MADAGASCAR ECONOMIC UPDATE Setting a course for recovery December 2020 i Economic activity in Madagascar has been severely impacted by the COVID-19 pandemic, resulting in a recession comparable to that of the 2009 constitutional crisis and the reversal of close to a decade of progress in poverty reduction. While conditions are expected to stabilize in 2021, the impact of the pandemic will cast a long shadow on economic and social prospects and could be compounded by other shocks, including droughts and other climatic events affecting already vulnerable populations. To set the country on a course for recovery, the government will have to extend emergency measures aimed at preserving livelihoods and preventing a resurgence of the pandemic, but also combine them with structural reforms aimed at accelerating Madagascar’s economic transformation, strengthening its resilience to shocks, and increase food security. ii FOREWORDS Gains in income per capita and poverty reduction accumulated over the last decade were abruptly reversed in 2020, as the COVID-19 pandemic triggered a sharp economic slowdown. The sudden contraction in activity has had a severe impact on vulnerable populations, while reducing fiscal resources available for priority investments and social programs. Beyond the knock-on effect of the crisis, growth remains structurally constrained by inadequate human capital, a high prevalence of informality and self-subsistence agriculture, insufficient and poorly maintained infrastructures, and governance and institutional weaknesses. In the absence of ambitious reforms, the crisis risks exacerbating these constraints with the effect of durably hindering the country’s growth potential. Madagascar was able to reduce the propagation of the pandemic but the government must remain vigilant and be prepared to respond to new outbreaks. A second wave of the pandemic in major economies during the final quarter of 2020 highlights the risk of resurgence in Madagascar and the need to strengthen preparedness. Key priorities in the short term include boosting testing and contact tracing capacities, developing capacity to distribute and administer vaccines when they become available, preparing for the possible extension of social protection programs for existing and new beneficiaries, and implementing additional measures to safeguard viable businesses and protect workers. More generally, health and social protection systems will need to be bolstered to improve livelihoods, inclusiveness and resilience to future shocks. A new reform momentum is key to rebuilding back better and stronger after the crisis. Beyond short- term mitigation measures, delivering a sustained economic revival after the crisis will largely depend on the government’s ability to mobilize domestic resources to sustain priority investments, implement far- reaching reforms to accelerate economic transformation, and address large gaps in infrastructure and human capital development with well targeted programs. To accelerate this economic transformation, the business environment will need to improve to boost market access and contestability, leapfrog the digitalization of the economy, reinforce the selectivity and management of public investments, and stimulate agricultural productivity to support living standards and food security. Marie-Chantal Uwanyiligira Country manager iii MADAGASCAR ECONOMIC UPDATE, DECEMBER 2020 | SETTING A COURSE FOR RECOVERY CONTENTS FOREWORDS iii ACKNOWLEDGEMENTS v PART ONE: RECENT ECONOMIC DEVELOPMENTS 1 1. The COVID-19 crisis triggered a sudden contraction in global and domestic activity 2 2. Poverty has increased, disproportionately impacting urban populations 7 3. Macroeconomic and financial stability has been maintained through difficult times 9 PART TWO: OUTLOOK RISKS 12 1. Activity is expected to recover in 2021, but prospects remain uncertain 13 2. A longer-lasting crisis could be a source of instability 14 PART THREE: POLICY PRIORITIES FOR THE RECOVERY 16 1. Preventing a resurgence of the pandemic and safeguarding livelihoods 17 2. Building back better for a sustained economic recovery 18 Box 1 BOXES Box 2 Government response to the COVID-19 crisis 5 Social Protection Response to COVID-19: an international perspective 20 Table 1 TABLES Table 2 Madagascar: Selected Economic Indicators 3 Table 3 Madagascar: Key Fiscal Indicators 8 Madagascar: Key Balance of Payment Indicators 11 Figure 1 FIGURES Figure 2 Contribution to GDP growth by sector 2 Figure 3 Main demand components 2 Figure 4 Share of countries in the world experiencing a recession 4 Figure 5 Global trade and air passenger travel 4 Figure 6 Tourism arrivals in Madagascar 4 Figure 7 Number of COVID-19 cases in Madagascar 6 Figure 8 Share of employment affected by COVID-19 7 iv CONTENTS Figure 9 Paddy production 7 Figure 10 Budget execution rate 9 Figure 11 Public expenditures, revenues, and budget balance 9 Figure 12 Evolution of current account balance and FDI 10 Figure 13 Actual and projected poverty rates and real GDP per capita 13 Figure 14 Poverty rate in 2019 13 Figure 15 General Government Debt (as % of GDP) 14 Figure 16 Present value of public debt-to-GDP ratio 14 Figure 17 GDP growth scenarios in 2020 - 2021 15 Figure 18 Coverage of basic health services 17 Figure 19 The Cost of Fixed-Line Broadband in Madagascar is among the Highest in the World 19 Box 2.1 Public investment and infrastructure quality 20 Box 2.2 Type of social protection measures during COVID 21 Box 2.3 Labor markets program type 21 Box 2.4 Type of social protection measures during COVID 22 Social Registry Coverage 23 v MADAGASCAR ECONOMIC UPDATE, DECEMBER 2020 | SETTING A COURSE FOR RECOVERY vi ACKNOWLEDGEMENTS This edition of the Madagascar Economic Update was prepared by a team led by Marc Stocker (Senior Economist, EAEM2). The team included Faniry Razafimanantsoa (Economist, EAEM2) ; Minosoa Lalaina (Consultant, EAEM2) ; Siv Tokle (Senior Operations Officer, HAES1); Rachel Ravelosoa (Senior Social Protection Economist, HAES1); Tinahy Emmanuelle Aristide (Consultant, HAWS3); Laura B. Rawlings (Lead Economist, HAES2) ; Zo Randrianatoandro (Consultant, HAWS3) ; Fanjaniaina Prisca Mamitiana (E T Consultant, EAEF2); Cristian Quijada Torres (Senior Private Sector Specialist, EAEF2) ; Maud Juquois (Senior Economist - Health, HAEH1); Fedja Pivodic (Economist – Health, HAEH1) ; Ibrahim El ghandour (Public Sector Specialist, EAEG2); Lira Rajenarison (Public Sector Specialist, EAEG2) ; Tiago Carneiro Peixoto (Senior Governance Specialist, EAEG2); Olivia Rakotomalala (Consultant, EAEG2); Noro Aina Andriamihaja (Senior Financial Sector Specialist, EAEF2); Maimouna Gueye (Senior Financial Sector Specialist, EAEF2); Mampionona Amboarasoa (Agriculture Economist – SAEA2), and Alexandra Jarotschkin (Economist, EAEPV). Valuable comments were received from Jose Luis Diaz Sanchez (Economist, EAEM2) et Vibhuti Mendiratta (Senior Economist, EAEPV). The report was prepared under the overall guidance and supervision of Idah Z. Pswarayi-Riddihough (Country Director, AECS2), Marie-Chantal Uwanyiligira (Country Manager, AEMMG), Mathew Verghis (Practice Manager, EAEM2), and Paulo Guilherme Correa (Program Leader, EAEDR). The team would also like to express gratitude to our counterparts from the government for sharing the data used for the analysis, Amélie Courau for translation services, Cybil Maradza for design work, Diana Styvanley (External Affairs Officer, ECRAE) for communications support, and Rondro Rajaobelison (Program Assistant, AEMMG) for logistics support. vii MADAGASCAR ECONOMIC UPDATE, DECEMBER 2020 | SETTING A COURSE FOR RECOVERY PART ONE RECENT ECONOMIC DEVELOPMENTS 1 PART ONE: RECENT ECONOMIC DEVELOPMENTS 1 The COVID-19 crisis triggered a sudden contraction in global and domestic activity 1. Prior to the pandemic, Madagascar was on and current account deficits remained moderate sustained recovery path and achieved progress