Central Bank to limit payments to only the kyat

The Central Bank of Myanmar is moving to strengthen the kyat’s use in the local economy, eventually pushing the country’s hotels, restaurants and shops to list prices only in the local currency.

It has issued a letter directed at government ministries and regional governments, stating they must use only local currency for charges as well as for price quotations when selling products or services. It also applies to private enterprise under the various national and regional government branches, said a Central Bank of Myanmar official.

The letter is directed at internal payments rather than foreign purchases, and is to be followed up by more formal rules. Yet experts say it may be a tall order to force transactions into the local currency.

The Central Bank official said businesses will still be able to trade internationally in US dollars.

“Any company can charge [and] quote in US dollars or in any permissible foreign currencies when they sell [and] export abroad,” he said.

“However, they are encouraged to use only the local currency for their domestic sales.”

Initially, it is intended that domestic retail sales for items such as air tickets, motor vehicles, tourist souvenirs and hotel room rentals will be done in kyat only.

“It is the same in countries like Singapore or Thailand where you can pay only in their respective currencies,” he said.

Later, it can be applied to domestic corporate wholesales once the currency forwards or swaps are available so that currency risk can be hedged.

Currency risk stems from fluctuations in currency values. If a Myanmar company buys imported raw materials in dollars, manufactures an item, and then sells it abroad in dollars, it faces the risk that the dollar-kyat exchange rate could shift during manufacturing, eating in to profits.

Hedging foreign exchange means a different entity such as a bank is willing to take this risk in return for a price.

The Central Bank of Myanmar official said that it is “encouraged that every domestic sale, either retail or wholesale, should be in the local currency. However, it is understood that enforcement could be difficult in the initial stage. Hence, respective ministries and regional governments are encouraged to enforce it initially for domestic retail sales.”

The May 28 letter, which was posted to the Central Bank of Myanmar’s website earlier this month, said the president’s office has agreed to the proposal to only use kyat in domestic transactions. It comes as authorities are concerned about increased use of foreign currency, which gives Myanmar authorities less direct control over its own economy in the long run, and may affect the local currency.

“Dollarisation has become more prevalent in Myanmar, increasing the demand of foreign currency and decreasing the demand and usage/ importance of domestic currency,” the letter said.

The kyat has been in decline for much of the year. Yesterday, unofficial exchange rates were near 1200 kyats per dollar, representing a 17 percent depreciation from the start of the year. The Central Bank of Myanmar’s official exchange rate was K1105 yesterday, still an 8pc drop since the start of the year.

The US dollar has strengthened against most currencies around the world over the past year to some extent.

Experts say that moves to strengthen the kyat, such as forcing its use, may be solved if the current problem is speculation, but will be more difficult if the kyat’s depreciation represents structural weakness in the economy.

“The problem of whether [the kyat’s depreciation] is fundamental or speculation is mixed up. It’s too early to say if the Central Bank’s intervention is effective,” said U Soe Thein, executive director of Asia Green Development Bank.

The Central Bank could probably better control the situation by selling the proper amount of US dollars rather than forcing kyats as the immediate currency of payment, he said. Currently, most US dollars are obtained from the black market rather than through formal channels.

Initially, the policy will most affect government branches, though many private sector businesses such as hotels, branded clothing or jewellery shops routinely use US dollars and are carefully watching the rules.

A serviced apartments businessperson said her company does business primarily in US dollars, as it is far more convenient for her long-stay customers rather than carting around big amounts of kyat.

“As long as there’s no leap forward into card payments, the most effective way of conducting transactions is with dollars. This method is suitable for our customers,” she said.

The Central Bank aims to reduce the artificial demand for foreign currency in the country, according to a client briefing by legal firm VDB Loi. The mounting need for US dollars, for instance, in the view of the Central Bank might increase the chance of currency destabilisations.

The letter is an announcement to put government agencies and private enterprise on notice.

“This is not yet an order with binding force,” the client brief said. “The text is fairly generally and not written in language used for legally binding rules. The Central Bank of Myanmar is in fact currently preparing detailed regulations which will be binding.

“It is thus too soon for enterprises to start refusing to pay in US dollars at this point in time, in our view.”

VDB Loi’s brief said that certain transactions could to be carved out as exceptions. Salaries of expatriate employees are not mentioned in the letter, while major transactions such as joint ventures and property deals may also be excluded from forthcoming regulations.

“One of the most important practical questions as we go forward in Myanmar’s new foreign exchange context is the actual extent of the obligation to use Myanmar kyat,” it said.

The note said that while some countries ban the use of foreign currencies domestically, they do allow contract prices in a value connected to US dollars. It is also possible the Central Bank will impose the use of kyat for contract prices, as well as invoices and payment. “To date, there are no such general restrictions on enterprises in Myanmar to invoice in a foreign currency,” it said.

One risk for foreign investors is that while the Foreign Investment Law does not guarantee foreign investors they can do business in foreign currency in Myanmar, it does guarantee that invested capital and profits can be extracted in foreign currency.

Yet with foreign companies having diminished options to collect US dollars in Myanmar, companies will need to convert their kyat profits into dollars at some stage.

“The million dollar question (excuse the pun) just got bigger,” it said. “Even if one makes money investing in Myanmar, will there be US dollars available to convert my profit into at the end of the year? The more time is spent between earning kyat and converting it, the greater the potential risk.”

Another question is whether existing contracts will be grandfathered, according to the VDB Loi briefing.

Source: Myanmar Times

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