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.

The Myanmar Times - - Front Page - HTIN LYNN AUNG htin­lyn­naung@mm­ – Ad­di­tional re­port­ing by Steve Gil­more, trans­la­tion by Win Thaw Tar, San Layy and Khine Thazin Han

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

Photo: Kaung Htet

The busi­ness com­mu­nity wants to govern­ment to help keep the kyat sta­ble against the US dol­lar.

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