in and the currency stabilized in real effective terms. In poverty reduction. The economic revival in the period this context, growth reached 4.4 percent in 2019, its leading up to the COVID-19 crisis was supported by fastest pace in over a decade, with export-oriented political and economic stability, renewed investor sectors such as textiles, mining, and tourism performing confidence, rising integration in key export markets, particularly well in the run-up to the crisis. Tourism growing flows of concessional financing and structural revenues were bolstered by a 19 percent increase in reforms. Activity continued to gain strength up until 2019, visitor arrivals, reaching a decade high of 375.000. In as public and private sector investments accelerated, the primary sector, favorable weather conditions have while moderate inflation helped support real income contributed to a bumper rice harvest and significant and consumer spending. At the same time, budget gains in agricultural production more generally. Figure 1: Contribution to GDP growth Figure 2: Main demand components by sector Percent Percent 8 20 6 15 4 10 2 5 0 0 -5 -2 -10 -4 -15 -6 -20 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Exports Private Private Public Public investment consumption consumption investment Agriculture Industry Services Net Taxes 2019 2020 2021 GDP growth Source: National Institute of Statistics, World Bank staff Source: National Institute of Statistics, World Bank staff calculations. calculations. Note: Contribution of sectors to GDP growth. Based on national Note: Based on national accounts in 2007 prices. Figures for 2019 accounts in 2007 prices. Data for 2019 are estimates and those are estimates and those for 2020-2023 are forecast. for 2020-2023 are forecast. 2. The COVID-19 pandemic triggered a sudden and contraction of -4.2 percent in 2020, similar to that deep recession, reversing nearly a decade of prior observed during the devastating 2009 constitutional income per capita gains. The combined impact of crisis (Figure 1). Considering a pre-crisis projection global trade disruptions and domestic containment of 5.2 percent in 2020, this means that income per measures is estimated to have resulted in a GDP capita would be 9.4 percent lower than expected at 2 MADAGASCAR ECONOMIC UPDATE, DECEMBER 2020 | SETTING A COURSE FOR RECOVERY the start of the year, erasing all gains achieved since the key driver of the decline in activity, while public the return to constitutional order in 2013 (Table 1). consumption and investment played a buffeting role On the demand side, a sharp drop in exports was (Figure 2). Table 1: Madagascar: Selected Economic Indicators 2018 2019 2020 2021 2022 2023 2020 2021 Actual Estimates Current Baseline Projections Revisions from Feb. Annual percent change Real GDP 3.2 4.4 -4.2 2.0 5.8 5.4 -9.4 -3.4 GDP deflator 7.1 8.3 5.6 5.9 5.7 5.9 -1.1 0.1 Consumer price index 7.3 5.6 4.3 5.9 6.1 6.1 -1.4 0.0 (end of period) Fiscal accounts, % of GDP Revenues 13.2 13.3 11.4 12.0 13.1 14.2 -2.0 -1.6 Expenditures 14.4 14.7 16.5 17.4 17.7 18.0 0.9 0.8 Overall balance -1.3 -1.4 -5.2 -5.4 -4.6 -3.8 -3.0 -2.5 (commitment basis) Primary balance -0.5 -0.7 -4.4 -4.5 -3.6 -2.7 -3.0 -2.5 General government debt 39.5 37.4 45.1 49.7 51.2 51.9 4.8 3.9 Balance of payments, % of GDP Current account balance 0.7 -2.3 -4.0 -4.4 -4.3 -4.3 -0.3 -0.2 Exports, goods, and services 34.7 30.8 25.3 26.0 26.6 27.3 -8.1 -4.7 Imports, goods, and services 37.8 35.0 31.2 32.2 32.8 33.3 -8.0 -4.6 Net income 3.8 1.9 2.0 1.9 1.9 1.8 -0.2 -0.1 Net foreign direct investment 2.6 2.6 1.9 2.5 2.5 2.5 -0.6 -0.1 Sources: World Bank Group and IMF. 3. The COVID-19 crisis was an external shock of Area—Madagascar’s largest export destination—output unprecedented magnitude. The contraction in global is estimated to contract by 7.4 percent. As the global activity in 2020, currently estimated at -4.4 percent, toll of the pandemic continues to increase, millions of would be by far the most severe and broad-based on people are suffering from diminished prospects and records, with output shrinking in more than 90 percent disrupted livelihoods. In the developing world, falling of countries around the world, against 83 percent income per capita in the vast majority of countries will during the great depression in 1930, and 60 percent interrupt poverty reduction trends and could tip over during the great recession 2009 (Figure 3). In the Euro more than 100 million people into extreme poverty.1 1 (Lakner et al. 2020; World Bank forthcoming) 3 PART ONE: RECENT ECONOMIC DEVELOPMENTS Figure 3: Share of countries in the world 4. Global trade and travel disruptions had a severe experiencing a recession impact on previously high-performing sectors in Percent Madagascar. In the first semester of 2020, global goods trade volumes were down 15 percent from a 100 year earlier, and passenger air travel down 98 percent 80 (Figure 4). This was reflected in a sharp contraction in export revenues in Madagascar, particularly from 60 textiles, mining, and tourism, which were key sources 40 of growth and job creation prior to the crisis (Figure 20 5). Overall, in the first half of 2020, goods export values fell at an annual rate of 15 percent, reflecting a drop 0 in both volume and prices amid weakening external 1918 1931 1945 2009 2020 demand. Although there were no specific limitations Source: World Bank to air and sea cargo, supply chains and access to raw Note: Sample includes 183 countries materials were disrupted, further dampening activity in trade-oriented sectors. Figure 4: Global trade and air passenger travel Figure 5: Tourism arrivals in Madagascar Percent, year-on-year Percent, year-on-year Number 10 50 50,000 5 25 40,000 0 0 30,000 -5 -25 20,000 -10 -50 -15 -75 10,000 -20 -100 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2018 2019 2020 2019 2020 Goods trade Container shipping Source: Ministry of Transport, Tourism and Meteorology, World International passenger travel (RHS) Bank staff calculations. Source: Haver Analytics; IATA Passenger Traffic Report; Institute of Note: Data from October 2020 to December 2020 are World Bank’s Shipping Economics and Logistics. staff projections. Note: Figure shows 3-month moving averages. Last observation is July 2020. International passenger travel reflects revenue passenger kilometers, i.e. the number of paying passengers time kilometers flown. 4 MADAGASCAR ECONOMIC UPDATE, DECEMBER 2020 | SETTING A COURSE FOR RECOVERY 5. Domestic containment measures contributed were implemented in parts of the country, including to a relatively short outbreak in Madagascar. the capital Antananarivo, complemented by the First COVID-19 cases were reported in Madagascar closure of borders (except for cargo), quarantine on March 20, 2020, leading to a period of rapid but and systematic testing of all travelers, and limits to short-lived propagation of the pandemic from May to business operations and movements between regions. July. Since then, containment measures contributed To organize its policy response, the government set to significantly reduce the number of active cases, up a multi-task Command Center led by the Minister with hospitalizations stabilizing at low levels in October of Interior and Decentralization and put in place a and November (Figure 6). As of end November, Multisectoral Emergency Plan, comprising health and there were less than 17.500 confirmed cases and safety measures, cash transfer programs, tax relief for 250 deaths, putting Madagascar in the category of the private sector and the supply of exceptional liquidity moderately affected countries when considering the to the financial system. Details about the government size of its population. Several periods of lockdown response to the crisis are presented in Box 1. Box 1: Government response to the COVID-19 crisis The government has taken action to slow the an analysis of priority needs