Government restricts forex to banks

Exporters and importers must use banks for foreign currency transactions, according to new government regulations. The new rules would be another step toward a functioning interbank currency market, but bankers are doubtful they can be immediately enforced.

The government amended its 2012 Foreign Exchange Management Law last week to prevent exporters from selling foreign currency. The amendment also requires lenders with foreign exchange licences to check that exporters with foreign currency accounts deposit export earnings in their bank account. Any discrepancies must be reported to the Central Bank.

The Central Bank also intends to issue instructions preventing firms from accessing foreign currency other than directly through banks, said an official with knowledge of the central bank’s plans. Under the current system, exporters and importers often exchange foreign currency directly by transferring money between bank accounts – often held with state lenders. But this system of local account transfers ultimately drains the banking system of foreign exchange.

“It can be challenging to find dollars in the banking system,” said a banker at one local lender. “The international banks have dollars and we have kyat. So you can exchange currencies, but there aren’t enough dollars. We need a proper interbank currency market.”

A businessman at one agricultural exporter said it would take time to assess the new policy’s impact. His firm exports most of its foodstuffs during the harvest season in the early months of the year. His firm then typically sells its US dollar earnings directly, often to importers. But in 2016 that will no longer be allowed.

U Hnin Oo, vice chair of the Myanmar Fisheries Federation, said banks may not be able to satisfy the demand for US dollars under the new regulation. A Yangon-based representative of a foreign bank said that the policy could lead to a shortage of dollars, but would be beneficial for the financial system over the long term.

The local banker also thought the new government policy was a step in the right direction, but questioned whether it would be enforceable.

“It’s hard to see how the government will know whether companies are exchanging currencies or not,” the banker said. “The infrastructure to monitor something like that isn’t there.”

Exporters also often hold their foreign currency earnings offshore in foreign bank accounts, the banker added. If the Central Bank was able to provide incentives for these firms to repatriate their foreign currency earnings, that could be another way to increase the supply of dollars in the financial system, the banker added.

“But that in turn might require changing the way the earnings are taxed,” the banker said. “There are many different aspects to this problem. Right now the regulator is making policies and seeing what works and what doesn’t. They [the regulators] are new to this, and they are learning as they go.”

Myanmar’s banks have already complained to the Central Bank about their lack of access to foreign exchange. Exporters and importers typically exchange currencies through their bank accounts, which are largely held at Myanma Foreign Trade Bank (MFTB) and Myanma Investment and Commercial Bank (MICB). These two state lenders have been dealing foreign exchange for far longer than private banks, which only began receiving licences in 2011.

Private financial institutions want the use of Nostro accounts — held in a foreign country and denominated in the currency of that country — to become mandatory for banks making import payments on behalf of clients, according to sources at private banks. This should also help create a more active interbank foreign exchange market, said one government official.

The Yangon Foreign Exchange Market Committee submitted its Nostro policy request to the Central Bank at a meeting on December 7, said U Mya Than, the committee’s chair. Private banks no longer have sufficient foreign exchange reserves to facilitate import payments, he said.

The request came two months after the Central Bank revoked foreign exchange licences held by hotels, airlines and thousands of other businesses, in a bid to counter dollarisation.

 

Source: Myanmar Times

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