Implementation of the new forex control regulation likely to result in further decline in exports and, consequently, reduced forex inflows—MCCCI

* Addressing forex scarcity requires a forward-looking approach that focuses on boosting export diversification and enhancing local production capacity for import substitution

* However, these proposed changes will likely create the desire to hedge further, promoting parallel trading, which will result in the escalation of parallel rates, continuing to fuel increases in production costs and price instability for basic goods and services

* This trend is likely to enhance speculation and motivation to declare Malawi as a country operating in a hyperinflationary status, further impacting its attractiveness as an investment destination

By Duncan Mlanjira

Implementation of the Foreign Exchange Control (2024) regulation — which the government introduced requiring public institutions to hold foreign currency reserves at the Reserve Bank of Malawi (RBM) with a mandatory conversion of 80% — is likely to result in unintended negative consequences, including a further decline in exports and, consequently, reduced foreign currency inflows.

This is observed by Malawi Confederation of Chambers of Commerce & Industry (MCCCI) in a statement on its position on forex control measures, which the business community — the main driver of the economy — takes note with concern that, in addition to the mandatory requirement for all exporters to sell 30% of their export proceeds, the government introduced the Foreign Exchange Control (2024) regulation.

“This regulation is likely to have negative implications for the private sector’s access to foreign currency and the economy,” said the statement, while taking note that these policy measures demonstrate the government’s acknowledgment of the forex challenges the country is grappling with.

“These measures could also disrupt the planning and implementation of projects by NGOs, particularly in the volatile environment the country is currently facing.

“This may discourage regional NGOs from carrying out their projects in Malawi, as the risk of foreign exchange losses would render Malawi a high-risk country. Although the measures aim to curb illegal forex trading, they fail to address how businesses will access foreign exchange once it is directed to the RBM.”

MCCCI observes further that “the principles being promoted contradict policies of a market economy and would likely increase the perception of instability in the policy regime and discourage investments” — thus it believes the 2022 regulations (repatriation of exports proceeds and operations of foreign currency denominated accounts) “are sufficient to curb illegal forex activities, and efforts should instead focus on ensuring compliance with these regulations”.

“The Confederation is of the view that addressing forex scarcity requires a forward-looking approach that focuses on boosting export diversification and enhancing local production capacity for import substitution.

“However, these proposed changes will likely create the desire to hedge further, promoting parallel trading, which will result in the escalation of parallel rates, continuing to fuel increases in production costs and price instability for basic goods and services.

“This trend is likely to enhance speculation and motivation to declare Malawi as a country operating in a hyperinflationary status, further impacting its attractiveness as an investment destination.”

RBM role should be maintained

The MCCCI thus urges the government to maintain RBM’s role as the regulator and enable commercial banks to continue operating as expected whilst prioritising the allocation of the available foreign exchange to productive sectors, “which can generate additional forex and thereby support both the private sector and the broader economy”.

“Furthermore, given the limited availability of forex, the Confederation encourages the government to implement measures that prioritise export-driven industries, as they have the potential to generate more forex, which is vital for economic stability.

“To achieve the intended goals of fostering adherence to existing regulations and curbing illegal activities, the government should engage banks and other stakeholders in the sector for consultation.”

In December 2024, the government introduced the new foreign exchange control regulation that additionally mandates commercial banks to convert, within 48 hours, 70% of NGOs’ foreign exchange receipts into Malawi kwacha and immediately transfer the proceeds to the RBM.

This measure aims to ensure the availability of forex for strategic purchases, such as fuel imports, and to reduce the proliferation of forex to the parallel market.

Strengthening existing forex regulatory frameworks to combat illicit currency trading

MCCCI thus asks the government reconsider its approach to the foreign exchange regulation, saying it should instead “adopt holistic measures that prioritise the private sector as a critical driver of economic growth”.

The government is advised to focus on policies that should enhance “forex availability for businesses, improving infrastructure and fostering a competitive and sustainable business environment”.

“Addressing these challenges is essential to strengthening the private sector’s resilience and unlocking Malawi’s economic potential,” says the statement. “Additionally, the government should strengthen existing regulatory frameworks and enforcement mechanisms to combat illicit currency trading, with adequate penalties to deter participation in the parallel market.

“Collaboration with financial institutions to increase forex availability for the private sector is vital, especially for prioritising essential imports and businesses with export potential.”

The MCCCI is also of the view that “fostering public confidence in the banking system — by ensuring stability, transparency and accessibility to foreign currency — will help shift demand from the parallel market to formal channels, effectively curbing its prevalence”.

“The Confederation, therefore, calls for urgent and immediate dialogue mechanism to identify workable solution to stimulate private sector investment in strategic value chains.”