for the period running propagation of the disease and limit its social and up to the end of 2020. Its objectives were to (i) control economic impacts. From the confirmation of the the spread of the virus and stem the pandemic; (ii) first COVID cases in March to end October, a state of help vulnerable populations and respond effectively emergency was declared, which was complemented to their needs and (iii) protect the economy, maintain by regulatory measures such as the closure of human capital and facilitate the recovery. The Plan borders except for cargo, quarantine and systematic is steered by the Prime Minister Office and will testing of all travelers, a lockdown of the cities where implement a range of measures and actions funded cases have been detected, the treatment of patients by the state budget and the donor community. Actual at the government’s charge, and a limitation of implementation was delayed by the late nomination business operations. The government also introduced of the steering committee for the PMDU and the social protection, and fiscal and monetary measures slow execution of emergency measures. Regarding to support livelihoods and businesses during the transparency initiatives, the government made lockdown. To limit the burden on private operators, the significant headways in November by producing limitation of business activity has been progressively two public dashboards: the first focusing on the released. The government has set up the Centre monitoring of COVID-related public spending, including de Commandement Opérationel, a multi-task information on public contracts, and the second on Command Center led by the Minister of Interior and the annual budget execution by ministry, program, Decentralization/BNGRC to coordinate its response. and nature of spending. In an effort to consolidate different sectoral Several social safety net measures have been interventions and to prepare the medium-term launched to support vulnerable households. The response, a multisectoral emergency plan has been government has launched a targeted unconditional developed. The development of the multisectoral cash transfer program in the cities of Antananarivo, emergency plan (PMDU) was formulated based on Fianarantsoa, and Toamasina to support households 5 PART ONE: RECENT ECONOMIC DEVELOPMENTS directly affected by the lockdown. In addition, the transport sectors will benefit from specific support government supported the distribution of food and and health protocols necessary for international staple products to selected vulnerable households; travel. Finally, the company Tsaradia will receive the operation of subsidized rice and edible oil sales at financial support to enable it to maintain domestic the fokontany level; and the rescheduling of electricity air service. In addition, several tax relief measures bill payments to the utility company JIRAMA. were effective since March, including the suspension of payment of installments and postponement of Measures for the private sector focus on support payment declarations for the tourism sector, air to business continuity and job protection. Actions transport and enterprises benefiting from the free- decided by the government to support the private processing regime. sector in the multi-sectoral emergency plan included (i) the provision of vocational training for employees; On the monetary side, the Central Bank of (ii) support inter-company medical services so that Madagascar has injected liquidity in the form they can ensure the continuity of the provision of care of main injection operations and marginal loan services to employees and advise and train companies facilities. To alleviate pressure on SMEs and household to better protect employees in the workplace; (iii) cashflows, banks were encouraged to reschedule loans to support the cash flow of entrepreneurs loan repayments and will be able to deduct a similar and small and medium-sized enterprises; (iv) amount from their reserve requirements. Exceptional communication and promotion actions to develop liquidity is also provided to the financial system, national and international markets. The tourism and conditioned on an increase in credit to companies. 6. The impact of a sudden stop in activity on an estimated contraction in total employment of 7.7 companies and households has been far-reaching. percent in the first semester. Hardest hit sectors were An abrupt slowdown in almost all sectors of the in restaurants, hotels and transportation (Figure 7). In economy led to a 20 percent contraction in GDP in Figure 6: Number of COVID-19 cases the second quarter (from a year earlier), by far the in Madagascar sharpest decline since the start quarterly national Number accounts data in 2007. On average, 97 percent of surveyed companies reported a decline in the demand 20,000 4,000 3,500 for their products and services in the first semester. 15,000 3,000 SMEs that have micro-enterprises or households as 2,500 10,000 2,000 clients have reported stronger declines in revenues 1,500 than the ones trading with larger companies. In 5,000 1,000 500 response, businesses in Madagascar have cut wages, 0 0 reduced working hours and laid-off workers or in some 20-Mar 10-Apr 1-May 22-May 12-Jun 3-Jul 24-Jul 14-Aug 4-Sep 25-Sep 16-Oct 6-Nov cases have been forced to exit the market altogether. Around 32 percent of formal companies surveyed are Active cases (RHS) Total cases estimated to have closed their doors (46 percent in the Source: Johns Hopkins University Center for Systems Science and tourism sector), 7 percent permanently. Households Engineering (JHU CSSE) surveys illustrate the impact on the labor market, with Note: Last updated on November 18, 2020. Total cases recorded. 6 MADAGASCAR ECONOMIC UPDATE, DECEMBER 2020 | SETTING A COURSE FOR RECOVERY total, 64.4 percent of households reported a loss of income, thereby threatening long-term health for more revenue since the start of the crisis. Reducing food vulnerable households. Food insecurity in Madagascar consumption was cited among the responses to lower ranks among the highest in Sub-Saharan Africa. Figure 7: Share of employment affected by COVID-19 Percent Catering and accommodation 61,2 Transport 38,3 Fabrication et transformation 13,8 Trade 12,8 Construction et immobilier 8,8 Public administration 8,3 Education 8,0 Personal services (Housekeepers) 6,3 Agriculture 0,0 0 10 20 30 40 50 60 70 Source: WB Households survey Note: Survey conducted in June 2020. 2 Poverty has increased, disproportionately impacting urban populations 7. Extreme poverty is predicted to increase Figure 8: Paddy production significantly in 2020, with vulnerable populations Million tons Kilo / person in urban areas particularly affected. Job losses in key manufacturing and service sectors, as well as the 5.0 250 sudden loss of income for informal workers affected 4.5 by lockdowns in major cities contributed to pushing 200 a large number of people into extreme poverty this 4.0 year. Under baseline assumptions, the poverty rate (at 150 $1.9/day) is estimated to rise to 77.4 percent in 2020, 3.5 up from 74.3 percent in 2019, corresponding to an 3.0 100 increase of 1.38 million people in one year. Given the 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 outsize impact of the pandemic on urban populations as well as the projection of an expected increase in Paddy production extreme poverty in 2020, there is a significant risk Production per capita (RHS) that this crisis could widen existing inequalities and Source: Ministry of Agriculture, World Bank staff calculations. societal divides, contributing to heightened fragility. Note: Data for 2020 is estimated based on FAO reports. 