Foreign exchange gap widens

The official reference rate for dollar-kyat exchange maintained by the Central Bank of Myanmar and the rate charged by unofficial moneylenders are increasingly diverging.

While the Central Bank’s reference figure has sat at K1027 per dollar since the end of February, at many informal traders the kyat has depreciated to around K1075 per dollar.

Divergent rates show the Central Bank is still developing its position in the market, experts say.
“This shows the Central Bank does not control the market, and there will be some impacts in the money market,” said Asia Green Development Bank executive director U Soe Thein.

The Central Bank and related financial institutions should work to build their influence over the market, he added.

Measures such as higher interest rates on bank deposits would strengthen Myanmar’s currency, but with a growing budget and trade deficit and continued strength in the US dollar, experts say the kyat may continue to weaken in the short-term. The reference rate is officially set by the daily auctions conducted by the Central Bank and authorised domestic dealers.

Yangon Foreign Exchange Market Committee chair U Mya Than said local banks rely on the reference rate for their operations – however, if the rate is not realistic, customers will look outside the banks.
Most commercial banks currently have small supplies of foreign currency and generally rely on supply from the Central Bank through the daily auctions.

The informal forex trade has shrunk considerably since a May 2012 move from an unofficial peg against Special Drawing Rights, was widely derided as unrealistic, to a managed float.

However, informal currency dealers have not disappeared completely, providing an alternative to businesses looking for better rates than can be obtained from commercial banks.

U Mya Than said the Central Bank appears to be stubborn on exchanges rates and moving in the wrong direction.

“The rate should be set by supply and demand of the market. We cannot deny the US dollar is strengthening internationally, and this should be reflected in the auction mechanism,” he said.

Although Central Bank of Myanmar officials declined to comment on the record, one official said the growing gap is a matter of discussion. The Foreign Exchange Management Department is currently holding internal talks on the issue, and has yet to share a broader strategy within the bank.

Ministry of Commerce trade promotion director U Win Myint said the weaker local currency encourages exports and decreases imports.

“We expect the informal market will be kept alive by exporters selling their forex back into the market,” he said.

Source: Myanmar Times

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