Aivo Andrianarivelo, governor of the Central Bank of Madagascar (Banky Foiben’i Madagasikara, or BFM), speaks to Global Finance about a more effective monetary policy framework and why a decline in bank loans is not a cause for concern.

Global Finance: What is your outlook for Madagascar’s economy over the next 12 months, and the main risks to growth?

Aivo Andrianarivelo: Madagascar’s economic outlook is generally positive. Growth is projected at 4.5% and 5% in 2024 and 2025, respectively, with the tourism, agriculture and telecommunications sectors being the main drivers. Improvement in the investment climate should also stimulate private investments. Overall, the macroeconomic fundamentals project optimism. Inflation is in the single digits and should average 8% this year. On foreign trade, falling prices of nickel and cobalt could impact earnings but should be offset by the increase in tourism receipts and revenue flows under private services. Foreign direct investment [FDI] should also consolidate, driven by the textile and mining sectors.

The government has also put in place measures to strengthen revenue mobilization and optimize expenditures. The move, coupled by budgetary support expected from development partners and temporary advances from BFM, is essential in regenerating liquidity in the economy and stimulating economic activities. Annual growth in money supply is thus estimated at around 12% at the end of 2024.

Despite the positive outlook, there are several risks, the top one being climate shocks. Madagascar remains vulnerable to cyclones, droughts and floods that can cause significant damage. Another risk is price fluctuations of agricultural exports such as vanilla and cloves. A global economic slowdown, particularly among our main trading partners, also has the potential to reduce demand for exports and curb FDI. The volatility of world prices that could trigger surges in the prices of energy and basic food products, particularly rice prices, could worsen Madagascar’s trade balance and cause additional inflationary pressures.

GF: BFM has implemented an operational monetary policy framework. What is the progress, and what has been the impact?

Andrianarivelo: BFM started using the new framework on February 7, 2024. It has four main characteristics. The first is the use of monetary policy instruments on money market interventions, thus guaranteeing stability. The second is adopting a methodology for calculating interest rates, namely the weighted average rates calculated on a daily basis for interbank loans with one day of maturity and without guarantee. The operational target constitutes the market reference rate and is published daily by BFM. The other characteristics are improving the monetary policy forecasting and formulation system in order to pursue a more forward-looking monetary policy and improve BFM’s communication with the public.

Since the implementation of the new framework, BFM has succeeded in achieving stability around its operational objective, ensuring a clear transmission of its decisions in terms of short-term interest rates on the money market. We understand that transmission on the rates of other market segments and on the medium- and long-term rates still needs to be improved.

GF: BFM has contained inflation at a single-digit rate. Are there any plans for monetary policy easing?

Andrianarivelo: Inflation has certainly slowed significantly compared with last year, but its current level remains high. Furthermore, inflation is persistent, having recorded only very slight variation since the start of the year. In our August meeting, the Monetary Committee opted for an increase in rates, signifying a tightening of policy after a year of status quo. We estimated that current monetary conditions, which are already in a tightening zone, are still insufficient to bring inflation back to its medium-term target. The disinflation process in Madagascar is considered fragile. New shocks could plunge the country back into an inflationary spiral. For the moment, we are very cautious about the prospects for monetary policy easing.

GF: Is BFM concerned about a decline in bank loans and the knock-on effects on the economy?Andrianarivelo: The banking sector plays a crucial role in the country’s economy, contributing 27.6% in terms of assets. Activity in the sector demonstrates its good solidity and capacity for resilience despite the context of crises that have plagued the country in recent years. Indeed, all banks have sound capital adequacy. Though the rate of growth of activity is lower compared to the previous year, profitability continues to flourish as reflected by the good level of return on assets of 3.6% and return on equity of 34.9%.