8. Rural households were impacted as well, but blow. Crop production levels in 2020 are estimated resilient agricultural output helped reduce the to be near to the country’s average in previous years, 7 PART ONE: RECENT ECONOMIC DEVELOPMENTS despite disruptions in intra-regional trade and slowing substantial adverse effects by lowering income for demand from urban and peri-urban areas (Figure 8). a vast swath of the country’s population. The decline This contributed to maintain income and livelihoods in vanilla prices combined with importers’ reluctance in more remote rural areas where extreme poverty to make longer-term commitments in this context of concentrate. However, paddy production slowed high uncertainty are also likely to generate a larger somewhat in 2020 and non-farm income are expected volume of unsold vanilla stocks. Such situation will to be severely impacted by crisis this year. This effect increase the vulnerability of the less resilient rural could be significant as about half of rural households producers. The COVID-19 crisis also coincided with have at least one working age member participating severe droughts in the Southern part of Madagascar, in off-farm activities for compensation. Contracting hampering livelihoods of at least 1,5 million people demand for off-farm activities are likely to have so far. Table 2: Madagascar: Key Fiscal Indicators 2018 2019e 2020f 2021f 2022f 2023f Percent of GDP Total Revenues and Grants 13.2 13.3 11.4 12.0 13.1 14.2 Tax Revenues 10.1 10.5 8.8 9.6 10.5 11.5 Tax on goods and services 2.2 2.3 2.0 2.5 2.6 2.7 Direct taxes 2.7 2.9 2.3 2.4 2.8 3.4 Taxes on International Trade 5.2 5.3 4.5 4.7 5.1 5.4 Non-Tax Revenues 0.7 0.2 0.2 0.2 0.2 0.3 Grants 2.4 2.6 2.4 2.2 2.4 2.4 Expenditures 14.4 14.7 16.5 17.4 17.7 18.0 Wages and Compensation 5.0 4.9 5.7 5.7 5.6 5.6 Goods and Services 0.8 0.6 1.2 1.0 1.2 1.4 Interest Payments 0.8 0.7 0.8 0.9 1.0 1.1 Transfers and subsidies 2.3 3.1 3.5 2.1 2.0 2.0 Capital Expenditures 4.9 5.6 6.8 7.3 7.6 8.0 Overall balance (commitment basis) -1.3 -1.4 -5.2 -5.4 -4.6 -3.8 Primary balance -0.5 -0.7 -4.4 -4.5 -3.6 -2.7 Overall Balance (cash basis) -1.9 -1.3 -5.2 -5.4 -4.6 -3.8 Debt amortization (gross) 6.4 5.9 5.7 6.3 6.3 5.9 Gross financing needs 8.4 7.2 10.9 11.7 10.9 9.7 Change in GFN since February 2020 0.0 0.0 2.8 2.0 n.a n.a Sources: World Bank Group and IMF. Note: GFN = Gross Financing Needs. Following the GoM’s classification, externally financed programs are reported as capital spending. COVID-related expenditures are those reported in the revised budget law for domestically financed spending and by donors for externally financed spending. 8 MADAGASCAR ECONOMIC UPDATE, DECEMBER 2020 | SETTING A COURSE FOR RECOVERY 3 Macroeconomic and financial stability has been maintained through difficult times 9. The budget deficit increased sharply in 2020 but is estimated to have widened to 5.2 percent of GDP was mostly financed by additional concessional in 2020 (Figure 10). The increase in fiscal financing financing. The sudden loss of fiscal revenues was needs from pre-outbreak expectations was entirely a major driver of rising budget deficits in 2020, with covered by emergency budget support operations the tax-to-GDP ratio falling back to 9 percent in 2020, from donors, which amounted to 3.1 percent of GDP its lowest level since 2012. On the spending side, in 2020 (Table 2). Madagascar is also participating government expenditures increased to reach 16.5 in the G20’s Debt Service Suspension Initiative, percent of GDP in 2020, notably driven by higher staff although it only stopped debt service payments to costs as salary adjustments were implemented and bilateral official creditors from the G20 in the course rising public investment. On the other hand, budget of November due to administrative delays. The execution rates were low in the first three quarters suspension is effective from June 2020 to June 2021, of the year and are only expected to partially catch potentially representing about US$ 35.5 million in up in the final quarter of 2020 (Figure 9). This low savings for the government. These various support execution rate reflected capacity constraints during measures and interventions are expected to help the lockdown period and delays in processing public create fiscal space to address the economic and procurement and payments. Overall, the fiscal deficit social consequences of the crisis. Figure 9: Budget execution rate Figure 10: Public expenditures, revenues, and budget balance Percent 100 Percent of GDP Percent of GDP 80 20 6 4 60 10 2 0 40 0 -2 20 -10 -4 -6 0 -20 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2014 2015 2016 2017 2018 2019 2020 2021 2022 Budget execution rate in 2020 Interest payment Public investment execution rate in 2020 Capital expenditures Budget execution rate (average 2014-19) Primary current expenditures Public investment execution rate (average Foreign grants 2014-19) Domestic resources Source: Ministry of Economy and Finance, World Bank. Fiscal balance (RHS) Note: The execution rate is the share of expenditures committed Source: Malagasy authorities, World Bank. as of the end of each month over the revised annual budget. The Note: Data for 2020-2022 are forecasts. underlying data is from the Treasury’s Global Operations table. 9 PART ONE: RECENT ECONOMIC DEVELOPMENTS 10. The financial sector has been affected by rising Figure 11: Evolution of current account credit risks, but solvency remains generally sound. balance and FDI Prior to the crisis, all banks fulfilled the minimum Percent of GDP capital adequacy requirement, with a capital to risk- 6 weighted assets ratio of 13 percent on aggregate, 4 well above a minimum of 8 percent. The impact of 2 the pandemic has led to deterioration in liquidity and 0 solvency indicators, particularly for microfinance institutions (MFIs), which serve most exposed sectors -2 of society including MSMEs, informal businesses and -4 households. MFIs experienced cash flow difficulties -6 2014 2015 2016 2017 2018 2019 2020 2021 2022 due to delay in loan repayment and deposit withdrawals at the beginning of the containment, Current Account Balance though the situation has stabilized since mid-2020. Foreign direct investment The Banking sector has generally been more resilient Source: Malagasy authorities, World Bank staff calculations. but was also significantly affected by rising credit Note: The current account measures net flows of goods, services default rates. Proactive interventions of the Central and income between the residents of a country and non-residents. Bank ensured the availability of adequate levels of A negative figure means that payments to non-residents exceed receipts. Data for 2020-2022 are forecasts. liquidity, while banks were allowed to deduct loans to SME that have been restructured from regulatory reserve requirements. The extension of the existing 12. Inflation was stable in 2020, at levels Partial Portfolio Credit Guarantee Schemes (PPGS) for consistent with price stability. Despite moderate firms affected by the crisis has also helped. currency pressures and supply chain disruptions due to the impact of lockdowns in some large 11. Currency pressures have been manageable cities, consumer price inflation remained subdued, and foreign exchange reserves remain adequate. hovering around 4 percent during 2020. The Adverse impacts of lower export revenues on the government took advantage of significantly lower trade balance were partially offset by a drop in import international oil prices to reduce its liabilities values reflecting lower demand for investment goods towards oil distributors, maintaining gas prices at and a sharp decline in oil prices (oil imports account the pump unchanged. Core inflation, excluding rice for 18 percent of total imports). The current account and energy prices, remained moderate, at around deficit nevertheless increased to 4 percent of GDP in 5 percent throughout 2020. This allowed the Central 2020, while foreign direct investments weakened as Bank to keep an accommodative monetary policy well (Figure 11; Table 3). Currency pressures increased stance throughout the year. So far, the monetary amid rising external financing needs, with the central policy response has consisted of providing liquidity bank more than doubling its net foreign exchange to commercial banks and the relaxation of some purchases compared with 2019. However, comfortable mandatory deposit limits to encourage banks to reserves were maintained, bolstered by emergency reschedule repayment on existing loans and boost budget and balance of payment support operations credit to corporates. The operational framework from donors. The Central Bank operates under a of the Central Bank is currently in transition from flexible exchange rate regime but aims at preserving a monetary aggregates-based framework to one currency stability with targeted interventions. based on interest rates. 