YANGON—Monday’s decision by the central bank to remove the trading band for foreign exchange transactions involving the kyat will make it easier for the government to implement its plans for sustainable development by helping to prevent distortions in the currency’s value and reducing its volatility, the Special Economic Consultant to Myanmar’s State Counselor said.
“Myanmar’s exchange rate will now truly reflect demand and supply in the market, allowing it to adjust to better suit the structural adjustment Myanmar’s economy needs,” Sean Turnell, Special Economic Consultant to State Counselor Daw Aung San Suu Kyi, told The Irrawaddy.
The Central Bank of Myanmar (CBM) announced on Monday that private banks and exchange counters are no longer required to trade within 0.8 percent of its reference exchange rate, in a move that is expected to ease foreign-exchange (FX) transactions and improve market liquidity flows.
The CBM’s move has been hailed in some quarters as an important advance in economic deregulation that will make Myanmar a more attractive base for export-focused manufacturers.
However, it remains unclear whether the government aims to adopt a fully floating regime or not. According to Turnell, however, that is the government’s plan. Under such a system, the rate is set by market forces based on the demand for and supply of foreign and domestic currencies, with no government intervention.
“The track record around the world is that a floating exchange rate protects a country from international economic shocks. This is especially important for countries such as Myanmar, which at this point mostly exports commodities, primary products and energy,” Turnell said.
Some experts hailed the CBM’s move, pointing out that its reference rate is based mainly on demand at its daily dollar auctions. When the gap between the CBM’s reference exchange rate and market-driven exchange rates grows beyond a certain point, the trading requirement of plus or minus 0.8 percent becomes unrealistic, creating a bottleneck that disrupts FX transactions. The rule also complicates the current account transactions of complying banks, discouraging foreign banks in particular from participating in the interbank FX market.
However, other financial market experts criticized the move, saying Myanmar is not ready for a free-floating FX market. They warned that the decision could lead to economic disaster by making it harder to defend the currency from flows of “hot money” from abroad.
“Our currency is not mature enough for a floating exchange rate. [The CBM’s move] creates an opportunity for those who want to undermine the government politically by manipulating financial markets,” said U Than Lwin, a senior adviser at Kanbawzaw Bank and a former deputy governor of the CBM.
“We have a big illegal financial market; any group with bad intentions could manipulate the market. [The move] puts the economy at risk,” he said.
The kyat has depreciated against the dollar since May. Some experts attribute this in part to the mounting trade war between China and the U.S., along with a shortage of foreign currency at home to facilitate imports.
The central bank’s reference rate on Wednesday was 1,475 kyats/USD. This compares to a purchase rate of 1,495 kyats and a selling rate of 1,503 at private banks. This is the weakest rate for the kyat in more than eight years. Many people blamed the situation on the CBM’s policy of removing the FX trading band.
However, former Citi Banker Saw Bo Bo said there are many reasons for the dollar’s record gain against the kyat, pointing out that the greenback has risen against currencies all over the world. He added that with business activity in Myanmar at a cyclical low due to the rainy season, private banks currently hold excess kyats, while people are buying dollars on the domestic market due to liquidity concerns as the currency strengthens.
Responding to the dollar’s record level against the kyat, Turnell wrote in a Facebook post that there is a degree of misunderstanding over the kyat’s present weakness. He said the current conditions are part of a global story, with the dollar strengthening against all emerging market currencies — and even some rich-world ones — as risk anxieties grow.
He added that the fall in the kyat is in line with those of other currencies. At around 10 percent, its decline has been far milder than some, though it is true that it has fallen marginally more than, say, the Indonesian rupiah (down about 8 percent), Indian rupee (also down about 8 percent), and the MCSI emerging market currency index (down about 7 percent).
According to Turnell, the kyat has fallen slightly further than some other currencies because Myanmar is a frontier, rather than an emerging, market. Accordingly, the kyat is perceived as less liquid than emerging currencies broadly, and thus carries a higher risk premium. Similarly, the country is regarded as slightly riskier than other countries, further down the political and economic reform track. Myanmar also has slightly higher inflation than some of its peer countries.
Turnell pointed out that Myanmar does not have sufficient forex reserves to defend the currency. If it did attempt such a defense, its reserves would rapidly be depleted, which would require it to float the kyat anyway. He added that the government was embracing a floating exchange approach that had proven beneficial to other countries. He raised the example of Australia, saying it was a particularly relevant example of a commodity-producing country for which the adoption of a floating exchange rate had provided sustained economic growth.
Saw Bo Bo said the government needed both short- and long-term plans to tackle the domestic dollar shortage and reduce exchange-rate volatility.
“The central bank needs to inject more USD into the financial market. It should also ease some foreign currency restrictions for private banks, and find ways to boost the flow of USD from foreign banks [based in Myanmar] into the local market,” he said.