I. COMMERCIAL OVERVIEW In 1993, the confidence of Madagascar's business community surged. Local and foreign businessmen and investors, encouraged by the establishment of a relatively stable democratic government, mounted new enterprises and/or made improvements to existing enterprises. Expectations for strong growth in 1994 were raised, only to be dashed at the end of 1993 by the slow pace of government commercial reforms and later by devastating cyclone damage in February of 1994. The business community, recognizing its role in the future economic development of Madagascar, is moving a few steps ahead of the government, and appears to be slowed only by bureaucracy and a weak commercial infrastructure. OVERVIEW OF IMPORT MARKET According to the Malagasy Ministry of Commerce, in 1993 Madagascar's total imports were USD 476 million. Basic food products are abundant in Madagascar, particularly fresh fruit, fresh vegetables and meat. However, the majority of manufactured goods available locally, from foodstuffs to consumer electronics, are imported as are inputs for transformation of primary products. Imports in greatest demand include petrol and petroleum products, cement and other construction materials, new and used vehicles and spare parts. Most imported products are subject to high customs duties. Until May 1994, the Malagasy Central Bank controlled foreign currency allocations. Now, in accordance with International Monetary Fund (IMF) guidelines, an interbank foreign exchange market has been established, allowing the rate of the Malagasy Franc (FMG) to float. In the long run, it is expected that Malagasy importers will be less restricted in what they can import, that imports will increase and that the foreign currency shortage will be alleviated. For the short term it is expected that import levels will remain the same or even decrease for two reasons: the float of the FMG led to an almost fifty percent devaluation, putting an additional financial burden on importers; and both importers and exporters lack familiarity with and confidence in the new system. BRIEF SYNOPSIS OF COMMERCIAL ENVIRONMENT The Malagasy commercial sector is newly liberalized, Madagascar having been a socialist country from 1975 to 1991, and enthusiastic entrepreneurs are taking advantage of new opportunities. Established private businesses and parastatals are being challenged by the market economy atmosphere, while new businesses are struggling with a weak commercial infrastructure. There are three basic infrastructure problems that confront businessmen in Madagascar: -Poor physical infrastructure: the telecommunications sector and internal transportation system, particularly roads and trains, are in desperate need of modernization/repair. -Poor legal framework: Madagascar's commercial code has not been thoroughly revised since independence from France in 1960. The result is an archaic code, supplemented by often contradictory legislation. In addition, there is only a small cadre of experienced commercial judges and lawyers, and the legal system is riddled with corruption and delays. As a result, businessmen have little confidence in contracts and prefer to work with individuals/companies they know and trust. USAID is developing a project to assist the Malagasy in revamping their commercial legal system. -Lack of familiarity with marketing techniques: The concept of marketing is relatively new to Malagasy businessmen. Several public relations firms began operating in 1993, but are not professionally trained. Businesses tend to rely on word of mouth, relatives, shop location and trade fairs to attract customers, and are only beginning to realize the added value of marketing campaigns. HOST COUNTRY BUSINESS ATTITUDE TOWARD THE U.S. Malagasy businessmen are for the most part unfamiliar with the United States and with American businessmen. Their traditional trading partner is France. In recent years, seeking new trade relations, Malagasy businessmen have increased contracts with Asian businessmen. The Malagasy express an interest in doing business with Americans, but are hindered by unfamiliarity, language barriers and distance. MAJOR BUSINESS OPPORTUNITIES The industrial sectors expected to experience rapid growth in the next few years are agriculture and food processing, aquaculture and transport. There are opportunities for U.S. businesses to supply products for these new industries, as well as a need for technical consulting. Major projects in negotiation with the World Bank include: Energy II- Rehabilitation of the Power Sector; Telecommunications Sector Restructuring; and Transport Sector - Restructuring of Public Enterprises. MAJOR ROADBLOCKS TO DOING BUSINESS In addition to the infrastructural problems mentioned in the "Commercial Environment" section, U.S. businessmen face the additional challenge of operating in a Francophone environment. There are few businessmen who speak English, and in order to work effectively in Madagascar, one must be able to communicate in French. The foreign currency shortage has been a road block for local importers, but it is hoped the new currency market will eliminate the problem. Many would-be importers continue to face the problem of obtaining short-term financing for imports. NATURE OF LOCAL AND THIRD COUNTRY COMPETITION The majority of manufactured imports in Madagascar come from France and petroleum products come from the Middle East. The French benefit from language and market familiarity and their large presence in Madagascar. In addition, the French government considers Madagascar an important opportunity for French commercial interests and is reluctant to give ground in Madagascar to U.S. competitors. There are several local products that compete with imports, particularly processed foods (UHT milk, jams, juices, cheeses) and also small manufactured items such as matches and batteries. However the quality of most local products is mediocre and imported products (machines, packaging materials, etc...) are needed to assist production.