The Weakening Kyat-Dollar Exchange Rate

By The Irrawaddy 7 July 2018

Ye Ni: Welcome to Dateline Irrawaddy! This week, we’ll discuss the current talk of the town—the weakening of the kyat-dollar exchange rate. Is it good or bad for the country and how should the Central Bank of Myanmar handle it? Economist U Naing Ko Ko, and importer/exporter U Hla Win Shwe join me to discuss this. I’m Irrawaddy Burmese editor Ye Ni.

The Myanmar kyat has slumped against the dollar. It has weakened from over 1,300 kyats on June 1 to nearly 1,400 kyats toward the end of June. Why did the kyat-dollar exchange rate weaken so steeply, Ko Naing Ko?

Naing Ko: There are about three factors. US President Donald Trump promised to raise the value of US currency during the election campaign, and he did. He increased the interest rate and the greenback has appreciated as a result. It seriously impacts Myanmar businessmen who have to buy it for trading. But it is an advantage for tourists who visit Myanmar and local employees who earn their salaries in US dollars. There will always be gains and losses, as is the nature of the exchange rate. There are always gains and losses in business. The US practices contractionary monetary policy. Therefore, the Central Bank of Myanmar needs to keep an eye out.

Secondly, Trump’s government is running a deficit in its trade with China. After assuming the presidency, he tweeted on his Twitter that the US would wage a trade war and would easily win. But taking a look at the market, it is not clear what is going on—a trade war or a currency war or small countries devaluing their currencies competitively. The Central of Bank of Myanmar needs to assess this. Investors who make investments with the dollar, yuan, or baht also need to see if it is a currency war or trade war or if all of the countries are devaluing their currencies to promote exports. In my opinion, it is just a trade dispute.

YN: According to you, the weakened kyat-dollar exchange rate is not caused by internal factors, but by external factors? As you’ve said to the general public, the weakening of the exchange rate means an increase in the price of imported goods, and importers will be affected. Also, exporters will earn good prices. Ko Hla Win Shwe, as an exporter and importer, can you explain the consequences of a softened exchange rate?

Hla Win Shwe: When the kyat-dollar exchange rate weakens, the prices of imports go up for sure. Companies that have won tenders for government projects will have trouble as they will have to pay higher prices to import materials. Fuel prices may go up, transportation costs may increase consequently and food prices may increase. These are possible consequences of a weakened kyat-dollar exchange rate. The advantage is that employees and those working at non-governmental organizations who earn their salaries in US dollars may earn more. Exporters may earn good prices. But for farmers, now is the cultivation season. And most of the agricultural inputs such as fertilizer and pesticides are imported. So, they will have to incur higher operating costs. These are the possible consequences. The appreciation of the greenback has impacts on not only our country, but also other countries. But we assume that the appreciation is just temporary.

YN: The Central Bank of Myanmar predicted last week that the dollar may continue to rise. The exchange rate is likely to remain unstable because of a trade war or monetary war as you have said. How can we small countries reduce its impact? How do the central banks of other countries respond and what should the Central Bank of Myanmar do?

NK: That is a trillion dollar question. In the time of former president U Thein Sein and [his advisor] U Zaw Oo, they managed to get US$2.7 billion dollars deducted from the loans Myanmar owed to lenders from the Paris Club and OECD (Organization for Economic and Cooperation Development). The central bank governor, finance minister or trade minister can adjust policies in consideration of the future of the country. Myanmar currently has US$65 billion in foreign investment. If effective changes would be introduced as a monetary policy, the foreign investment may reach US$100 billion in time. I don’t say this groundlessly. It [monetary policy] is important to increase saving and investment of our country.

The governor of the Central Bank of Myanmar has enormous responsibility for the prosperity of the country. So does the board of directors of the bank. [New] finance minister U Soe Win may have a warning system for financial chaos. I think he does. He is much better than [former] finance minister U Kyaw Win. So, he might have prepared a warning system. There might also be a crisis response plan in case of financial and bank panic. [Central Bank Governor] Uncle U Kyaw Kyaw Maung needs to explain those plans to the market and alleviate their worries. He should guarantee that there will not be a crisis and that the Central Bank will act as lender of last resort (LOLR) and provide a sovereign credit. The bank should communicate with the market, which is very important. By ‘bank’ I mean the Central Bank of Myanmar, and by ‘market’ I mean private commercial banks. The central bank is responsible for regulating and facilitating the market players. It is its top priority to alleviate their worries.

The Central Bank should study non-conventional monetary policy. I think there are currently about 2,000 people around the world who monitor the markets with microchip, financial technology and mainframe computers. But Myanmar still does not even have a two-board system. There is a need to set up a policy board. There must be a policy board for the Central Bank. And there should be around 10 people on the policy board to study the markets of Myanmar, Thailand, India, the New York Exchange and so on. They don’t need to sit around all day and monitor. There is financial technology, which is also known as Fin-Tech. It solves that problem. Banking services such as the deposit and withdrawal of money can be controlled by technology. And manpower can be reduced.

I would like to request the Central Bank legalize purchase of goods with the yuan by local traders at the Shanghai Stock Exchange. I would like to request it decriminalize their purchases. Don’t discourage local traders, but encourage them. Merchants in Kachin State and northern Shan State have bank accounts in China. As far as I know, there are a total of 132 merchants from those areas and they have US$500 million in their bank accounts in China. I would urge the Central Bank to help them and address this situation. The business sector must improve to revive the economy. Businessmen in Karen and Mon states and Tanintharyi Region also have opened bank accounts with Thai baht. There are more than a 1,000 bank accounts and they import billions of dollars worth of goods. The trade between Mae Sot and Myawaddy totals around US$2 billion a year. I would like to urge the Central Bank to facilitate microeconomics so that they can improve the quality of their products, enhance their competitiveness, and trade in line with rules and regulations.

YN: So you want the [Central Bank] to focus on microeconomics rather than macroeconomics. Ko Hla Win Shwe, as the import and export sector is microeconomics, what have you decided to do in response to the weakened kyat-dollar exchange rate?

HWS: From the point of view of a businessman, I think the government will do as much as it can [to address the problem]. Our country imports large quantities of goods and measures should be taken to reduce import volumes. I think industrial zones that can substitute imported goods should be established in all regions, not only in Yangon and Mandalay. I don’t mean big industrial zones, but they should attract foreign investment. Most of the goods we consume are imported and I think the more we can reduce imports, the more the use of dollars will decline.

For the time being, [the government] should invite more foreign direct investment in infrastructure like road and bridge construction and power generation. The inflow of FDI will create jobs and the country will earn more US dollars. Talking of the electricity sector, the amount of investment in renewable energy in the world totaled around US$320 billion in 2017. But Myanmar barely received foreign investment in electricity. Our country needs electricity, and if [the government] shapes a policy regarding renewable energy, foreign investment may come in immediately. The country can use half for production [and export the rest]. It would create a lot of job opportunities. There may be other factors [that can attract foreign investment]. I have just mentioned one of them that could attract foreign investment in a short time. If both the government and local businessmen try to attract FDI, I think we will be able to manage the exchange rate fluctuations.

As for the tourism industry, visitors who would spend money in our country can gain greater benefits from the weakened exchange rate. So, measures should be taken to attract travelers when the rainy season ends. The tourism industry can partly cover [losses from] dollar price fluctuations in the country. I think the government should adopt a systematic plan [to attract foreign visitors] when the rainy season ends.

YN: Ko Naing Ko, Ko Hla Win Shwe, thank you for your contributions.