LILONGWE-(MaraviPost)-The country’s civil rights group under the banner National Advocacy Platform (NAP) has expressed worrisome over the new law that controls foreign currency of Non-Governmental Organisation (NGOs) arguing that the legal framework will jeopardize the financial sustainability, operational efficiency, and independence of NGOs in Malawi.
NAP observes that while the 2024 exchange control regulations aimed at promoting accountability, rigid mandatory conversion requirements and punitive compliance measures, risk crippling the sector’s ability to deliver critical services.
In a press statement issued on Wednesday, December 18, 2024, signed by NAP Chairperson and National Coordinator Benedicto Kondowe and Baxton Nkhoma respectively the government to urgently amend these regulations to introduce flexibility, proportionality, and stakeholder collaboration.
NAP observes further that a balanced framework is essential to uphold financial integrity while enabling NGOs to fulfill their developmental mandate effectively.
“Revise Regulation 8 to allow NGOs to retain a significant portion of foreign currency receipts in designated accounts. This flexibility would reduce exchange rate risks and enhance financial stability while meeting domestic currency needs.
“Introduce differentiated compliance requirements based on organizational size and capacity, ensuring equitable enforcement of Regulation 9 and related provisions. Larger NGOs could shoulder more comprehensive obligations, alleviating burdens on smaller organizations,” recommends NAP.
The grouping urges further, ” Establish a consultative framework involving NGOs, donors, and financial institutions to refine regulations. A technical working group can clarify ambiguous provisions and develop practical compliance guidelines
“Provide training on financial management, compliance, and currency regulations to empower NGOs, particularly smaller entities, to meet regulatory demands without compromising their missions”.
NAP appeals, “Invest in digital tools for reporting and compliance to streamline processes and reduce administrative burdens. NGOs should be supported in accessing affordable technological solutions”.
The 2024 Exchange Control Regulation comes as Malawi is grappling with forex shortages, which are preventing the country from purchasing essential goods and services, including farm inputs, medicines, fuel, and raw materials for the manufacturing sector and others.
Below is NAP full statement…
NAP’S STATEMENT ON THE EXCHANGE CONTROL ACT (CAP. 45:01): EXCHANGE CONTROL (HOLDING FOREIGN CURRENCY DENOMINATED ACCOUNTS AND MANDATORY CONVERSION OF FOREIGN CURRENCY RECEIPTS) REGULATIONS, 2024 (Government Notice No. 73): IMPLICATIONS ON THE OPERATIONS OF NON-GOVERNMENTAL ORGANIZATIONS IN MALAWI
Dated: Wednesday, 18th December, 2024
INTRODUCTION
Non-Governmental Organizations (NGOs) play a vital role in addressing Malawi’s socio-economic challenges, advancing human rights, and delivering essential services. However, the introduction of the Exchange Control Act (Cap. 45:01) and the Exchange Control (Holding Foreign Currency Denominated Accounts and Mandatory Conversion of Foreign Currency Receipts) Regulations, 2024 (Government Notice No. 73), issued by the Minister of Finance and Economic Affairs on December 12, 2024, imposes stringent controls on foreign currency management and compliance. While these measures aim to enhance financial accountability and curb illicit financial flows, they present significant challenges to the financial sustainability, operational efficiency, and independence of NGOs. This statement outlines the adverse implications of these regulations and advocates for revisions that balance accountability with the ability of NGOs to effectively fulfill their developmental mandate in Malawi
2.0. INTENT OF THE REGULATIONS
The regulations aim to promote accountability, prevent money laundering, and safeguard Malawi’s financial system. Key provisions include mandatory financial reporting, prohibiting unlicensed foreign currency exchange, and enforcing the conversion or retention of foreign currency receipts into local currency. Under Regulation 8(1)(b), NGOs are required to avoid dealings with unlicensed foreign currency brokers and must deposit foreign currency receipts only into designated accounts. Additionally, Regulation 8 (3) mandates NGOs, international NGOs, and incorporated trustees to convert or retain foreign currency at prescribed ratios, ostensibly to support domestic currency availability. The intent aligns with the goals of the Financial Crimes Act, 2022, but these measures introduce significant complexities for NGOs.
3.0. HISTORICAL CONTEXT OF THE REGULATIONS
Malawi’s regulatory framework for NGOs has been shaped by persistent government allegations of forex shortages, money laundering, and fraud within the sector. Concerns over donor fund mismanagement have driven increasingly stringent financial controls.