10 MADAGASCAR ECONOMIC UPDATE, DECEMBER 2020 | SETTING A COURSE FOR RECOVERY Table 3: Madagascar: Key Balance of Payment Indicators 2018 2019e 2020f 2021f 2022f 2023f Percent of GDP Current account balance 0.7 -2.3 -4.0 -4.4 -4.3 -4.3 Trade balance -3.1 -4.2 -5.9 -6.3 -6.2 -6.1 Net income balance 3.8 1.9 2.0 1.9 1.9 1.8 Capital account balance 1.7 2.3 2.3 2.1 2.3 2.4 Financial account balance -1.1 -0.5 -1.9 1.0 1.0 1.0 Net FDI and portfolio investment 2.6 2.6 1.9 2.5 2.5 2.5 Debt amortization 0.7 1.8 2.1 2.1 2.2 2.2 External financing needs 0.0 4.1 6.0 6.6 n.a n.a Change in EFN since February 2020 0.0 0.0 1.9 1.9 n.a n.a Sources: World Bank Group and IMF. Note: FDI = foreign direct investment; EFN = External Financing Needs. Currency pressures increased amid rising external financing needs, with the central bank more than doubling its net foreign exchange purchases compared with 2019. 11 PART TWO OUTLOOK AND RISKS 12 MADAGASCAR ECONOMIC UPDATE, DECEMBER 2020 | SETTING A COURSE FOR RECOVERY 1 Activity is expected to recover in 2021, but prospects remain uncertain 1. The global economic impact of the pandemic will gradually lifted during the first quarter of 2021, global persist in 2021 amid a resurgence in cases in many growth is predicted to reach 4.0 percent in 2021, and countries. Governments and central banks around 3.7 percent in 2022. The baseline scenario assumes the world have pledged trillions of dollars of stimulus, that new vaccines will be distributed starting in the leading to expectations of a modest global economic first quarter of 2021, reaching peak coverage in the recovery in 2021. However, a second wave of the course of 2022. However, the pace of distribution pandemic in many of the countries where lockdowns and uptake by the population remains importance were eased in previous months will adversely affect sources of uncertainty at the present juncture. This this expected rebound, aggravating an already dire vaccination campaign is expected to underpin a situation due to historically high unemployment and pickup in consumer and business confidence during indebtedness. Assuming that new policy restrictions 2021, supporting a gradual upturn in global demand, are able to contain community spread and can be travel and tourism. Figure 12: Actual and projected poverty rates Figure 13: Poverty rate in 2019 and real GDP per capita Percent 1,000 Constant LCU Percent 80 900 100 880 80 78 860 76 60 840 74 820 40 800 20 72 780 0 70 760 Burundi Madagascar Congo, Dem, Rep. Malawi Guinea-Bissau Zambia Nigeria Tanzania Angola Rwanda Togo Benin Liberia Mali Chad Congo, Rep. Uganda Burkina Faso SSA Kenya Senegal Swaziland Lesotho Ethiopia Cote d’Ivoire Cameroon Namibia Comoros Sudan Ghana 2005 2007 2009 2011 2013 2017 2019 2021 International poverty rate Real GDP per capita (RHS) Source: National Institute of Statistics, World Bank. Source: World Bank. Actual data: 2012. Nowcast: 2013-2019. Forecast are for 2020-2022. Note: Poverty measured at USD 1.90 per day in 2011 PPP. SSA stands for Sub-Saharan Africa. 2. Growth in Madagascar will recover in 2021-23, 2 percent, which is insufficient to increase average but at a gradual pace and will continue to face income per capita. This means that the crisis would underlying constraints. As global demand picks up in have shaved over a two-year period about 13 percent 2021, export and investments should regain strength, to average income per capita when compared with but the 2020 recession will leave a long shadow for pre-crisis expectations. In the baseline scenario, businesses and households. In this context, growth growth would bounce back to 5.8 percent in 2022 is expected to remain subdued in 2021, at around and 5.4 percent in 2023, but the crisis will likely 13 PART TWO: OUTLOOK AND RISKS exacerbate constraints to growth associated with but the crisis is expected to have set back the a dualistic society, high exposure to shocks; and a country’s efforts in alleviating extreme poverty by a lack of adequate human capital and infrastructures. decade (Figure 12) and maintain it among the poorest countries in Sub-Saharan Africa (Figure 13). Over the 3. The poverty rate should resume its downward medium to long term, the pace of poverty reduction trend over the medium to long term, but vulnerable will largely depend on the country’s ability to facilitate populations remain highly susceptible to shocks. A formal job creation in off-farm employment, improve gradual economic recovery should allow poverty rates agricultural productivity and resilience to climate and to return to a declining trend from 2022 onwards, other shocks. 2 A longer-lasting crisis could be a source of instability 4. Debt sustainability risks have increased but remain (Figure 14). External debt distress risks have increased moderate. The projected economic recovery in 2022-23 in recent months from low to moderate, but baseline should result in gradually declining budget deficits, from projections for key external debt and debt service an estimated 5.2 percent of GDP in 2020 to 3.8 percent ratios remain well clear of risk thresholds considered in 2023. The main driver of this decline will be a recovery for Madagascar (Figure 15). The current debt risk profile in government revenues, offsetting accelerating public for Madagascar still makes plans to scale up priority investments, particularly in infrastructure. In this context, investments appropriate but calls for prudent borrowing public debt is projected to stabilize around 52 percent of policies and fast-track reforms to boost revenue GDP in 2023, following a sharp increase in 2020 and 2021 mobilization and public spending efficiency. Figure 14: General Government Debt Figure 15: Present value of public (as % of GDP) debt-to-GDP ratio Percent of GDP Percent of GDP 100 60 55 80 50 45 60 40 40 35 30 20 25 Cote d’Ivoire Madagascar SSA Senegal Rwanda Mauritius South Africa 2019 2021 2023 2025 2027 2029 Baseline scenario Most extreme scenario: Commodity price shock 2021 2019 2020 Risk threshold: 55 Source: World Bank. Source: IMF and World Bank. Note: 2019 data are estimates, 2020 and 2021 are forecasts. SSA stands for Sud-Saharan Africa. 