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Compliance Challenges for Financial Institutions in Madagascar
Madagascar has been facing repeated political crises over the past three decades, which have severely impacted its economic growth and stability. According to a recent report by the Independent Evaluation Group, the World Bank Group was forced to adapt to these rapidly changing circumstances and address the country’s development challenges.
The Impact of Instability
The instability has led to:
- A significant decline in investor confidence
- Limited access to finance
- Curtailed tourism, one of the country’s main industries
The latest political crisis resulted in a 4% drop in GDP, a temporary suspension of most donor assistance, and a surge in poverty rates. Child malnutrition also increased by 50% in some areas.
Elite Capture: A Major Factor
Elite capture has been a major factor in Madagascar’s political crises, with state institutions being run for personal gain by high-status individuals. Intra-elite competition for rents has fueled cycles of instability, weakening state institutions and triggering political coups.
The World Bank Group’s Response
However, the World Bank Group was able to adapt its approach during this challenging period. The bank pivoted its engagements to the local level, prioritizing the capacity of local administrations to deliver services and recover revenue in a more transparent and accountable manner.
Lessons Learned
The report notes that while some positive outcomes were achieved, the continued capture and misuse of resources by elites undermined the impact of these efforts. Reforms supported by the World Bank were reversed or diluted due to pressure from vested interests.
Going forward, the World Bank Group will need to seek innovative ways to work around political economy constraints in Madagascar. The evaluation finds that while the bank was successful in identifying and analyzing political and governance risks, it fell short in operationalizing its findings.
Recommendations for Future Engagement
The report highlights the need for the bank to:
- Reconsider how and when it supports reforms, particularly in sectors where elite capture is prevalent
- Double down on areas where progress can be achieved
By adopting these recommendations, the World Bank Group can better address Madagascar’s compliance challenges and support the country’s economic growth and stability.