sometimes hinder their makers. To enhance the deterrence effect of the law independence. Board members could be selected following on anticompetitive behavior, the Council needs to build an open and competitive hiring process, and in some cases, a credible threat of enforcement action with sufficient international expertise could also be sought, particularly in penalties. Developing a framework for settlements will the early phase of a regulatory agency undergoing reforms. D CONCLUSION 29. A lack of market competition in key sectors of the are key input for other sectors, including retail, banking, economy is a major constraint to productive, inclusive and services to enterprises. The case of lychee and and sustainable growth in Madagascar. This chapter vanilla shows how lower barriers to entry in key export presents an overview of regulatory and non-regulatory markets could boost opportunities for smallholder barriers to competition, and ways of overcoming them, farmers and their participation in value addition. The with a focus on three specific sectors. Telecommunication, chapter presents both market-specific and economy-wide which is tightly interconnected with the rest of the recommendations to ensure a leveling playing and release economy, illustrates how improved competition could the untapped potential for higher and more productive help stimulate investments by operators, which could investments. These include reinforcing competition laws help lower cost and improve penetration of both fixed and strengthening their enforcement by independent and mobile services. This could have positive effects on regulators and encouraging best practices for incumbent the rest of the economy, as telecommunication services firms and private sector associations. 43 Leniency can be described as a system of immunity and reduction of fines and sanctions that would otherwise be applicable to a cartel participant in exchange for reporting on illegal anticompetitive activities and supplying information or evidence. 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