Liberalisation of capital and financial account in Malawi

Over the past several years Malawi has gradually begun to reform its economy. The most significant of these reforms has been the liberalisation of the currency regime from a managed peg to a free float. In early 2014, in the latest in a series of financial reforms, the Basel II capital adequacy requirements were enacted by the Reserve Bank of Malawi. Given a recent trend toward a more liberal economic regime, this paper seeks to determine whether Malawi is now ready to further liberalise its capital and financial account. Additional motivations for the report come from the questions that have been raised during previous foreign reserve crises over the actual effectiveness of capital controls as a tool for managing demand for foreign exchange. In addition, as one of the most donor-dependent countries in the world, the paper has been spurred by the need to diversify official funding services and reduce the macroeconomic effect of donor actions. As a signatory of the SADC Finance and Investment Protocol (FIP), Malawi has committed to liberalising its capital and financial account. From an international relations perspective, the question of capital account liberalisation is thus a nonsequitur, and the important question relates to the local economic case for liberalisation. This paper takes an agnostic view to the political implications of Malawi’s SADC commitment, focusing instead on the domestic case for capital account liberalisation, and making recommendations as to the desirability, extent and timing of liberalisation initiatives for Malawi?s economy in isolation of FIP commitments. This economic perspective forms an input into the ultimate political decision.