Bankers, economists and traders are growing increasingly concerned that the Central Bank’s policy is moving away from the managed floating exchange rate, which was established in 2012 with the help of the International Monetary Fund (IMF). It ended 35 years of a dual rate system, in which the official rate of around K6 to the US dollar was more than a hundred times stronger than the black market rate.
Many are also concerned that the Central Bank does not have sufficient US dollar reserves to support the kyat – the IMF Article IV Consultation report published last October said they were low, then covering less than three months of prospective imports. Central Bank officials have more recently said there are enough reserves for essential imports.
Furthermore, the black market for currency trading, which was on the way to being eliminated, is showing signs of reemergence. Depositors are withdrawing US dollars and money changers have all but stopped buying the local currency inside the Central Bank’s official band.
The government has stepped in and the response to the currency crisis is now being managed in coordination with the President’s Office, a senior Central Bank official confirmed.
“In many countries, if there is a situation where the economic stability is threatened or where significant amounts of foreign exchange reserves need to be utilised to control the situation, Central Banks cooperate with the relevant ministries,” he said.
“In the case of Myanmar it is not abnormal that the Central Bank cooperates with the President’s Office and other relevant ministries. In other countries, Central Banks need formal approval of either the finance minister or prime minister by law. However, in Myanmar, decisions [are made in] cooperation.”
Last year, when the US dollar began to strengthen versus international currencies, the Central Bank of Myanmar’s reference rate, which is supposed to reflect the market rate, began to diverge from the price offered by local banks and foreign exchange traders.
Over the past few weeks the gap has widened significantly – on June 10 the unofficial rate reached a high of K1280 to the US dollar, compared to the official rate of K1105, which has remained fixed since June 5, despite major volatility in the unofficial market. The market rate is now around K1200, according to industry website naungmoon.com.
Concerns are growing that the Central Bank has not taken an active enough response to the situation. “The big mistake they’ve made is to do nothing, which is actually one of the riskiest things you can do. They have confused inaction with conservatism,” said a local banker.
Others ascribe the diverging exchange rates to speculation by the banks. The Central Bank holds daily foreign exchange auctions, which theoretically allow it to set the reference rate according to demand, but the amount auctioned each day is far too small to provide a fair representation, said bankers.
“The auctions are a joke – it changes each day, but is around $200,000 per day compared to $150 million dollars of demand. They are basically not giving out any currency at all. I’m not sure how much money the Central Bank even has to give,” said one banker. Local banks have reportedly been playing the auction system, by bidding at the official rate of K1105, and selling the dollars on the unofficial market to make a profit.
To address the issue, meetings have been held in Nay Pyi Taw and Yangon during the past few weeks, attended by parliamentary committees, ministers and representatives from the Central Bank. If Myanmar is committed to defending the kyat, it would need significant US dollar reserves to buy up local currency from the market.
Bankers say that greater use could be made of the reserves held by the Ministry of Energy and other ministries that generate revenues from exports.
“The Central Bank is currently selling only around $10,000 to each domestic bank through its daily auctions, which is not nearly enough,” said U Mya Than, chair of the Yangon Foreign Exchange Market Committee and chairman of Myanmar Oriental Bank (MOB), adding that some banks are in short supply.
“Meanwhile, state banks such as Myanma Foreign Trade Bank and Myanma Investment and Commercial Bank, and some commercial banks are likely to have enough US dollars to sell to the public,” he said, adding that the Central Bank has the authority to buy currency from these banks.
A senior Central Bank official confirmed previously that this is already happening. “We do have enough forex for the import of essential items. The Ministry of Finance and state-owned banks have reinforced the Central Bank. They have so far transferred hundreds of millions of dollars into the Central Bank and there is more to come,” he said last week.
Furthermore, he said that measures will be taken to support the kyat, such as speeding up approvals for the $1.8 billion backlog of offshore loans and encouraging foreign banks to lend more through the interbank market. The Central Bank also called a meeting in Nay Pyi Taw yesterday to discuss a plan for banks to offer US dollars to importers on the basis of need.
U Mya Than said that while he was not opposed to efforts to make dollars available immediately, the measures put forward so far are only short-term solutions. Instead of simply selling US dollars to the market, the Central Bank could be setting policies to encourage the inter-bank foreign exchange market to become more active, he said.
“It’s important to do this immediately, to reduce the burden on the Central Bank,” he said, adding that in meetings over the past week, bankers have suggested the Central Bank sets an official rate that is much closer to the market rate, to encourage an active market.
Sean Turnell, an expert on Myanmar’s economy at Australia’s Macquarie University agrees. “[It would be] so much better to simply let the kyat find its own level in the market, which more than likely will be at a rate that enhances the country’s competitiveness. There is no reason there should be any sort of currency crisis in Myanmar,” he said.
Source: Myanmar Times