The Non-Governmental Organizations Act of 2001 initially formalized oversight, which evolved through laws like the Financial Crimes Act (2022) and the Exchange Control Act. Efforts such as the Terrorist Financing Risk Assessment for the Non-Profit Organization (NPO) Sector, led by NGORA and the Financial Intelligence Authority, identified vulnerabilities that could enable illicit activities, reinforcing the government’s resolve to tighten financial regulations.
The 2024 Exchange Control Regulations reflect this trajectory, with provisions like mandatory currency conversions and restrictions on unlicensed forex dealings. While intended to curb illicit financial flows and improve forex liquidity, these measures risk undermining NGO autonomy and financial sustainability. Balanced regulations are crucial to safeguarding NGOs’ capacity to deliver essential services.
4.0. IMPLICATIONS FOR NGOs
Increased Administrative Burdens: The regulations impose significant administrative obligations on NGOs, charities, religious organizations, and trusts operating foreign currency-denominated accounts funded externally. Regulation 9 requires detailed annual financial reporting and funding disclosures, diverting resources from program implementation. Smaller NGOs with limited capacity are particularly at risk of non-compliance and penalties.
Challenges in Foreign Currency Transactions: Regulation 8(5) restricts NGOs from utilizing foreign exchange balances for cross-border payments, while sub-regulation (6) limits these funds to the same legal entity’s imports of goods or services. These restrictions complicate cross-border transactions, causing delays, increased costs, and reduced financial efficiency, particularly for NGOs reliant on foreign funding.
Mandatory Conversion or Retention Ratios: The mandatory conversion of foreign currency receipts under Regulation 8 poses significant financial risks. For example, sub-regulation (3) requires 70% of foreign currency to be converted at the prevailing bank rate within two days of receipt notification. Sub-regulation (4) further authorizes automatic conversion by the bank after this period. Such forced conversions expose NGOs to exchange rate losses, reducing funding for critical programs and disproportionately affecting international NGOs managing multi-currency projects. This disproportionately affects international NGOs and those managing multi-currency projects, as it limits their ability to hedge against market volatility.
Severe Penalties: The penalties under Regulation 12 are punitive, including fines of up to K200 million (or equivalent financial gain) for corporate bodies and operational suspensions for non-compliance. Individuals face fines of K150 million and up to four years imprisonment for actions perceived as circumventing the regulations. These measures risk deterring donor investments and undermining sector credibility. These punitive measures create uncertainty, potentially discouraging donor investments in the sector and undermining its credibility.
Erosion of independence: Centralized financial control under the Ministry of Finance and Economic Affairs risks eroding NGOs’ independence, especially those advocating for governance and human rights. Heightened scrutiny could lead to undue political interference, stifling critical voices and weakening accountability mechanisms.
RECOMMENDATIONS
Revise Regulation 8 to allow NGOs to retain a significant portion of foreign currency receipts in designated accounts. This flexibility would reduce exchange rate risks and enhance financial stability while meeting domestic currency needs.
Introduce differentiated compliance requirements based on organizational size and capacity, ensuring equitable enforcement of Regulation 9 and related provisions. Larger NGOs could shoulder more comprehensive obligations, alleviating burdens on smaller organizations
Establish a consultative framework involving NGOs, donors, and financial institutions to refine regulations. A technical working group can clarify ambiguous provisions and develop practical compliance guidelines
Provide training on financial management, compliance, and currency regulations to empower NGOs, particularly smaller entities, to meet regulatory demands without compromising their missions.
Invest in digital tools for reporting and compliance to streamline processes and reduce administrative burdens. NGOs should be supported in accessing affordable technological solutions.
8.0. CONCLUSION
The 2024 Exchange Control Regulations jeopardize the financial sustainability, operational efficiency, and independence of NGOs in Malawi. While aimed at promoting accountability, rigid mandatory conversion requirements and punitive compliance measures risk crippling the sector’s ability to deliver critical services. The government must urgently amend these regulations to introduce flexibility, proportionality, and stakeholder collaboration. A balanced framework is essential to uphold financial integrity while enabling NGOs to fulfill their developmental mandate effectively
Signed by: NAP Chairperson Benedicto Kondowe and NAP National Coordinator Baxton Nkhoma