People hold new kyat banknotes featuring a portrait of the late general Aung San, outside Myanmar Economic Bank in Nay Pyi Taw on January 7. (AFP)

The challenges of a surging kyat

The kyat has appreciated 15 percent in value against the US dollar since last October, creating headaches for exporters and a challenge for the Central Bank of Myanmar.

By SITHU AUNG MYINT | FRONTIER

AT A TIME when public attention has focused on the constitution amendment debates in parliament, fighting in Rakhine State and the coronavirus pandemic, Myanmar’s business community has been affected by the steady appreciation of the kyat against the United States dollar and other foreign currencies.

The coronavirus outbreak has been a blow for the economy. The closure of garment factories because of shortages of raw materials has left thousands of workers jobless. Tourist arrivals, including from China where the pandemic was first detected, have declined sharply. Exports of farm products to China through land borders have slumped, partly because of transport restrictions imposed by Beijing to counter the spread of COVID-19. The appreciation of the kyat is a challenge that risks impeding economic growth.

Between April 2016 and mid-2018, after the National League for Democracy government took office, the kyat was stable against the greenback and other foreign currencies. Since mid-2018 the kyat has been unstable and has lost value against other currencies. In September 2018 the national currency plunged to a record low of around K1,650 to the US dollar on informal markets. It recovered to K1,500 by the end of 2018 because of the activities of foreign exchange speculators. In late 2018, the Central Bank of Myanmar launched moves aimed at addressing fluctuations in the exchange rate within a short period.

The CBM mainly tried to control private banks licensed to handle foreign exchange. It issued a series of instructions for private banks, such as requiring them to report four times a day on foreign exchange transactions, including the size and time. It also took action against banks suspected of involvement in foreign exchange speculation. The CBM moved the release of its reference exchange rate from the morning to 4pm to prevent banks from taking advantage of an announcement made early in the day. The measures taken by the CBM worked and for most of last year the kyat’s value was steady at about K1,520 to the dollar.

However, since last October, the kyat has appreciated in value against most currencies. Between October 1 last year and March 10, the kyat’s rate against the dollar has appreciated from K1,537 to K1,335. Over the same period, the national currency has strengthened against the euro (K1,677 to K1,510), Singapore dollar (K1,113 to K980), Thai baht (K50 to K40.5), and Malaysian ringgit (K369 to K310). The kyat has gained 15 percent against the US dollar, 11pc against the euro, 13.5pc against the Singapore dollar, 20pc against the baht, and 19pc against the ringgit.

A stable currency supports economic growth. In order to effectively manage budget and trade surpluses and deficits, it’s desirable to have only small fluctuations. The appreciation of the kyat is causing losses for all exporters. Those hit hardest by a stronger kyat include rice exporters. They are facing a perfect storm of three factors.

First is the depreciation of the US dollar against the kyat. Since traders signed their export contracts, the US dollar has lost 10pc of its value. As rice is bought in kyat and sold in dollars, they’ve effectively lost 10pc due to the exchange rate.

Secondly, the price of rice has risen on international markets. Three or four months ago, around the time they signed the contracts, the price of rice was $320 per tonne. Now it’s $365 a tonne, but they’ll still only get $320.

The third factor is an unexpected increase in the domestic price of rice. Water shortages affected the planting of the summer crop this year and the harvest was disappointing, leading to the price increase. Exporters who have already signed supply contracts have to buy rice at market prices.

But what about importers ­– are they passing on lower prices because the appreciation of the kyat has made imports cheaper? No. This is not happening. In shopping malls and markets, imported goods are being sold at prices fixed when the US dollar was stronger. Retailers give the reason that they bought the goods when greenback was higher.

Similarly, even though prices of imported raw materials are falling, domestically made products are not selling at cheaper prices. The people are not enjoying the benefits of a stronger kyat against the greenback and other foreign currencies. The exception is a small decline in the price of fuel, which is sold in a competitive market.

The stronger kyat is also hurting many people employed in the services and hotels and tourism sectors who are paid in US dollars or another foreign currency. They are suffering an effective cut in their income, while most others, including civil servants, are paid in kyat.

Until recently, the Central Bank had not been doing much about the appreciation of the kyat. When the value of the kyat is easing, it is difficult for the Central Bank to strengthen it by selling foreign exchange because it does not have enough in its reserves. But if the kyat is appreciating strongly, it is easy for the Central Bank to bring it down by buying as much US dollars and other foreign currency as necessary.

On March 10, the Central Bank bought $9 million on the domestic market to try to raise the value of the US dollar, which rose by between K50 and K60 in a day.

It is time for the government’s policy makers to pay more attention to the sectors that are suffering and experiencing losses because of the excessive appreciation of the kyat. It is time for the Central Bank to try to maintain the value of the kyat at a level that is healthy for the country’s economy.

By Sithu Aung Myint

By Sithu Aung Myint

Sithu Aung Myint became a reporter in 1997. Prior to Myanmar gaining its press freedom in 2012, he worked for various exile media outlets, and is now one of Myanmar's most respected political commentators.
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