July 22, 2010 / 10:29 AM / 9 years ago

Madagascar cuts 2010 growth forecast to 0.8 pct

* 2010 GDP seen at 0.8 pct from pvs forecast of 2.6 pct

* Inflation revised down to 9.7 pct

* Budgetary assistance shortfall curbs spending

By Alain Iloniaina

ANTANANARIVO, July 22 (Reuters) - Madagascar’s government slashed its forecast for economic growth this year to 0.8 percent on Thursday from a previous 2.6 percent, saying public spending would be badly hurt by a suspension of donor aid. An 18 month-long political crisis has dramatically stunted growth on the Indian Ocean island, largely due to the suspension of budgetary assistance by Madagascar’s key donors which has forced the government to put nearly all public investment projects on ice.

Fiscal receipts during 2010 are projected to fall by 10 percent compared to earlier forecasts to 1,904 billion ariary ($900 million).

“All public spending should therefore be diverted towards projects ... which directly affect the interests of the people, health, education, security and agriculture, and which can be completed before the end of 2010,” a statement from the president’s office said.

The $8.6 billion economy shrank 0.2 percent in 2009 from 5.0 percent growth a year earlier, IMF data showed, as government spending dried up and private investment slowed sharply.

Consumer prices on the world’s fourth largest island are expected to rise by 9.7 percent compared to an earlier forecast of 13.7 percent. This is due to a good rice harvest and stable rice prices on the international market, the statement said.

Foreign diplomats fear Madagascar could be shunned abroad if President Andry Rajoelina fails to deliver free and fair elections after he overthrew former leader Marc Ravalomanana following weeks of deadly protests in March last year.

A referendum on constitutional reform initially slated for next month has been indefinitely postponed.

Ravalomanana opened Madagascar’s doors to major foreign companies keen to exploit its oil, nickel, cobalt and uranium deposits, and overseas investment surged to around $1.47 billion in 2008 from $86 million in 2005. Analysts say inflows collapsed during last year’s crisis, but by how much is not clear.

The European Union, the island’s largest donor, is demanding a “consensus-based solution for a return to constitutional order” before unlocking suspended aid totaling 600 million euros.

“Because of this (budgetary assistance shortfall), a gap has been recorded in the Finance Law. It is due to this that the state is re-allocating funds,” the statement said. (Writing by Richard Lough; editing by Patrick Graham)

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