Myanmar promises reforms, aims to develop foreign exchange market

Myanmar will move towards developing a foreign exchange market to enable trading of foreign currencies between local banks and international traders, according to the country’s 2018 Public Finance Management Reform Strategy.

The move comes at a time when the country is facing a shortage of foreign currency in the domestic market, which is adding pressure on the State and Central Bank.

In Myanmar, the Central Bank is responsible for setting the daily exchange rate. It also sells a designated amount of foreign currency to local banks and authorised money changers, which limits the amount of foreign exchange available for trade in the market.

Currently, only State-owned banks like the Myanmar Foreign Trade Bank (MFTB) and local private banks are allowed to open foreign currency accounts as well as transfer, deposit and withdraw cash in foreign currency.

Each year, government ministries propose the amount of US dollars they require to repay loans or interest, after which the equivalent amount in Myanmar kyat is provided for in the budget with permits to convert the local currency into US dollars. The transactions are arranged by the MFTB.

“Given that there is no market for forex in Myanmar, when demand from the ministries rises, the value of the dollar versus the kyat will automatically increase as supply becomes limited. This will result in a higher exchange rate and higher inflation as imports become more expensive,” said U Than Lwin, former governor of the Central Bank of Myanmar and senior advisor to Kanbawza (KBZ) Bank.

Forex market

Now, backed by the flow of foreign direct investments, the country intends to build up the foreign exchange market, enabling the banks to engage with a wider pool of traders in buying and selling foreign currencies.

“The move to reform the system and develop the forex market in Myanmar is good and it should be done so that banks can replenish their supply of foreign exchange from abroad,” said U Than Lwin. “Having a functional forex market will help support local requirements without driving up the exchange rate.”

U Tun Tun Naing, permanent secretary of the Ministry of Planning and Finance, told The Myanmar Times that “in the longer term, opening up the foreign exchange market to multiple players will be more beneficial than placing control in the hands of the State and local banks.”

Gradual transition

There are risks involved in moving too quickly to open up the market though. “The government should move gradually. It needs to be aware that there is no 24-hour forex market in Myanmar yet so if they open up too abruptly, there could be a rush to buy dollars, which would result in short term appreciation of the dollar versus the kyat,” said U Than Lwin.

Already, the dollar to kyat exchange rate has been rising, hitting a 2018 high of K1,374 on June 22. That is up by around 4 percent since the start of the year. Analysts attribute this to the ongoing trade war between the US and China, which has seen the US impose tariffs on $50 billion worth of Chinese imports.

As such, it would be better to allocate “an initial limit for buying foreign currency from the international market to meet the forex requirements of the ministries and gradually increasing that by a percentage year by year,” he added.

That is important given that the flow of foreign direct investments (FDI) into Myanmar has slowed in recent months, particularly from the West due to the Rakhine crisis, resulting in a shortage in supply of dollars within the local economy, said U Than Lwin.

“The government should be aware that other countries are able to develop forex markets after attracting FDI into the country. But the flow of FDI into Myanmar has been weak. As such, it is better to open up the market gradually,” he said.

Source: Myanmar Times

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