New era for Myanmar’s financial sector

Fresh legislation has paved the way for a major shift in Myanmar’s financial sector, spearheaded by the separation of the central bank from the Ministry of Finance and Revenue.

The long-awaited Central Bank of Myanmar (CBM) Law was signed by the president, Thein Sein, on July 11. The legislation secures the bank’s autonomy and clarifies its responsibilities. Widely seen as one of the key building blocks in the recent round of reforms, the law is set to radically shift the way the financial sector is regulated in Myanmar, while providing potential investors with a confidence boost.

The financial system in Myanmar remains one of the least developed in the world, with under 10% of the population holding of a bank account and less than one citizen per 1000 active in the credit market.

Both individuals and businesses have struggled to access capital from financial institutions for decades, due to a combination of high inflation, bank runs, insider lending and low capital bases. Attracting depositors back into the banking system is regarded as one of the biggest challenges Myanmar faces.

The New Light of Myanmar, which usually voices state thinking, highlighted the problems that had plagued the old system when giving details of the new law. It cited “slow responses” and “bureaucratic sentiments”, adding that the central bank in its prior form was “most responsible for the current weak banking system” and “one of the main restrictions for potential investors”.

Bodies such as the IMF had criticised the CBM for its lack of budgetary and operational independence from the government of Myanmar, which permitted the state to print money to finance its deficit. The new CBM Law gives the central bank the authority and responsibility to implement monetary and exchange rate policies independently from the government. The institution is expected to act as a lender of last resort on rare occasions only, using its autonomous power to enact the policies needed to achieve its broader aims.

The primary objective of the central bank will be to keep inflation in check, while sustaining monetary and fiscal stability. The new body, alone, holds the right to issue new currency. It has also been tasked with establishing a credit bureau that will gauge the creditworthiness of borrowers.

The law requires the CBM to regulate local banks, oversee the development of capital markets and manage the official foreign exchange reserves, which are forecast to increase in the coming years on the back of rising gas exports. As reserves build up, confidence in the local currency, the Myanmar kyat, is expected to grow, with investors likely to eye the country more favourably. The responsibility for deciding how to achieve these goals will rest largely on the shoulders of the new CBM governor. The post looks set to be filled by Kyaw Kyaw Maung, who has been recommended by the president’s office, with a formal announcement likely to be made in the coming weeks.

Kyaw Kyaw Maung, who graduated from Mandalay University before joining the ministry of finance, has already served as the central bank governor, between 1997 and 2007. Under the new law, the role will be upgraded to ministerial level, giving the governor a responsibility which, until now, has been non-existent in Myanmar.

In line with international practice, the overhauled central bank will be expected to adhere to a much stricter level of transparency and accountability. Under the new law, the bank will be required to submit its reports on monetary affairs to the government at least twice a year and publish reports on monetary developments quarterly. The information flow will allow financial researchers and onlookers to assess risk more effectively and invest accordingly.

The complex systems of monetary policy and regulation required by a central bank take years of fine-tuning and can still fall prey to the market forces around them, as western nations, whose bank regulations are built on decades of detailed analysis and data, know all too well.

Myanmar’s challenges, however, will be those faced by a country starting almost from scratch. As it steels itself for the gargantuan task ahead, the world and its investors will be watching closely.

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