The World Bank has recommended that Malawi unify its exchange rates and move towards a market-determined system. In its biannual Malawi Economic Monitor publication, the Bretton Woods institution proposed tightening fiscal and monetary policies and stabilising the parallel market rate. This would lay the groundwork for exchange rate unification. The World Bank also suggested strengthening foreign exchange market operations and phasing out forex surrender requirements.
The current exchange rate system in Malawi has been criticised for being overvalued, weakening export-oriented sectors and contributing to foreign exchange shortages. The World Bank argued that this has exacerbated external imbalances. The Reserve Bank of Malawi has tightened controls on foreign exchange due to scarcity on the market. Individuals are now restricted from physically possessing more than $1,000 in foreign currency without permission.
The Reserve Bank of Malawi has also restricted the amount of Malawi kwacha that can be taken or sent abroad without permission. Cross-border traders can take or send up to $5,000, while other travellers can take or send up to $100. These measures come amid continued pressure on forex reserves, which declined from $616.1 million to $600.6 million between June and July.
The decline in forex reserves has been attributed to lower estimated private sector reserves. Despite this, gross official reserves improved slightly. Minister of Finance, Economic Planning and Decentralisation Joseph Mwanamvekha cautioned against viewing changes to the exchange rate mechanism as a sufficient solution to the shortage. He emphasised the need for a comprehensive approach to address the underlying imbalance.
Mwanamvekha's emphasis on sequencing policies mirrors the World Bank's prescription, which does not propose exchange rate unification in isolation. The World Bank recommends fiscal and monetary tightening ahead of the adjustment. National Smallholder Farmers Association of Malawi chief executive officer Betty Chinyamunyamu said forex shortages are affecting productive businesses, making it difficult to import machinery and spare parts.
The Economics Association of Malawi executive director Esmie Kanyumbu stressed the need for reforms that expand production, value addition and exports. Ecama president Bertha Bangara-Chikadza argued that sustainably resolving the forex problem requires increasing the country's capacity to earn foreign currency. This can be achieved by increasing the export base through production of goods and services with world demand.
The National Planning Commission and International Food Policy Research Institute urged the Malawi Government to move decisively to unify the exchange rate, citing the current dual system as untenable. The commission argued that this would help restrain inflation. The World Bank's prescription is part of a broader effort to address Malawi's economic challenges and promote sustainable growth.
Key points
- The World Bank has proposed a unified exchange rate for Malawi, citing the current system's negative impact on foreign currency generation.
- The Reserve Bank of Malawi has tightened controls on foreign exchange due to scarcity on the market.
- Malawi's forex reserves have declined, prompting concerns about the country's ability to meet its import needs.
