Did the diverging informal and formal kyat rates just earn Myanmar’s banks a load of money?
By MANNY MAUNG | FRONTIER
Myanmar’s currency, the kyat, has dropped spectacularly over the past few weeks, sliding to its lowest point since it was floated on the market in April 2012 at a rate of K818 to the US dollar. The kyat fell as low as K1,300 to the dollar in the second week of June, prompting the president’s office to force the Central Bank of Myanmar (CBM) to stablise the currency.
Measures by the CBM in May to limit dollar withdrawals, in addition to a trade deficit from the previous financial year of US$4.9 billion, are likely factors to why the kyat has fallen so rapidly.
Critics argue the bank’s “knee-jerk reaction” to the trade deficit of withholding foreign exchange, in combination with exchange counters withholding dollar notes to make more profits, has pushed the informal market rate up.
At a time when neighbouring countries in Southeast Asia have been actively trying to devalue their currencies to encourage trade, Myanmar’s move to limit the forex has raised concern from local exporters about their ability to compete on the international markets.
Complaints from importers, fears of spiralling import costs and rising inflation has finally prompted the CBM to respond.
A source within Myanmar’s imports industry claims the hidden inflation rate could even be as high as 13.9% more than the gazetted rates.
The CBM says it will begin the unrestricted sale of foreign currencies at its set rate of K1105 to the dollar, in a bid to support the import of fuel and other oils, as well as to prevent the kyat from sliding further.
According to state media, a total of 20 banks will begin selling dollars to ease restrictions.
Fuel import prices have been steadily rising in parallel to the slide of the kyat. The Myanmar Petroleum Trade Association’s website as of 12 June showed the priced of Octane 95 petrol had risen 2.5% from the previous week, while the cost of diesel was up 3%.
Win Myint, secretary of the Myanmar Petroleum Trade Association, last week told state media that the deputy chair of CBM had reassured importers that sufficient quantities of US dollars would be sold as required.
Authorities have begun cracking down on trading outside the legal band of plus or minus 0.8% around its reference rate of K1105. But prior to the government stepping in to push the CBM to set its rate, this had resulted in banks and money exchange becoming reluctant to sell dollars rather selling a rate below what they would achieve in an open market.
But while the petroleum association and importers generally have welcomed the measure, others such as in the rice export industry say the easing of restrictions is unbalanced.
“As an exporter, if I were to sell USD at the current bank buy rate, I could in no way match the price being paid by European importers,” the industry source said.
“The only way I could compete at the current European buyer rate is if I were able to sell my USD to the informal market, which considering the base product price increase, clearly some exporters are doing even though the central bank has a USD$10,000 withdrawal per week policy in place.”
The bigger question, he says, is to ask where is that money going?
“Banks don’t sell hard USD currency to customers, but instead sell hard USD currency at an inflated rate to the informal market. Customers need to buy at inflated rate on the informal market and then deposit hard USD currency back into bank for electronic transfer. Banks then sell hard USD currency back into the informal market at an inflated rate. It is a nice little money-go-around!”
Two domestic banks contacted by Frontier admitted the reselling mechanism, but said they were not making any money of it and that they didn’t want to go on record.