By Mcloyd Chilangiza
Malawi has been urged to adopt a unified, market determined exchange rate to improve access to foreign currency and restore transparency in the economy.
This is contained in a study titled “Does Malawi’s Exchange Rate Regime Keep Prices Low?” which indicates that aligning the official exchange rate with the parallel market would have only a modest impact on prices.
Produced by the International Food Policy Research Institute (Ifpri) in collaboration with the National Planning Commission (NPC), the report says fears of runaway inflation may be overstated, as projected consumer prices would increase by about 5.3 percent, while food prices would rise by only 2.3 percent following exchange rate unification.
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“Malawi has already endured much of the inflationary adjustment that would ordinarily accompany exchange rate reform, as most imports are already priced using the informal exchange rate,” reads the policy note in part. The study argues that the current dual exchange rate regime, where the official rate is significantly lower than the parallel market rate, has lost its relevance, as businesses rely on parallel markets for foreign currency exchange.
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According to the analysis, even an adjustment of the exchange rate from about K1,750 to K4,400 per dollar would not translate into proportionate price increases.
Produced by Frederick Changaya, Andrew Comstock, Joachim De Weerdt, Jan Duchoslav, Andrew Jamali, Frank Kamanga, Grace Kumchulesi and Karl Pauw, the study, however, recommends effective execution of a coherent set of complementary reforms including strengthening fiscal discipline, maintaining a tight and credible monetary policy stance, boosting export diversification and productivity among others.
The World Bank has consistently advised the Malawian government to adopt a flexible exchange rate mechanism to minimise the spread between the official exchange rate and the parallel market rate. In its 2024 to 2026 Malawi Economic Monitor, the Bank warns that an overvalued official rate, coupled with foreign exchange scarcity, hinders economic recovery, encourages parallel market activities and acts as a tax on exports. However, economists have expressed mixed views.
Economics Association of Malawi President Bertha Chikadza said while the study shows Malawi is already operating under informal market conditions, unification may not immediately resolve foreign exchange shortages. “It is important to note that Malawi continues to face significant supply side challenges, and the suggested unification may not be the best way of addressing the challenge.
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“Further, we learn that the recent exchange rate realignments of 25 percent and 44 percent did not do much in narrowing the gap between the official and the parallel rate but intensified inflationary pressures,” she said.
Chikadza observed that while the policy note is informative, the suggested realignment may not necessarily translate into increased foreign exchange availability and removal of price distortions in imports. Meanwhile, economist Milward Tobias criticised the push for exchange rate alignment, arguing that it does not address the root cause of the problem.
RBM data show that total reserves stood at $526.8 million in recent months, equivalent to about 2.1 months of import cover, below the required 3.9 months recommended by international financial institutions.
