Madagascar; imports are needed, but limited capital and credit retard their purchase

Business America, Oct 14, 1985

The ongoing efforts of the Malagasy government to improve economic conditions have focused on the continuing balance-of-payments crisis and the concomitant problem of lack of productivity. Agricultural and industrial production have stagnated over the past few years, due in large part to the country's inability to finance the importation of raw materials, spart parts, machinery, and other necessary inputs. Also inhibiting production is the deterioration of once-healthy infrastructure. Irrigation systems are broken down; port facilities are in disrepair; and the deplorable state of the transportation network makes the development of industry and agriculture and the subsequent marketing of production extremely difficult. Recent cyclone and flood damage has exacerbated this problem. Long-standing Malagasy government policies which failed to provide adequate production incentives and which block the free interplay of market forces have also had a deleterious effect.

The Malagasy government has been addressing these problems on several fronts. First, its public investment program for 1983-85 places heavy emphasis on developing agriculture--particularly rice, cotton, coffee, and sugar--and on rehabilitating existing infrastructure. Second, it has instituted a series of reforms aimed at restoring production incentives in the private sector, stream-lining the system of allocating foreign exchange for imports which support the public investment program and for export industries, eliminating agricultural subsidies, and reducing government expenditure in general. Third, it has cooperated closely with the International Monetary Fund, the World Bank, and major trading partners in an effort to improve its balance-of-payments situation.

There also has been renewed interest on the part of the Malagasy government in encouraging foreign investment in Madagascar. One American oil company (Amoco) began drilling operations on the island in the fall of 1984; two others (Mobil and Occidental Petroleum) are expected to commence independent drilling operations in late 1985. The Malagasy government is also actively seeking additional investment and/or export markets for its minerals and other commodities.

In June 1985, the Malagasy government announced the adoption of a new investment code. According to the drafters of the code, its aim is to attract foreign investors and to expand the role of the private sector in the Malagasy economy. One feature of the code, which will prove interesting to foreign investors, is that it allows for private participation at the government's initiative in economic activity otherwise preempted by the public sector, i.e., energy matters, banking, insurance, and mining. Likewise, it guarantees the equal treatment of foreign investors and national investors, compensation for nationalization of property, and transferability of dividends in foreign currency upon assignment or liquidation of business if the investment was in foreign currency. The code also guarantees certain tax and customs benefits. In addition to the new investment code, the government has adopted a new mining code and has announced its intention to liberalize import-export procedures and open up more areas of the economy to the private sector.

As Madagascar grapples with its debt and balance-of-payments problems, prospects for the short-run expansion of U.S. exports will be limited, despite the overall improvement in bilateral relations between the two countries. Exporters with the best chances of success will be firms providing oil drilling and related equipment (imports of which increased dramatically from almost nothing in 1982 to $15.9 million in 1984), agricultural equipment and accessories (particularly hand implements), road construction, mining and civil engineering equipment, trucks and heavy-duty vehicles, aircraft and air traffic control equipment, insecticides, fertilizer, essential pharmaceuticals, and hospital supplies. Spare parts from companies which have been past exporters to Madagascar will also be needed. This country shows great potential in the area of hydroelectricity because of its high level of rainfall and numerous mountains. Should the government proceed in this area, U.S. exporters could possibly be successful in providing the needed equipment and services.

The U.S. trade position in Madagascar could improve markedly if American oil companies find exploitable petroleum deposits, which seems quite possible. Beyond that, aggressive sales promotion, in French as much as possible, will be essential for any company interested in making inroads into the Malagasy market.

U.S. investment in Madagascar is minimal at present, although the oil exploration efforts of Amoco, Mobil, and Occidental Petroleum have been significant and are likely to lead to a fairly substantial level of U.S. investment in Madagascar in the foreseeable future. In addition to the petroleum companies, the N-ReN Corp. of Cincinnati, through its Bahama-based international operations, owns 25 percent of the equity in a recently inaugurated fertilizer plant in Tamatave. After years of emphasizing self-sufficiency and creating obstacles to foreign private investment in Madagascar, the Malagasy government is increasingly viewing such outside help as an essential condition for renewed economic growth. As the recent arrival of U.S. oil companies demonstrates, American companies whose interest are compatible with Madagascar's investment priorities are especially welcome. Mining companies are high on the list of those being sought by Madagascar.