At the invitation of President Marc Ravalomanana, in August 2004, the Initiative for Policy Dialogue (IPD) helped the the Government of Madagascar to analyze alternative policy solutions for the depreciation of Malagasy Franc and ensuing currency crisis, the reform of the banking sector, as well as the challenges of rural development. During this visit, the IPD team met with the country's top leadership as well as representatives from the Central Bank, local private sector, academics, and media to discuss economic policy options for Madagascar's development challenges.
Begining in late 2003, the Malagasy Franc devalued nearly 40 percent over the course of five months. The collapse of the currency had pushed the country to the brink of financial crisis. The IPD team advised the government to restore a stable exchange rate in order to contain and thwart speculative attacks on the Malagasy Franc. In addition, they urged better coordination between tax and monetary policies to enforce capital controls. At the time of the meeting, Madagascar had announced duty exemption on import of all capital goods. It also authorised exporters to keep their earnings in foreign exchange. Professor Stiglitz and the rest of the IPD team advised the government to implement a more effective, pro-growth tax policy. Instead of offering duty exemption, the government could offer a duty-back option to screen out speculators from real investors.
Madagascar's market economy has suffered from severely restricted credit, which has stifled the growth of local business. The delegation discussed policy mechanisms to encourage bank lending to local businesses. Possible methods included ensuring greater competition with in the financial sector as a means to drive down lending rates. The government could also enact legislative provisions to prevent banks from allowing capital to sit idle in their coffers.
Lastly, the complex issue of land reform was discussed. Reforming Madagascar's land tenure system would permit farmers to hold permanent title on their land holdings. The legal distribution of these holdings would allow farmers to secure credit using their land as collatoral. Furthermore, the privatization of currently public land holdings would incentivize farmers to increase the productivity of the land. This is important because Madagascar is a net importer of food, and thus subject to external price volatility. Yet, the IPD team cautioned that poorly designed land distribution programs can intensify inequality and poverty in rural areas. They urged the government to invest in agricultural research and extension programs to improve the productivity of Madagascar's agricultural sector.