14 MADAGASCAR ECONOMIC UPDATE, DECEMBER 2020 | SETTING A COURSE FOR RECOVERY 5. Macroeconomic imbalances are expected to of affordable insurance mechanisms. Madagascar has remain limited. As export revenues gradually recover, historically experienced cycles of social and political the current account deficit is expected to stabilize instability and has only recently completed a peaceful around 4.3 percent of GDP in 2021-23, which will be democratic transition. Although it has made notable covered by expected FDI and official financing flows. progress, the country is still vulnerable to weak Inflation is projected to stabilize at about 6 percent state institutions, as well as challenges related to over the period 2021-23, precluding major weather elite capture. These factors are at the heart of state or commodity price shocks and assuming that fragility in Madagascar, and links to other sources and domestic and global value chains gradually return drivers of fragility, including regional imbalances and to normal operations. In this context, the Central Bank inequalities that have contributed to the historical is expected to keep its policy interest rates steady, neglect of the lagging regions such as the south, and while continuing to implement targeted liquidity and that undermine social cohesion and compromise foreign exchange interventions to alleviate pressure state-society relations. Fiscal risks are also significant, on the banking sector. Solvency of the banking sector including those associated with exposures to SOEs is expected to remain robust on the whole, but the facing growing financial pressures during the crisis adverse impact of growing non-performing loans such as the national utilities company JIRAMA and and of credit payment rescheduling has significantly the airline company Air Madagascar. Both are in hampered balance sheets of more exposed banks. need a credible financial recovery plans in order to contain those risks and make them financially and 6. Risks associated with a more prolonged crisis operationally viable over the medium term. than currently envisioned could be significant. Projections are particularly uncertain in the face Figure 16: GDP growth scenarios in 2020 - 2021 of a fast-evolving global and domestic pandemic. Percent In particular, the resurgence of COVID-19 cases 6 could linger in Europe and United States more than 4 currently expected despite the recent discovery of 2 vaccines, while a second wave could hit Madagascar. 0 In such case, activity in Madagascar could continue to -2 contract in 2021, leaving a cumulative impact after two -4 years significantly larger than the constitutional crisis -6 in 2009 (Figure 16). Such risk could be compounded by -8 other shocks, including natural disaster and the risk Pre-crisis Baseline Downside of social unrest amid persistent economic hardship. scenario Rural communities are highly vulnerable to the risks 2020 2021 of cyclones and floods due to the dependence on rain- fed agriculture, poor infrastructure and the absence Source: World Bank. The country is still vulnerable to weak state institutions, as well as challenges related to elite capture. 15 PART THREE POLICY PRIORITIES FOR THE RECOVERY 16 MADAGASCAR ECONOMIC UPDATE, DECEMBER 2020 | SETTING A COURSE FOR RECOVERY 1. To put the country back on track, emergency measures reforming the business environment to increase market to protect livelihoods and prevent a resurgence of the access and contestability, accelerate the digitalization of pandemic will need to scaled up, and combined with the economy, mobilize additional domestic resources for structural reforms aimed at accelerating economic priority infrastructure and human capital investments, transformation and creating opportunities for more and boost productivity in agriculture to support living and better jobs in the post-crisis period. This includes standards and food security. 1 Preventing a resurgence of the pandemic and safeguarding livelihoods 2. Responding to the COVID-19 crisis with emergency reinforce the response and resilience of the health measures to save lives, protect productive businesses sector to future emergencies. Priorities include and jobs remains the number one priority for improved coordination of health and security-sector the government in the short-term. Additional actors for outbreak response, increased attention interventions will be needed to prevent a second wave to the continuity of basic health services, additional of the pandemic in Madagascar while existing social public resources for health from the national budget, protection and private sector support measures and improved accountability and transparency of should be ramped up as the crisis persist longer spending execution in the sector. Results of a than initially expected. preliminary analysis shows for instance a sharp drop in the number of children receiving third pentavalent 3. The health sector response will need to be vaccine doses during the earlier phase of COVID-19 scaled up to mitigate the risk of a second wave crisis, which could have lasting adverse effects on and accelerate the reopening of the economy. children’s livelihoods pandemic (Figure 17). Additional measures are required to prevent a resurgence of the pandemic, including a mass Figure 17: Coverage of basic health services testing and contact tracing strategy and improved Percent coordination in the health sector response. With 80 rapid progress on COVID-19 vaccines, Madagascar must reinforce its capacity to distribute and 60 administer vaccines at scale, including institutional 40 strengthening to ensure appropriate minimum standards for vaccine management, an allocation 20 policy prioritizing vulnerable populations, as well as effective communication and community 0 Antibiotics for DPT Childbirth Contraceptive engagement campaigns. It also requires improved pneumonia Vaccine in health prevalence logistics infrastructure such as cold chain facilities facilities rate and capacity to monitor vaccination progress. After Usual Service disruption the crisis abates, lessons will need to be drawn to Source: GFF Secretariat Brief. 17 PART THREE: POLICY PRIORITIES FOR THE RECOVERY 4. Social safety net programs will also need to be in order to rapidly inject assistance to pre-targeted expanded to increase coverage and preparedness and enrolled poor households in affected areas to future shocks. An unconditional cash transfer (vertical expansion) and by including new vulnerable program, called Tosika Fameno, was implemented beneficiaries and possibly new localities (horizontal in coordination with donors, targeting nearly 345,000 expansion). To ensure the sustainability of those vulnerable households spread across 14 districts programs beyond the lifetime of externally financed affected by the lockdown measures (See Box 2 for projects, a transparent and predictable budget details). A recovery program was also put in place to allocation to national programs by the State paired provide income support during a six-month period with the identification of innovative sources of funding to 200,000 urban poor in urban/peri-urban areas at the national level, in partnership with the private (i.e. 58 percent of Tosika Fameno Beneficiaries) sector and donors would be crucial. Developing a and 40.000 families affected by the drought in the more expansive social registry that covers rural Southern of Madagascar. This program should be and urban/peri-urban areas would also help further expanded in case of a resurgence of the pandemic, enhance social protection implementation capacities. 2 Building Back Better for a Sustained Economic Recovery 5. The prospects of a sustained economic and social recovery including through the digitalization of revival will depend on the country’s capacity to the business operations, particularly for the most protect viable business and jobs during the crisis, impacted sector such as tourism. In order to limit while reinvigorate an agenda of structural reforms undue burdens on public finances and to avoid a to accelerate economic transformation and create persistent misallocation of resources and policy opportunities for more and better jobs. uncertainty, the government should establish a credible and transparent schedule for the removal 6. A strategy to support the economic recovery of exceptional relief measures. Beyond short term will need to mix measures to address immediate mitigation measures, attracting new investments, impacts of the crisis on businesses and job supporting entrepreneurship, facilitating market creation and structural reforms. By avoiding the access and contestability will be key elements bankruptcy of otherwise productive businesses of this recovery strategy. This includes opening and the layoff of productive workers, measures up opportunities for investment and job creation to support firms and workers can enable a through reforms in the areas of getting licenses, faster and more robust recovery. In the short construction permits, getting electricity, registering term, these measures should address immediate property, access to credit, enforcing contracts, liquidity challenges (i.e., “to keep the lights on”) and resolving insolvency. An efficient insolvency through a mix of grants, soft loans and credit regime, improved access to capital, including guarantees. The provision of grants can be an equity finance, and effective policies to support important mean to safeguard job, support skills vocational training and entrepreneurship are also development and prepared businesses for the key priorities in the post-crisis period. 