Dollar/MMK for Thought

On 29 May, the Central Bank of Myanmar (CBM) issued two circulars with immediate effect. The first circular asks governmental agencies to use Kyats (MMK) instead of US dollars (USD) for their transactions. The second circular is a policy to limit the withdrawal of US dollars to $10,000 per week for all people and organizations in Myanmar except a few international organizations such as embassies, UN agencies, bilateral aid agencies and international NGOs. For the formal, we applaud the CMB’s decision. MMK ought to be the medium for all financial transactions in Myanmar. The latter is controversial if not unfitting for the present economic situation in Myanmar. We anticipate this intervention will cause the development of black markets for exchanging MMK and US dollars.

U Mya Than, Chairman of the Yangon Foreign Exchange Committee, told Myanmar Times that “the necessity of using foreign currency for local payments tends to make exchange rate fluctuations worse. Some people speculate by buying lots of dollars or withdrawing massive amounts from their accounts that they do not actually need.” This statement has merit but it does not address the underlying reason of why people are keeping USD instead of MMK. The problem lies on the people’s confidence on MMK. Fundamentally, the confidence is strictly related to the stability of the purchasing power of MMK. This means the price level viz. the inflation rate. Myanmar monthly inflation rate has ranged between 6.5% and 7.5%, which is exceptionally high. This implies value of 1,000 MMK in May depreciates to 992.5-993.5 MMK in June. Or, a basket of goods that costs 100,000 MMK in May will require 106,500-107,000 MMK to purchase. Hence most people and firms incline to hold USD that does not devalue or it fluctuates at a very narrow band and thus it is the safest medium for savings. Put differently, USD100 in Myanmar has the same purchasing power over time disregards with the inflation rate.

Moreover, MMK has depreciated because the demand of USD has risen in the last two years. According to the CBM’s published information, the reference rates of MMK per USD on 13 August 2013 was 994 MMK and this rate has depreciated to 1,095 MMK on 4 June 2015. The daily turnover volume of USD on 13 August 2013 was merely $300, and it rose to about $5.4 millions on 18 December 2014, subsequently it went up to about $4.3 million and $2.8 million on 10 April 2015 and on 4 June 2015, respectively. At the same time, according to other source of estimate, exports were $874 million while the imports were $1,373 million, a trade deficit of $499 million. This figures show the rise of USD demand in Myanmar, which caused the depreciation of MMK.

By imposing a weekly limit of USD withdrawal will undoubtedly encourage the formation of black market exchange. Because of the CBM’s restriction, anyone who wants to have more than $10,000 transaction a week will have to seek an alternative source, which is the black market exchange. No matter how the authority wishes to restrict the availability of USD, people in market place certainly have the ability to source it informally. The restriction itself is a good policy intention, but it is a wrong instrument because it causes distortions in the foreign exchange market. Thus, the CBM should reconsider its latest approach and re-design a more appropriate measure to curb excessing demand of USD.

There are at least two alternatives. Firstly, the CBM ought to resort to interest rate in stabilizing prices and output level. Presently this measure might be difficult in Myanmar considering the CBM’s capability but this must not be a reason in avoiding the use of this policy instrument. Secondly, the restriction of USD has to be targeted at those who are not in immediate needs. More specifically, USD ought to be made available to people/firms who require that foreign currency for business transaction. For example, the CBM could allow those people/firms in export sector to exchange MMK with those people/firms who are dealing with imports. Bench marking the availability of USD by based on performances is a means for facilitating market coordination of the supply and demand of USD and MMK in the foreign exchange market. Insufficiency of USD because of trade deficit can be compensated by the rise of inward direct investments. In these contexts, we urge the policy makers in the CBM to modify its intervention by introducing those measures that are discussed here.