There is only one answer: Float the kyat

As long as the dual rate is tolerated, the black market will prosper.

Myanmar’s currency problems are the talk of the town, with the black market rate for dollars set to keep rising.

The crisis, which has affected banks, moneychangers and importers for the past four months, is largely the result of the Myanmar Central Bank’s misguided policies, say international financial experts.

Earlier this year, many banks and moneychangers stopped selling dollars to customers – although they still bought them over the counter – causing panic among businesspeople, especially importers. One of the main causes of the situation is the disparity between the bank exchange and the black market rates.
Every day the government conducts a foreign exchange market, which is meant to establish the daily market rate. It has been slightly lower than the actual market rate, but just before Thingyan, things began to go awry.

There is a fierce battle going on within the Central Bank over monetary policy and especially how to handle the slide in the kyat and a shortage of dollar bills. In mid-June, the Bank intervened to try to ease the crisis. It told a meeting of importers and major business leaders that it would start to sell dollars to importers at the official government rate in an attempt to help them.

So far only palm oil importers have been granted this concession, an acknowledgement of the commodity’s importance in the economy. Myanmar imports about US$40 million worth of palm oil a month. Importers of other products are expected to receive the same privilege soon.

This is the first time the Bank has intervened in the currency market. Sean Turnell, a specialist on the Myanmar economy at Macquarie University, has described the Bank’s move as an “innovative way to minimise the damage caused by the government’s ‘managed’ flotation of the currency”. Sources close to the Bank’s governors say there may be more to come.

But they say the real problem is that the Governor is wedded to the rigid approach of former military and socialist governments that insisted the exchange rate be controlled and currency instability prevented. “There’s a money pathology in the senior echelons of government that’s a hangover from the past,” said Dr Turnell.

Government sources say some ministers, especially in the President’s office, believe a depreciation of the kyat would be a loss of face and demonstrate a lack of confidence in the country’s reforms. For some, a stable exchange rate is a matter of national pride.

Although the Bank has paid lip service to floating the kyat a hybrid method has emerged: a suggested rate backed by the Bank and in the street, a black market rate that is allowed to stray from it within a predefined bandwidth. This has made official currency exchange outlets reluctant to sell dollars at the official rate – though they certainly buy them back at the official rate – because they prefer to sell them at the higher “black market rate” to unofficial currency traders. As long as this dual rate is tolerated, the black market will prosper.

The answer is to float the kyat, which is necessary for the economy in the long run but it will not happen before the general election. The kyat has stabilised since the Bank’s limited intervention and was last week hovering at about 1,120 to the dollar. However, currency speculators predict that the kyat will fall to about 1,500 to 1,600 to the dollar by October. Such as scenario would send more shock waves through the economy and create serious difficulties for importers because demand would be likely to rise before the election.

Many of Myanmar’s bankers and businesspeople believe it is time for the Bank to bite the bullet. “There is only one answer; float the kyat and allow the market to determine its real value,” said Dr Turnell. “The depreciation of the kyat would be unambiguously good for the Myanmar economy, helping make it more competitive.”

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