A clerk counts US dollar notes at a money changer in Yangon. / The Irrawaddy
Friday’s decision by the Myanmar junta’s central bank to weaken its official kyat-US dollar exchange rate and ease forced-conversion regulations for exporters will provide temporary relief at best for the crisis-hit Myanmar economy, according to financial analysts.
The Central Bank of Myanmar raised its official exchange rate from 1,850 kyats per dollar to 2,100 kyats on Friday. In a directive dated the same day, central bank chairman U Than Nyein said export companies would now only be required to convert 65 percent of foreign currency earnings into kyats at the central bank rate, down from 100 percent previously. They have 30 days to use the remaining 35 percent to purchase imported goods or make other trade or non-trade cross-border payments. After 30 days, if it is not used, the remaining 35 percent of export proceeds must be converted at the official central bank rate, according to sources in the export/import community.
However, the move has not had much of an impact on the black market rate, which fell from around 2,700 kyats per dollar on Friday to around 2,550 kyats on Monday. The central bank has prohibited individuals and companies from trading US dollars since the coup in February 2021. The situation appeared the same for other currencies and gold prices on Monday.
The recent erratic policy shifts by the central bank have made the situation worse for Myanmar’s economy, which has already been battered by the country’s post-coup crisis.
Last month, the central bank ordered borrowers to suspend repayment of foreign loans in a measure intended to conserve foreign currency reserves.
In April, it ordered all businesses to convert all foreign currency earnings into kyats within one day at the official rate of 1,850 kyats, well below the informal market rate of over 2,200 kyats.
The actions only further eroded confidence in the kyat and prompted people to buy other assets like US dollars, other foreign currencies, gold, cars and property, leading to a shortage of dollars in the market.
Why has the central bank changed its policy?
With the central bank buying dollar earnings from exports at the official rate of 1,850 kyats—while the informal market rate stands at about 2,500 kyats—export companies last month began setting up companies in countries like Thailand and the United Arab Emirates, smuggling export products abroad and receiving payment in US dollars in foreign bank accounts.
“This deprived the central bank of taxes and US dollars, so I think they eased the regulations” as a result, said a local market analyst.
The central bank has set its exchange rate at 2,100 kyats in an effort to encourage exporters to go through legal channels, he added.
“It is a temporary solution to the problem of the kyat’s depreciation. A free-float dollar exchange market and [permitting] unlimited selling of earnings would improve the situation,” said a local market analyst.
However, the Myanmar junta is currently battling an armed revolution and renewed conflicts with ethnic armed groups triggered by the military coup. Needing US dollars to fund its war, it is unlikely to lift the restrictions totally anytime soon.
The World Bank projects Myanmar’s economic growth at 3 percent in the fiscal year ending September 2022, following an 18 percent contraction last year, with firm downside risks.
Junta spokesperson Zaw Min Tun said at a press conference on July 26 that the regime had plenty of US dollars in hand, so it wasn’t worried about a possible financial crisis like the one that recently engulfed Sri Lanka.
One financial analyst who asked for anonymity said the junta’s ad hoc actions would not achieve financial stability, as they did not address the main problems of a large budget deficit, banking sector instability and a decline in foreign direct investment, which had sapped the country’s supply of dollars.
The World Bank warned in a policy note issued on July 8 that the political and economic chaos since the coup had destabilized the financial system. “Recent policy shifts are likely to have longer-term effects: inhibiting potential growth, worsening macroeconomic instability, and impairing the efficient allocation of resources,” the bank wrote in its policy note in July 2022.