Does Malawi's exchange rate regime keep prices low? Evidence and policy implications

The current exchange rate regime in Malawi is untenable. It results in multiple effective parallel rates, which impose significant costs on the economy and the daily lives of citizens. A key concern underpinning the existence of the regime is that its removal would trigger rampant inflation and worsen livelihoods. However, the widespread importation of both food and nonfood products at informal exchange rates means that the average citizen derives little real benefit from the maintenance of the official rate. After two major fuel price hikes in recent months, pump prices have nearly converged with the cost that would prevail at market-determined exchange rates. Drawing on a combination of price multiplier and food demand simulations, this policy note shows that an exchange rate regime rationalization – through devaluing the official exchange rate to eliminate the informal premium and allowing the Malawi kwacha to trade at market-clearing levels – would not lead to runaway inflation or harm household welfare. Recent fuel price increases – in October 2025 and January this year – have pre-emptively absorbed much of the inflationary impact that would have been associated with exchange rate reform. Our analysis documents the direct, short-run effects of exchange rate unification on domestic prices and finds them to be relatively modest. Longer-term economic growth and sustained price stability will hinge on the effective execution of a coherent set of complementary reforms. Exchange rate unification is a necessary component of this package, but it is not sufficient. Implemented in isolation or treated as a one-off devaluation followed by business as usual, it will bring little relief. It must be accompanied by sound fiscal and monetary policy and sustained export growth to restore macroeconomic stability. We do not discuss the trade-offs inherent to these accompanying measures, as they have been addressed at length in AfDB et al. (2025) and Engel et al. (2025). Critically, there must be a credible and durable switch toward a more flexible and transparent exchange rate regime. It will take time for exports and growth to pick up after a devaluation, and whether they do will depend on economic actors believing that macroeconomic conditions will remain stable over the lifetime of their investments. It will require careful preparation to get the cocktail right. Politically, the current administration might just have one shot at this: failure will make future reform attempts much harder.