Central Bank to Reform Reference Rate

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The Central Bank will reform its daily dollar auction system as part of an attempt to address the weakening kyat, deputy governor U Set Aung told Myanmar’s business community last week.

The deputy governor, along with vice president U Myint Swe, Minister for Finance and Planning U Kyaw Win and Yangon Region Chief Minister U Phyo Min Thein, met with local entrepreneurs and business organisations at the Union of Myanmar Federation of Chamber of Commerce and Industry on December 1.

During the meeting, U Set Aung discussed measures the bank intends to take to address volatility in the US dollar exchange rate, following weeks of requests from the business sector for a clear policy response.

The deputy governor singled out the bank’s reference rate system, which provides the daily benchmark for dollar-kyat trading throughout the financial sector. The Central Bank uses demand at a morning auction for US dollars open to Myanmar banks to determine the day’s rate.

Commercial banks and money changers are restricted to trading the dollar across a narrow band 0.8 percent above and below the daily reference rate. But Myanmar bankers complain that the actual gap between the reference rate and the market rate often becomes too large. This leads customers to seek exchange services in the informal market, and has in some cases has led banks to suspend foreign exchange services.

The Central Bank’s US dollar reference rate was K1308 to the dollar on December 2. In the informal market, meanwhile, the dollar was trading at K1357 to K1362.

U Set Aung said there is a misconception among the public that the bank’s reference rate was somehow increasing the exchange rate. In fact, the reference rate provided by the current system has very little impact on the market exchange rate, he said.

“We have to admit that [the] auction system is not so effective and therefore there is a gap between reference rate and market rate.”

U Set Aung said reforms will mean a reference rate that better reflects the market rate. He also said it will be necessary to develop a system where there is an adequate supply of US dollars in order to provide more stable exchange rates.

“The Central Bank has to do one thing – prevent an over-supply or under-supply of dollars in the market,” he said, adding that the state-banks could provide the key to allowing more dollars into the financial system.

“The [institutions] that have lots of dollars in Myanmar are the state-owned banks,” he said. “If dollars can be sold from state-owned banks in the domestic market, everything will be fine.”

Myanmar’s private banks have complained that the state-owned lenders, which built up large dollar holdings during an earlier monopoly over foreign currency services, are reluctant to trade foreign currency on the interbank market.

U Soe Thein, a former deputy director general at the Ministry of Finance, said that reform the auction system and reference rate was only one issue among many causing exchange rate volatility.

The IMF has pointed to twin trade and current account deficits and high inflation as other factors contributing to a weaker currency.

U Set Aung said there should also be arrangements to a higher percentage of export earnings find their way back into the financial sector. This will require domestic exporters opening nostro accounts in which to place export earnings, he added.

“We need an influx of dollars into Myanmar,” he said. “That means an influx of dollars through exports [sales] as well as [foreign] investments.”

The Central Bank has begun monitoring the flow of export earnings back into the banking system in collaboration with the Customs Department, and found that only 60 percent of earnings are repatriate to Myanmar, he said.

Senior Central Bank officials have said is a particular problem for border trade with China.

 

Source: Myanmar Times

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