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INTERVIEW -Cash-strapped Madagascar needs budget support back - Finance Minister

Richard Lough and Alain Iloniaina
Thursday, 24 Oct 2013 | 10:31 AM ET

Minister@

* Madagascar votes Friday in first poll since coup

* GDP growth seen around 2 pct in 2013, 3 pct in 2014

* Political crisis has hammered investor confidence

* Foreign reserves running low

ANTANANARIVO, Oct 24 (Reuters) - Madagascar will need foreign donors to resume budgetary support within three months of the election of a new president or meeting spending needs will be difficult, its finance minister said on the eve of the country's first vote since a 2009 coup.

The cash-starved government had revised down its 2013 GDP growth forecast because multiple delays to Friday's poll had prolonged a crisis that has battered investor confidence and badly damaged the economy, Lantoniaina Rasoloelison told Reuters.

External financing made up 40 percent of the Indian Ocean island's budget until donors withdrew aid when rebel troops stormed the presidential palace a stone's throw from the Finance Ministry and former disc jockey Andry Rajoelina seized power.

The ballot is likely to go to a second round run-off due in December, meaning the next president should be in office by January. Rasoloelison said the 2014 budget was only an interim step and would require additional funding within three months.

"If not, it is going to be very difficult to manage the economy," he said in an interview. "The state cannot run on this budget." Madagascar's fiscal year runs January to December.

Rasoloelison took over the top job at the Treasury last month after his predecessor opted to run for president.

A smooth election, the minister said, would remove the political uncertainty deterring foreign firms from exploiting Madagascar's oil and mineral reserves and kick-start private sector growth that stalled during the near five-year crisis.

Rasoloelison said the nickel- and vanilla-producing island's economy will grow an estimated 3 percent in 2014 from around 2 percent this year - below the previously forecast 2.8 percent.

"(That) was based on an election in May," he said, referring to the initial election date. "No-one will invest in a period of flux. For 2014, the outlook is much clearer."

DWINDLING RESERVES

Not all 7.8 million voters in Madagascar, which lies off Africa and is famed for its exotic wildlife, share his optimism.

There are fears the outcome of the vote which counts 33 candidates might be disputed, plunging the world's fourth largest island into yet more chaos.

Even at 3 percent, growth would be anaemic for a country boasting deposits of oil, nickel, cobalt, gold and chrome and whose economic growth topped 7 percent in the year before Rajoelina's ouster of former President Marc Ravalomanana.

Deprived of budget support and faced with dwindling tax revenues since the economy shrank in 2009, the government has slashed spending. The World Bank estimates committed spending this year as 10.3 percent of GDP against 18.7 percent in 2008.

It has focused on keeping government running, paying the salaries of civil servants and soldiers as well as keeping the local currency stable and inflation at bay.

Rasoloelison said inflation was seen rising to 6.2 percent in 2014. "This year we project 5.2 percent due to the slowdown in economic growth. There are no imports, there is no demand."

Haleh Bridi, the World Bank's representative, told Reuters Madagascar was in dire financial straits.

"We believe they are at rock bottom, that if the elections don't happen and things don't start falling back into place they may even have difficulty holding the place together as their finances are in a very difficult situation right now," Bridi said.

Asked if the Treasury was broke, Rasoloelison said: "There is no problem to see through the year. The situation is delicate but under control."

Foreign reserves had fallen to below two months cover, he said, adding that this was no cause for concern.

(Writing by Richard Lough; Editing by George Obulutsa, Ron Askew)