Recent attempts by the Central Bank of Myanmar (CBM) to reduce the use of dollars triggered an unexpected backlash in the form of dollar hoarding and black market trading, providing a timely reminder that managing the currency demands of a newly-opened economy is something of a learning curve.
Dollars have been in short supply in recent months in Myanmar as imports have been rising faster than exports, prompting an 88% jump in the country’s trade deficit to $4.9bn at the end of March. Myanmar’s currency, the kyat, has been steadily depreciating against the dollar, causing the gap between the official and unofficial rates to widen.
On May 27, the CBM halved the daily withdrawal limit from local dollar bank accounts to $5000 − from a previous limit of $10,000 − whilst urging government organisations to make domestic payments in kyat. On the same day, the central bank also enforced a widely ignored legal requirement asking for all transactions within the country to be conducted in kyat in a bid to stave off dollarisation of Myanmar’s financial markets.
Private banks and business leaders were critical of the measures introduced, saying business owners would resort to past practices of sourcing dollars outside official channels. As fears mounted in June that supplies of the currency were set to dwindle, some rushed to make withdrawals from their dollar accounts. “Central bank intervention has come too late,” Daw Kim Chawsu, head of transformations at KBZ Bank, told OBG. “Dollarisation is a major issue. Putting a limit on US dollar withdrawals only pushed people to withdraw their holdings.”
Exchange counters in some local banks refused to sell dollars to customers, instead holding on to them with the expectation that the value would rise, while some retailers hiked their kyat prices, raising the risk of inflation.
The measures also led to further fluctuations in the currency. Towards the end of July, the official exchange rate of the Myanmar kyat climbed to 1230 to the dollar, while the informal rate at foreign exchange counters was about 1300 to the dollar, the highest since the government introduced a managed float system over three years ago.
Myanmar scrapped a fixed exchange rate and adopted a managed float on April 1, 2012, with the aim of closing the gap between official and black market rates. The central bank now sets an official reference rate each morning through an auction with 20 local banks. Trading is allowed by the banks and 200 licensed moneychangers within a range of 0.8% above or below the reference rate.
A senior official at the CBM told Reuters in July that the central bank had started to slowly depreciate the kyat in a bid to bring the official exchange rate closer to the market rate and ease fluctuations.
The move came after recommendations from the IMF at the start of the month, which underlined the need for tighter monetary and fiscal policies to stabilise exchange rate expectations. “A more flexible CBM reference rate that reflects market conditions and closes the gap between the CBM reference rate and parallel market rates would help contain demand and bring back the supply of foreign exchange to the market,” the fund said in a report issued on July 1.
All eyes on trade
Despite the need for intervention, commentators have stressed larger issues at play such as the widening trade deficit, which the IMF said may “pose risks to price and external stability”.
Economist and author U Aung Ko Ko told local media that the government should focus on wider structural reform as opposed to implementing partial measures. “The major problem is the bigger trade deficit. Local manufacturers can’t produce essential commodities to compete with regional imports,” he said, following the CBM’s late May rule issuance. “As long as the government can’t address this issue, the value of the kyat will continue to fall.”
Companies also need to be aware of the substantial drawbacks associated with a dollarised economy. Hal Bosher, CEO of Yoma Bank, said most local companies want to hold dollars because they import in dollars. “This increases the risk of dollarising the economy. However, there are significant forex risks associated with this approach for local companies,” he told OBG. “For example, if you borrowed $5m two and a half years ago, you now owe more than MMK7.6bn. It’s a real risk that needs to be better understood by local corporations.”
Myanmar’s banking officials are keen to learn lessons from Cambodia, where dollars account for 90% of currency in circulation and 97% of bank deposits. “Their local currency is becoming extinct. We don’t want such a situation happening in Myanmar,” U Set Aung, deputy governor of the CBM, said last September.