By Benadetta Chiwanda Mia:
The International Monetary Fund (IMF) has urged the Reserve Bank of Malawi (RBM) to take decisive action and re-anchor inflation expectations while addressing distortions in the foreign exchange market.
The fund warns that the country risks falling into a “high inflation, low growth” trap if action is not taken urgently.
In its Staff Report for the 2025 Article IV published last week, the IMF noted that inflation in Malawi remains elevated and is expected to persist through 2025.
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To restore price stability, the fund recommends a raise in the policy rate ‘to a positive real level’ until inflation shows credible signs of easing.
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“The RBM should prioritise open market operations at fixed rate with full allotment to mop-up excess liquidity and sterilise purchases of government securities in the secondary market,” IMF says.
The Fund also raised red flags about Malawi’s exchange rate regime, noting that although officially a floating rate system supported by inflation targeting, the RBM is operating a de facto “stabilized” regime.
Malawi Economics Justice Network (MEJN) Chief Executive Officer Bertha Phiri said it could be challenging for Malawi to implement the IMF recommendations amid existing structural challenges.
“There should be contextual considerations. Malawi’s economy is characterized by significant structural challenges, including a large informal sector, limited economic diversification, and vulnerability to external shocks,” Phiri said.
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Economist Marvin Banda observed that the IMF’s latest warning reflects Malawi’s urgent need to restore monetary stability and fix distortions in its currency market.
However, Banda emphasized the need for caution on the exchange rate recommendations as part of a broader package of reforms, saying this must be carefully managed to avoid a price shock that could hurt vulnerable households.
“The IMF is not famous for policy guidance that has helped the Malawian economy with its monolithic policies,” he said.
He added that the Open Market Operations can only be recommended if the policy rate is reduced and food supply is increased.
At its third meeting of 2025, the RBM’s Monetary Policy Committee (MPC) maintained the policy rate at 26 percent, Lombard Rate at 20 basis points and retained the Liquidity Reserve Requirement (LRR) at 10 percent for local currency deposits to sustain the downward trend in inflation toward its medium-term target of five percent.
