Talking about the kyat
Myanmar’s business community wants to see the government and the Central Bank take clear action to address exchange rate volatility.
MYANMAR’S business community has welcomed more details from the government on investment policy, but is calling for similar clarity on how the authorities will tackle exchange rate volatility.
The government presented a more substantial account of its plans for directing investment at a Nay Pyi Taw conference on October 22. But senior figures in the business community complained on social media that none of the speakers, which included Central Bank governor U Maung Maung Kyaw and Finance Minister U Kyaw Win, raised the issue of the exchange rate.
“We haven’t seen any specific policy on what they will do [about the volatility],” said U Kyaw Kyaw Hlaing, chair and CEO of Smart Technical Services. “This is a major problem.”
Economist U Aung Ko Ko told The Myanmar Times discussion between the government and the Central Bank on the matter was “urgently needed”.
Myanmar’s currency has had a rocky year. The kyat started 2016 at historic lows against the US dollar, but strengthened by more than 10 percent in the first three months. It then enjoyed a few months of relative stability, but since August has lost over 8pc against the US currency.
The Indonesian rupee, Malaysian ringgit and other regional currencies also experienced strong gains early this year before starting to weaken. To some extent, the Myanmar kyat is the victim of the same global currency trends as other regional economies.
“A lot of currencies have depreciated against the US dollar, Myanmar is not the only one,” said the IMF’s deputy division chief for Asia and the Pacific, Yongzheng Yang, during a recent briefing on Myanmar’s progress on economic reform.
President U Htin Kyaw also pointed to volatility in other currencies, not just Myanmar’s, at a meeting in Nay Pyi Taw on October 31, according to state media. He also blamed high inflation on consecutive deficits, and said the government was preparing to accelerate monetary policy reform.
Many people believe the government could and should be doing more to stop the currency weakening and keep it stable.
“Businesspeople face difficulties because of the unstable exchange rate,” said U Aung Thein, who has an import business and is associate secretary of the Union of Myanmar Federation of Chambers of Commerce and Industry. “They can’t plan because the exchange rate moves very quickly. This is going to have consequences for Myanmar because it’s a country that relies on imports. The government needs to deal with [this situation] quickly.”
The weakening kyat has implications for consumers across Myanmar’s economy. The vast majority of electrical and IT stores base their prices on the dollar exchange rate, and so consumers are facing higher prices. Key imports like palm oil and engine oil becoming more expensive.
U Win Si Thu, chair of the Myanmar Pharmaceutical and Medical Equipment Entrepreneurs Association, told The Myanmar Times that the weakening kyat is forcing medicine importers to raise prices – causing issues for local distributors.
“The government has to make stabilising [the exchange rate] a priority,” he said.
Myanmar’s Central Bank operates a managed float system, under which the currency is ostensibly allowed to fluctuate freely and the bank will only step in to stop very large swings. However, a lack of foreign exchange reserves often makes it hard for the bank to answer demand at daily foreign exchange auctions, let alone defend the currency against volatility, Central Bank officials told The Myanmar Times earlier this year.
The IMF is also adamant that the Central Bank allow the exchange rate to move with more flexibility, not less.
“To intervene you need a lot of reserves and that takes time to build up and needs to be protected,” said Mr Yang. “Our advice is that [the bank] should allow [the exchange rate] to be flexible.”
Central Bank officials declined to comment for this story and the bank did not respond to requests for an interview.
Although the country needs a flexible exchange rate, the Myanmar authorities do need to implement tighter monetary and fiscal policy, said Mr Yang. The fiscal deficit had increased since the fund’s mission the previous year, and he expects the current account deficit to “rise continuously” for some time. Both of these factors have contributed to inflation, which puts pressure on the kyat to weaken, he added.
A drop in exports rather than a rise in imports has pushed the trade deficit wider. Lower agricultural exports after flooding last year and lower natural gas prices – a key Myanmar export – both contributed to the wider deficit.
“If you bring down inflation, lower the current account deficit, I think the confidence [in the currency becomes] stronger,” said Mr Yang. “So the fluctuation in the market will be smaller.”
Although how much smaller was “anyone’s guess”, he added.
The IMF expects inflation to stay at about 9pc for the rest of the fiscal year. This has its origin in loose monetary and fiscal policy, including allowing the Central Bank to finance the deficit, which Mr Yang said was “equivalent to printing money”. But he added that people should “bear in mind the country suffered a major flooding disaster [in 2015] that pushed prices much higher”.
Finance ministry officials, meanwhile, have told The Myanmar Times the government plans to gradually reduce the Central Bank’s participation in domestic Treasury bond and bill auctions, which are increasingly being conducted at market price.
Mr Yang also said that based on his conversations with the Central Bank he believed it had made progress on measures such as enforcing a new reserve requirement on banks and soaking up excess liquidity through deposit auctions, which should help reduce the amount of cash in circulation and help combat inflation.
“We’ve seen signs of progress,” he said, “but recognise there is some way to go.”
Although the Central Bank may be making progress on reducing its debt purchases and mopping up liquidity, Myanmar’s banks are sceptical much is being done to deal with the informal market for foreign currency exchange.
A great deal of unofficial border trade takes place, where foreign exchange earnings are not reported or deposited in a Myanmar bank. Likewise, foreign exchange transactions are sometimes not declared in formal trade transactions, but settled in bank accounts held offshore. The result, according to Myanmar bankers, is a shortage of dollars in the formal sector, which businesspeople say pushes up the value of the dollar against the kyat.
“We often have a big black market in Myanmar, and this leads businesses to use unofficial channels because it’s often so much easier,” said U Aung Thura, chief executive officer of consulting firm Thura Swiss.
An official at another international financial institution, who asked to remain anonymous, said some local traders estimate that perhaps 75pc of foreign exchange takes place in the informal sector, but that there is no way of verifying this.
The IMF says the informal market is larger than the formal, although “the tricky thing is you don’t know how large”, said Mr Yang. But the issue of the informal market was less important to the exchange rate volatility than addressing key economic issues like monetary and fiscal policy and inflation, he added.
“I wouldn’t say it’s the informal sector per se that causes the [exchange rate volatility] problem,” he told The Myanmar Times. “[The informal market] is integrated into the wider global market system. When other currencies move, the informal market rates move.”
And although Myanmar bankers want to see the Central Bank take strong action to curb the informal market, this is likely to take years.
The Myanmar authorities’ aim is to gradually draw the informal market into the formal, said Mr Yang, but it “will take a long time to take people into the formal market”.
“[The authorities] can’t just issue an instruction and it will disappear tomorrow. You need to do it in an orderly way – to bring down inflation, reduce the current account deficit, [and] create greater confidence in the domestic currency.”
‘We see signs of progress but recognise there is some way to go.’
Yongzheng Yang IMF
The business community wants to government to help keep the kyat stable against the US dollar.