By: CIJM

Malawi’s economy, battered by multiple crises including Cyclone Freddy’s devastation, faces a persistent threat from illicit financial flows (IFFs) that’s undermining its recovery efforts and development goals.

“The magnitude of illicit financial flows has reached alarming levels, posing a direct threat to our monetary policy effectiveness and economic stability,” warns Dr. Wilson Banda, Governor of the Reserve Bank of Malawi (RBM). “Our latest estimates suggest these illegal outflows could be depriving our economy of resources equivalent to 12-15% of our annual trade volume.”

Malawi’s GDP growth shows a concerning downward trajectory over the past five years. From a robust 4.5% growth in 2019, the economy experienced a sharp decline to 0.8% in 2020 during the COVID-19 pandemic. Source: RBM 2023 report.

The escalating threat of IFFs in Malawi

The 2023 RBM Annual Report reveals an intensified focus on combating IFFs, with a 40% increase in offsite monitoring of financial institutions. Despite these efforts, the challenge persists, particularly in high-risk sectors.

“We’ve identified systematic under-invoicing in our key export sectors, especially tobacco and tea,” notes Dr. Banda. “Our analysis shows discrepancies between declared export values and international market prices averaging 23% in these sectors alone.”

The Global Financial Integrity (GFI) report estimates annual losses to trade misinvoicing exceeded $400 million in 2022, with agricultural exports being particularly vulnerable to manipulation.

The inflation chart reveals a dramatic acceleration in price increases, particularly over the last two years. After maintaining relatively stable rates between 8-9% from 2019 to 2021, inflation more than doubled to 21.2% in 2022 and surged further to 28.8% in 2023. Source: RBM 2023 report

Economic Impact on Malawi

The impact of IFFs on Malawi’s economy has been severe. GDP growth has declined steadily, reaching just 1.9% in 2023, while inflation has surged to 28.8%, marking a five-year high. The graphs above illustrate these concerning trends.

Foreign exchange reserves have plummeted to critical levels, covering just 1.4 months of imports by December 2023, well below the recommended three-month minimum. This decline correlates strongly with periods of increased illicit outflows, according to RBM analysis.

 Government response and outlook

The government’s response includes strengthening the Anti-Money Laundering (AML) Act and enhancing the Financial Intelligence Authority’s capabilities.

“We’re implementing a risk-based supervision framework that has already led to the identification of suspicious transactions worth over K12 billion in 2023,” reports Dr. Banda.

Malawi’s GDP growth shows a concerning downward trajectory over the past five years. From robust 4.5% growth in 2019, the economy experienced a sharp decline to 0.8% in 2020 during the COVID-19 pandemic.Source: RBM 2023 report

However, experts emphasize that more comprehensive reforms are needed. The World Bank estimates that controlling IFFs could boost Malawi’s GDP growth by 2-3 percentage points annually and significantly improve its foreign exchange position.

Decisive action is essential to prevent Malawi from sinking deeper into poverty and foreign aid dependence, putting its future economic stability at greater risk.