Myanmar is nearing a decision to dismantle its fixed exchange rate, which risked holding back trade and investment as the country seeks economic ties with western nations after five decades of military rule.
Authorities will soon announce a shift to a managed float of the kyat, and seek to keep it from rising beyond the informal rate of about 800 per dollar, a person familiar with the discussions said. Officials will then activate an interbank exchange market, in which the central bank will intervene to influence the kyat’s value, according to the person, who spoke on condition of anonymity because the talks are private.
The step would mark President Thein Sein’s biggest economic shift since he began removing the remnants of military rule after taking office last year. With the U.S. and European nations pledging to review sanctions after April 1 by-elections involving dissident leader Aung San Suu Kyi, the change would lay the groundwork for reconnecting Myanmar to global commerce.
“It would be a considerable victory for the reformers,” said Sean Turnell, a professor at Macquarie University in Sydney who conducts research on Myanmar’s economy. “The people who would lose out the most would be the inner core of the highest echelons of the military, which used the old rate to accumulate reserves that were used to do what the military wanted to do.”
The managed float would end a 35-year official peg to the International Monetary Fund’s special drawing rights, under which a dollar fetches 6.4 kyat, about 125 times stronger than the informal market rate. Restrictions on capital flows have left a legacy of about seven unique exchange rates in Myanmar.
Scrapping the complex multiple-rate system would reduce constraints to growth in a country with the potential to become “the next economic frontier in Asia,” the Washington-based IMF, which has provided guidance to Myanmar, said on Jan. 25.
Myanmar banks are seeking training from regional lenders as sanctions in place for more than two decades have deprived the banking sector of technical expertise, complicating efforts to modernize the financial system.
Standard Chartered Plc and General Electric Co. are among European and U.S. companies seeking to invest in Myanmar if sanctions are eased. Investor Jim Rogers, the chairman of Rogers Holdings who predicted a global commodities rally in 1999, said Feb. 22 he’d put all his money in Myanmar if he could.
The country of 64 million people bordering India and China, with resources including rubber and natural gas, largely disconnected from the global economy after democracy ended in the early 1960s.
The government is preparing to activate licenses granted to 11 local banks last year to act as authorized dealers in U.S. dollars, euros and Singapore dollars in a wholesale interbank exchange market. The banks are seeking relationships with foreign lenders in major trading partners such as Thailand, Singapore and China, the person familiar with the talks said.
Myanmar’s central bank will also auction foreign exchange under the new system, according to the person. Reducing controls on flows of currency, which include a requirement that all imports be paid for with export earnings, will take time in order to prevent a flood of cheap imports, particularly from China, the person said.
A managed float would help private exporters, whose goods have become less competitive as the informal market rate for the kyat appreciated to about 800 this year from 1,300 in 2006, the fastest gains in Southeast Asia, according to a paper written in January by Koji Kubo, a research fellow at policy group affiliated with the Japan External Trade Organization.
“The risks of an overvalued exchange rate are even greater” with a more open economy, Joseph Stiglitz, a Columbia University professor, Nobel laureate in economics and former World Bank chief economist, said in an interview with the Wall Street Journal after a visit to Myanmar last month. “They made it very clear that they are headed for foreign-exchange-rate unification,” he also said, according to the newspaper.
Natural gas sales to neighboring Thailand over the past decade have helped boost Myanmar’s foreign-exchange reserves, which rose to $5.5 billion in 2010 from $201 million in 2000, Asian Development Bank data show. The central bank aims to preserve the value of the kyat, according to its website.
“The parallel exchange market has been left uncontrolled by the government,” Kubo wrote. “By unifying the segmented foreign exchange market, the government and the central bank can influence the exchange rate of the private sector and bring more stability.”
Moving to a managed float would mostly hurt state enterprises that use the official rate, raising the prospect of bankruptcies, non-performing loans and fiscal bailouts if not properly managed, Kubo wrote.
Myanmar laws currently restrict foreign banks from conducting transactions in the country, a provision that must change in 2015 as part of an agreement with the 10-member Association of Southeast Asian Nations. As of November 2010, 13 foreign banks had set up representative offices in Myanmar, 10 of which are from Asean nations, according to the central bank.
While the state-owned Myanma Foreign Trade Bank, Myanma Investment and Commercial Bank, and Myanma Economic Bank are permitted to operate abroad, the U.S. maintains financial sanctions on them.
American sanctions also ban imports, restrict money transfers, curb aid money, freeze assets and target jewelry with gemstones originating in Myanmar. The European Union has lighter restrictions, including a ban on weapons sales and imports of minerals.
Myanmar will likely issue more treasury bonds to domestic investors to finance fiscal deficits, reducing its reliance on printing money to fill budget gaps, the person familiar with the economic-policy talks said. Bond sales to foreigners are unlikely to happen anytime soon, the person said.
Myanmar is among the poorest countries in Asia, with citizens earning an average of just $2.25 per day, according to IMF estimates. Inflation averaged about 24 percent a year over the past decade, IMF data show.
“Further reducing inflation would require stopping the financing of the fiscal budget deficits through money creation,” the IMF said in January. “A prudent fiscal policy is essential to maintain macroeconomic stability, especially during the exchange rate unification process.”