About 60 percent of the funds that many international non-governmental organisations (Ingos) receive from their donors do not physically enter the country.
A report on the Impact of NGOs’ Forex Remittances on Malawi’s Foreign Currency Reserves, says once the project funds are secured, a sizeable portion of the budget is allocated to international expenses.
These expenses, including technical assistance, insurances, procurement of commodities such as vehicles, and expatriate staff salaries, are paid directly by the Ingos’ global headquarters, but the Ingos domestically record them as income received.
This practice, according to the report, complicates the accurate representation of forex earnings as it combines foreign outflows with local inflows, potentially skewing the financial statements’ clarity and transparency.
The research further found that many other Ingos operate within a complex, multi-layered funding structure.
“The practice of paying expatriate salaries abroad while recording them locally introduces distortions in the recording of foreign exchange earnings within the country,” reads the report in part.
The report follows a study commissioned by the Non-Governmental Organisation Regulatory Authority (Ngora) to understand key issues leading to the country’s forex management in the sector.
It was conducted by Professor David Boston Kamchacha and Dr. Kondwani Thokozile Kamchacha on behalf of Produce Mart International Limited and provides an analysis of the flow of foreign exchange remittances from donors to NGOs in Malawi.
The study focuses on the year 2023 and how government, through different agencies, plays various roles in ensuring that these foreign remittances contribute to the economic growth of the country.
Financial data shows that NGOs operating in the country in 2024 received in foreign currency K734 billion, up from K589 billion in 2023, representing a 25 percent annual income growth.
However, according to Ngora’s annual sector report for 2024, the above funds are from financial reports submitted by 498 NGOs out of 959 NGOs which Ngora expected to receive annual reports from.
Ngora chief executive officer Edward Chileka Banda confirmed in an interview when commissioning the study that the country continues to struggle with forex issues yet the NGOs receive huge sums through foreign currency.
He said the 2024 sector report findings show that only 52 percent of the NGOs submitted their annual reports, implying that the sector received more forex than recorded.
“This is why Ngora is ensuring that all NGOs should submit their reports so that we can properly profile the sector’s contribution towards the development of the country. Ngora has directed all NGOs operating in Malawi to register and comply by December 31 2024,” said Chileka Banda.
He said while the NGO Act does not give the authority mandate to track forex received by the NGOs, it provides credible information to the Reserve Bank of Malawi (RBM) to make informed decisions.
“After the report was shared with RBM, they indicated that they will have measures in place to ensure that all forex received by the NGO sector is properly tracked and contributes to the country’s economy,” said Chileka Banda.
He observed that if more NGOs comply and properly remit forex, donor and public confidence would be enhanced and the sector would be able to attract more funding.
“Ngora would also like to advise all NGOs to resist all illegal transactions in order to enhance accountability and transparency in the sector,” said the Ngora head.
According to Ngora’s annual sector report for 2023, the NGO sector received K589 billion of which K473 billion was in foreign currency.
“Despite these substantial inflows, Malawi continues to face foreign currency shortages, a trend that has persisted for the past three to four years. This paradox raises several critical questions,” reads the study.
An analysis of the study shows that forex remittances from donors to local NGOs, although budgeted in foreign currencies such as $ or euro, often enter the country as local currency through local accounts through activities of international forex brokers thus complicating the monitoring and tracking of these funds’ true impact on the economy.
The practice also leads some NGOs to have challenges in accurately reporting foreign currency inflows due to intermediary conversions and asset purchases handled directly by donors.
It also says some local organisations use foreign currency-denominated accounts (FCDAs) to receive funds in foreign denominations which facilitate transparent pathway for NGOs to demonstrate the flow of funds.
But the study found that the funds remitted to FCDAs are usually not in accurate reconciliation with the awarded amounts.
“One NGO [name withheld] receives US$ funds through its FCDA account, intended solely for operational purposes. The overall budget allocation is structured as follows: 28 percent is designated for technical assistance, which means these funds remain with the financing agency, typically in the USA or Europe.
“However, the NGO is required to report these funds as received, making a contra entry, and passing a journal entry for technical assistance. For instance, in a project valued at $25 million, $7 million would be retained by the financing agency.
“Additionally, 30 percent of the budget is allocated for specialised equipment procurement, where payments are made directly by the financier to the supplier. The NGO only receives the equipment, not the cash equivalent, amounting to $7.5 million in this example,” says the report.
Consequently, out of the $25 million project budget, the NGO receives only $10.5 million in actual cash yet the full $25 million is recorded in the NGO’s financial accounts.
While some NGOs receive their funds at the Reserve Bank of Malawi (RBM) exchange rate, it remains unclear at what actual rate the bank has converted the funds to the local account, according to the study.
The study, therefore, recommends several policy issues for operational practices of NGOs to enhance the impact of forex remittances on Malawi’s economy.
Commenting on the study, financial analyst Brian Kampanje said international NGOs adopt public accounting standards that are different from traditional or conventional accounting standards, adding that the problem of spending too much outside Malawi is huge and undesirable and reflects badly on the country’s negotiations skills.
“We give substantial powers to the NGOs to dictate the terms and conditions of the projects with minimal input. The NGOs determine which technical experts to hire, country of origin and pay rate.
“They also determine which airlines to use and which country to supply the vehicles. We accept the undesirable conditions due to desperation. We need to train more people on the international relations courses to understand the dynamics of the particular NGOs or donor and find better means for the project negotiations,” said Kampanje, a professor of finance.
However, he said the increase in funds received by NGOs from K589 billion in 2023 to K734 billion in 2024 is an indication of contraction of funds regarding NGO activities in view of the massive 44 percent devaluation in November 2023 meaning that less donor money was received in 2024 in US$ terms.
He observed the recent RBM directive to banks to transfer to it all the FCDAs should encourage transfer to local denominated accounts for immediate use and not treasury activities to gain exchange rate movements in view of the scarcity of forex.
Last month, Attorney General Thabo Chakaka Nyirenda warned commercial banks and both local and international NGOs operating in the country to stop engaging in illicit foreign exchange transactions.
In his letter addressed to the Bankers Association of Malawi (BAM) and Ngora, Nyirenda alleged that some banks and NGOs were colluding to sell foreign exchange from their FCDAs to individuals or entities instead of authorised dealer banks and cautioned failure to comply would lead to legal consequences.
But in an interview with Weekend Nation, RBM spokesperson Mark Lungu said the central bank would get guidance from the AG on certain areas where there are gaps in terms of regulatory frameworks to be closed.
He said: “Where there is need to get more information and evidence on the observations made we will do so and take the necessary action in accordance with the provisions of the law with those involved.”
