The amount of foreign currency sent back to Malawi by Malawians living in the diaspora plummeted from $300 million in 2021 to $112.5 million last year, exacerbating the country’s foreign exchange challenges, according to the latest Malawi Economic Monitor by the World Bank.
At the same time, outflows reached $126.4 million, turning net remittances negative for the first time.
According to the World Bank, high transaction fees for inbound remittances and a significant premium between the official and parallel exchange rates discouraged inflows through official channels, thereby intensifying the forex crisis.
“Recent regulations have been introduced to further strengthen foreign exchange controls beyond existing export proceed surrender requirements, to include the mandatory conversion of foreign currency receipts.
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“While these are intended to bolster official reserves, they could also have the unintended consequence of further increasing capital outflows, reducing liquidity in the formal foreign exchange market and discouraging private sector investment,” the bank states.
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In recent years, Malawi has struggled with inflation, which, according to economic experts, erodes the value of remittances.
They argue that high inflation can reduce the purchasing power of the money sent by the diaspora, making it less effective in addressing the needs of recipients.
Similarly, as the Malawian Kwacha weakens against major currencies, the value of remittances drops when converted into local currency, leading to a decrease in the amount people choose to send.
In an interview Sunday, Scotland-based economist Velli Nyirongo said Malawi’s plummeting remittances have deepened the country’s forex crisis.
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According to Nyirongo, high transaction fees for formal transfers, coupled with stringent exchange controls that yield unfavourable rates and delays, incentivise the use of informal channels.
“A lack of incentives for official transfers, global economic pressures on diaspora incomes and the allure of faster, albeit riskier, informal methods compound the problem.
“Broken promises regarding diaspora initiatives, such as proposed ‘diaspora cities’, have eroded trust in the government,” Nyirongo said.
He added that reversing this situation requires lowering transaction costs by fostering competition among money transfer operators and leveraging mobile money platforms.
“Crucially, simplifying exchange regulations and offering competitive rates are essential. Incentivising formal channels through tax breaks and innovative financial products, alongside strengthening financial infrastructure, is also vital,” Nyirongo said.
He further suggested that rebuilding diaspora trust through targeted campaigns and closer engagement, addressing macroeconomic instability via sound fiscal policy and export diversification and embracing technologies like blockchain could further stimulate official remittances.
“A less risk-averse banking sector could capitalise on fintech opportunities to facilitate cross-border transfers and explore technologies like cryptocurrency and blockchain,” the economist said.
In April last year, Malawi’s Ambassador to the United States, Justice Esmie Chombo, told President Lazarus Chakwera that a study conducted by her office had discovered that remittances were moving through informal channels.
Chombo said that, according to her findings, over $600,000 a month was being remitted to Malawi.
“But these are the uncharted channels, as there doesn’t seem to be an environment conducive for people to remit their money through the legal channels,” Chombo said.
She further cited conditions in Kenya, where people could access their foreign exchange back home when they sent it through formal channels, which encouraged remittances, resulting in greater inflows from the diaspora.
Meanwhile, the Malawi Confederation of Chambers of Commerce and Industry (MCCCI) has released a position paper in which it addresses the persistent forex issues affecting the private sector.
The paper outlines strategic recommendations aimed at enhancing economic stability and growth.
Among other issues, MCCCI has raised concerns about the introduction of the Foreign Exchange Control regulations by the government.
While it acknowledges the government’s efforts to address foreign exchange challenges, the chamber warns that the implementation of these measures could have unintended negative consequences for the private sector and the broader economy.
MCCCI has since advocated for what it calls a forward-looking approach to addressing forex scarcity by boosting export diversification and enhancing local production capacity for import substitution.
“By driving export diversification, promoting industrialisation and attracting foreign direct investment, the private sector will significantly contribute to the economy.
“Additionally, fostering value addition by processing raw materials into finished goods will enhance export revenues while generating employment and tax revenues.
“However, the private sector is facing a constrained business environment characterised by inadequate infrastructure, weather shocks, limited access to finance, macroeconomic imbalances and persistent foreign exchange shortages,” MCCCI says.
The chamber has urged the government to reconsider its approach to foreign exchange and “adopt holistic measures that prioritise the private sector as a critical driver of economic growth.”