18 MADAGASCAR ECONOMIC UPDATE, DECEMBER 2020 | SETTING A COURSE FOR RECOVERY 7. The COVID-19 crisis has also been a catalyst for Figure 18: Cost of Fixed-Line Broadband digital solutions. Lockdowns and social distancing Average cost of broadband (per month in USD) measures have accelerated the use of digital technologies for both public and private services, such as e-commerce offerings. This provides a unique opportunity to accelerate reforms towards e-governance and the digital economy, even though challenges remain daunting: currently, only 18 percent of the adult population has a bank account or uses mobile money (compared with 43 percent average for sub-Saharan Africa) and broadband connections are unaffordable for a majority of the population (Figure 18). Accelerating the digitalization $5-$20 $20-$40 $40-$60 of the economy requires measures that increase $60-$100 $100-$200 competition in the ICT sector to stimulate needed +$200 Excluded investments, provide training to raise the uptake of digital services, and expand public digital Source: cable.co.uk public service deliver. These include improving the telecommunication regulatory framework to improving absorptive capacity and strengthening reduce access costs; rolling out ambitious digital financial management systems and efficiency, there is training programs to support digital transformation; a strong case to increase the current budget allocation accelerating the Government’s digital transformation on education. Further reforms to ensure meritocratic with the adoption of service standards, improved recruitment of teachers, to improve flow of funds quality of service delivery, and digital identification management for school grants, and ensure effective systems, which would also create new opportunities decentralization are key to enhance the quality and for the private sector (G2B). efficiency of public education and boost human capital. The mobilization of additional domestic resources to 8. Improving infrastructure quality and human support priority investments in infrastructure and social capital will require adequate reforms and sufficient sectors has become imperative. This requires focusing financing. Public investment in Madagascar is too on tax reforms that bolster revenues while encouraging low and ineffective to deliver the type of quality investment and job creation, such as the accelerated infrastructure that is needed for its development digitalization of tax declarations and payments, the (Figure 19). This calls for wide-ranging reforms to removal of ineffective and costly tax expenditures, and improve the selection, evaluation and execution of the optimization of the tax regime applying to mining public investments. This includes the use of objective activities. socio-economic and spatial criteria for the selection of projects, effective multiannual planning, and improved 9. The crisis also highlighted the importance of coordination between various ministries and entities, boosting productivity in the agricultural sector and a PPP framework that encourages private sector in order to improve livelihoods and food security. participation while limiting contingent liability risks. Most rural households are engaged in low-productive Improving education outcomes is also a key priority subsistence farming with household food security to creating opportunities for more and better paying being a consistent concern across the country. The jobs in the face of a rapidly growing population. By rice sector has been the focus of government support 19 PART THREE: POLICY PRIORITIES FOR THE RECOVERY for decades; however, paddy rice production is lower underexploited, and most of the rice surplus regions today than in 2010, farmed surfaces are insufficient or have difficult road access. This situation has led to rising imports, declining self-sufficiency and exposure Figure 19: Public investment and to international food price shocks, making bold reforms infrastructure quality critical. Improving rural feeder roads and developing 7 regional mills could help significantly reduce transport costs, which represent a major burden and disincentive Quality of overall infrastructure 6 to commercialize production for most farmers. Partially removing tax exemptions on imported rice could also 5 incentivize local production and encourage domestic producers to invest in quality inputs, higher-yielding 4 production methods and operations and maintenance 3 of irrigation and storage facilities. Greater reliance on domestic production and increased productivity in 2 MDG the rice sector could make a significant contribution 0 0.5 1 1.5 2 2.5 towards lowering extreme poverty in rural areas and Log-log Form: Orthogonalized improving food security across the country. Reform to Public Investment Per Capita limit government interference in markets and efforts to promote value chain organization such as public-private governance platforms would be relevant for major Source: World Bank; World Economic Forum; Santiago Herrera agricultural exports, such as vanilla and food crops. and Abdoulaye Ouedraogo (2018) Box 2: Social Protection Response to COVID-19: an international perspective At the outset of the COVID-19 crisis, the social safety to the local level (commune, fokontany) with self- net system in Madagascar focused mostly on rural registration and community validation: (c) mobilizing poor, with a beneficiary registry under development existing implementation capacity, grievance and but not yet operational. Yet, current programs redress mechanisms, mainly through the Fonds had invested heavily in emergency response and d’Intervention pour le Développement (FID); and coordination in response to cyclones and draughts. (d) prior experience with mobile payment methods This enabled the Government and development that could quickly be scaled up. The partners have partners to quickly design and implement an urban drawn lessons to strengthen future response and cash transfer response to COVID-19, called TOSIKA improve communication to the public. Future FAMENO in just a few weeks. Reaching up to 345,000 challenges remain in scaling up to a national vulnerable households affected by confinement social registry and financing a broader social measures with unconditional cash transfers in a protection system in both short and longer term. short period of time was made possible by: (a) This box presents the experience of other countries using the national emergency response system in the region and globally, providing perspective and social protection coordination mechanisms; on international good practices and guidance for (b) moving registration and household targeting future interventions in Madagascar. 