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.