20 MADAGASCAR ECONOMIC UPDATE, DECEMBER 2020 | SETTING A COURSE FOR RECOVERY i Social Protection Responses in Other Countries A vast majority of countries have introduced widely used, followed by social insurance measures social protection and jobs measures in response and supply-side labor market programs. Social to COVID-19. Among types of interventions, social assistance accounts for most of Africa’s COVID- assistance (or non-contributory transfers) is most related response (Figure Box 2.1). Figure Box 2.1: Type of social protection measures during COVID Percent 100 80 60 40 20 0 AFR EAP ECA LAC MNA North Africa SAR World Social assistance Social insurance Labor markets Non-contributory social assistance was the most third of total social protection programs and about 56 frequent measure adopted by governments. Social percent are new programs introduced as a response assistance programs account for 60.1 percent to the Covid-19. Wage subsidies continue to dominate of responses, and include cash transfer, in-kind labor market programs, accounting for 60 percent of transfers, public works, and utility waivers. Among them (Figure Box 2.2). There is considerable diversity safety nets, cash transfer programs account for one in generosity and accompanying conditions. Figure Box 2.2: Labor markets program type Labor regulatory adjustment Shorter work time benefits 19% 5% Activation (training) measures 14% Wage subsidy 62% 21 PART THREE: POLICY PRIORITIES FOR THE RECOVERY ii Typology of responses and design of cash transfer programs Countries’ COVID responses have used all five relaxation of requirements or conditionality. typologies for expanding social safety nets (Figure Box 2.3): • Piggybacking: using a social protection program’s administrative framework to deliver • Vertical expansion: increasing the benefit assistance, but running the shock-response value or duration of an existing program for program separately. existing beneficiaries, increasing the frequency of payment. • Shadow alignment: running a parallel humanitarian system that aligns as best as • Horizontal expansion: adding new beneficiaries possible with a current or possible future social to an existing program. This may include protection program. (a) extension of geographical coverage, (b) an extraordinary enrolment campaign, (c) • Refocusing social safety nets by centering them modifications of entitlement rules, and (d) on the people who are most vulnerable to shocks. Figure Box 2.3: Type of social protection measures during COVID Benefit amount Vertical expansion Temporarily increased benefit amount Regular Regular social protection Horizontal expansion benefit(s) system parameters amount Population Core beneficiaries of Those not in receipt of regular the social protection benefits, but affected by a shock Source: World Bank. Traditional or existing cash transfer programs have cases, programs duration is undetermined as it tied to been customized by extending their duration, size, the uncertainty of the crisis (e.g. Morocco and Tuvalu). and scope. The duration of new programs ranges from Current transfers account for an average 27 percent 1 to 6 months, for an average of 3.1 months. In some of monthly GDP per capita in respective countries (the 22 MADAGASCAR ECONOMIC UPDATE, DECEMBER 2020 | SETTING A COURSE FOR RECOVERY highest increase, or 47 percent, is registered in low- who were not among the extreme poor prior to income countries). On average, transfers have more the crisis but suffer large losses, whether in urban than doubled (+134 percent) compared to average or rural areas. In response, many countries have pre-COVID transfer levels. Increases in benefits introduced several innovations to reach informal among preexisting programs are implemented in 45 workers including through new online platforms countries, including transfer value being increased (Thailand), use of databases in health (Morocco) and in 45 programs (e.g., Egypt) and taking place in energy (El Salvador) sectors; and cross-checking with 18 programs (e.g., Chile). Various administrative taxation information (Colombia, Argentina). adaptations are occurring in 41 countries. Coverage extension is underway in 157 countries. Comprehensive social registries are key to help countries respond rapidly to crises and scale up The COVID-19 crisis has given new impetus to programs. Expanded coverage of social registries innovations in urban safety nets and support to the facilitate expansion of transfers to people and informal sector. The social distancing measures have households that may not usually be covered. Where had direct impacts on urban populations, while rural functional registries and data-sharing protocols with workers are also affected through the disruption of other big data sources exist, programs can target value chains. Urban poverty is generally substantially and expand social protection quickly while avoiding lower than rural poverty while most of urban poor lengthy new enrollment processes. Speed and work in the informal sector (domestic work, street digital enrollment are particularly important during vending, waste picking…). Yet, meeting the needs of pandemics. Social Registries can also be used to link informal sector workers affected by crises remains a and refer people to appropriate services or to qualify challenge. They are excluded from social security and them automatically for subsidy/waiver programs. from most social assistance in low-income countries. Yet, the coverage of social registries in Africa is low COVID-19 is also impacting informal sector workers (Figure Box 2.4). Figure Box 2.4: Social Registry Coverage 100 80 Coverage (%) 60 40 20 Median = 21% 0 Egypt Argentina Peru Saudi Arabia Chile Jordan Ecuador Ukraine Honduras Djibouti Yemen Senegal Gabon North Macedonia Mauritania Kenya Iraq Benin Mauritius Jamaica Azerbaijan Mali Bolivia Sierra Leone Burkina Faso Rep of Congo Comoros Madagascar Chad Source: GFF Secretariat Brief, Présenter les services de santé essentiels pendant la pandémie de COVID-19 à Madagascar, May 2020. 23 PART THREE: POLICY PRIORITIES FOR THE RECOVERY The COVID-19 outbreak has highlighted key and lower transaction costs; measures to allow requirements to improve social protection systems continuous enrollment in programs or reassessments in the face of large-scale epidemics. These include of needs rather than only rare ‘survey sweep’ based improved digital services and procedures that are intakes; and labor protections that depends less on more ‘human-centered’ in order to improve availability the form of employment contract. iii Lessons for Madagascar Safety net coverage and spending remain very large covariate shocks. An estimated 25 percent low in Madagascar compared with peers. Whereas of the Malagasy population live in areas highly countries allocate on average 1.2% of GDP to social exposed to cyclones, floods and drought, and the safety nets in sub-Saharan Africa, Madagascar pandemic lessons are equally applicable to such devotes only 0.3% of GDP to these programs. types of emergencies. The crisis demonstrated the Coverage of the extreme poor is low (5 percent) ability of the Government and partners to mount compared to other countries in the region (28 a rapid response. Building on achievements of percent). So far, the main cash transfer social safety welfare impacts of the current models, the future programs cover nine (of 22) regions, mainly in poor expansion of the Madagascar social safety nets rural areas. The COVID-19 crisis yielded international will depend on continued excellent coordination and local lessons that provide a foundation for between development and humanitarian sectors; expanding and improving Madagascar’s social a broader and more sustainable financial base; protection system and propelled the extension of scaling up implementation capacities; and constant the safety net into urban zones. enhancement of dynamic models for reaching different vulnerable groups efficiently and effectively. A national system of social protection for the poor The consequences of the COVID-19 pandemic will be and vulnerable should build resilience ex-ante and felt for some time to come, increasing the need for provide effective counter-cyclical responses to a robust social protection system. The COVID-19 outbreak has highlighted key requirements to improve social protection systems in the face of large-scale epidemics. 24