Home Insider Insider Analysis A Fixed Exchange Rate System Perhaps?

A Fixed Exchange Rate System Perhaps?

Central Bank of Myanmar (CBM) issued one notification and one directive in first week April 2022, that would change the way financial institutions and businesses operate in the foreseeable future. It would essentially affect three key areas of business finance.

Incoming Foreign Currencies from Overseas

Effective from 4 April 2022, all proceeds received by Myanmar residents from foreign countries (from both trading and non-trading activities) must now be repatriated into Myanmar and foreign currency accounts must be opened at authorised dealer banks. Such proceeds received must be converted into Myanmar Kyat (“MMK”) and deposited into the MMK bank account within one business day from the date on which such proceeds were deposited into the foreign currency account other than exemptions specifically notified by the CBM. In addition, any foreign currency holdings in a foreign currency account prior to this date are also required to be handled in the same manner.

Transfer of Foreign Currencies to Other Countries

The transfer of foreign currency to foreign countries must now be conducted through authorised dealer banks and requires the approval of the Foreign Exchange Regulatory Committee i.e., the government.

Fixed Exchange Rate

The directive sets the MMK to $ exchange rate for conversion at 1,850 Kyats per Dollar. The exchange rates for other foreign currencies have also been set based upon this fixed rate.

CBM further issues an exemption letter on April 20, stating the exemptions from the requirements of notification issued during the first week:

  1. MIC approved FDI enterprises.
  2. Investments operating in SEZs.
  3. Foreign diplomats and their family members.
  4. Staff of UN and its subsidiaries.
  5. Foreign staff of foreign development agencies.
  6. Foreign staff of diplomatic rank from international organisations such as Red Cross, ILO, etc.
  7. State-owned or locally owned international airlines.

This sudden and unexpected move has left many enterprises and traders in a tight spot, struggling to find a way out of losses and strategising how to handle international trades in the future. Importers and exporters would be the hardest hit, according to many businesses and individuals  MI spoke to.

“Because of the requirement to sell the incoming $ at 1850 Kyats, many exporters suddenly are facing losses”, said one entrepreneur who is exporting beans and pulses to India and China. ‘The $ out there is being traded at 2,150 Kyats at the time when CBM asked us to sell off at 1,850. We are losing 300 Kyats per $” he continued. “Immediate negative impact would be on exporters. They lost millions within a day”. The day after the CBM announcement, the black bean prices dropped two lakhs per ton. And some export businesses stopped their operations.

The same policy change also impacted rice exporters. According to one official from MREA (Myanmar Rice Exporters Association), this sudden policy change has immediate impact on the rice market and exporters now have to buy at reduced prices from the farmers, in order to continue their export activities.

Whatever items being exported, without the change in CIF or FOB prices, the income in Kyats dropped by more than 10% because of this fixed rate conversion policy. For the future, these exporters would have to buy at lower costs from the producers in order to sustain the same level of income.

The news may somewhat be welcoming to importers, provided the foreign currency is available at the fixed rate from banks. At least based on CBM and MOC official statements, as long as the imports got approved, the importers should be able to requisite the required $ at authorised dealers (AD). If sufficient foreign currency can be provided by the government, the prices of essential imported items such as fuel, cooking oils, pharmaceuticals, construction materials and machinery and general consumer goods, are likely fall around 10% also.

One importer of electrical and building materials stated the April announcements equate to the annulment of the requirement to sell incoming foreign currencies to AD at the market rate, based on one CBM announcement made in October of last year. Other than having negative impact on exporters, the importers are still trying to digest on how to get the $ at the official rates through the import license application process (which itself is not a walk in the part). Most of the importers are now only selling their leftover inventories. “Its best doing nothing at present. No point buying from black market, when some may get at the fixed rate. I have stopped all import activities at present,” he continued.

Japan and Singapore consulates have also sent letters to the government to lower the strict fixed exchange rate requirements as they might impact FDI in the future.

In the fuel sector, there have been rumours that fuel sales are being limited due to the inability of importers to settle their bills. “The government called for a meeting and it said they would sell the $ at 1,850 Kyats for fuel importers. Everything would be ok if the government keeps this promise” said one official from Myanmar Fuel Oil Importers and Distributors Association.

Going to the Bayint Naung Wholesale Market, one trader selling edible oil said ‘this exchange rate policy is causing the increase in price of edible oil as well as consumer goods’. With trade being stopped for water festival long holidays, the difficulties in settlement are adding to the upward momentum in edible oil prices.

During the last meet the press session, Investment and International Economic Relations Minister Aung Naing Oo, stated this fixed rate policy may be revised once Myanmar Kyat exchange rate stabilises.

The Benefits

Obviously, a fixed change rate system limit speculative activities and provide a stable system needed in a country trying to stabilise everything to get back to normal. A stable system allows importers, exporters and investors to plan without considering the implications for exchange rate volatilities.

Without the government need or inclination to alter interest rates to manage economic growth, a fixed rate system may be workable in the short term, while fiscal stimulus might just do the trick.

The Dangers

Effective management of a fixed rate system requires a large pool of foreign currency reserves, in case the Kyat comes under pressure. Myanmar government may not have that much of a deep pocket. An unrealistic exchange rate can also lead to a development of an unofficial or black market rate, just like we have prior to 2011.

A large gap between the official and unofficial rates can divert the hard currency away from the CBM, which can lead to reserves shortages and a potentially large devaluation. This would be more destructive to the economy than the periodic adjustment under a floating rate regime.

May be the government is trying to kill many birds with one stone; cure the potential shortage of $, stop the import cost push inflation and kill speculative activities on $ once and for all. For the government more homely with fiscal policy and uncomfortable with monetary policy instruments, the fixed rate system may be more palatable to digest for everyone in the high echelon. As long as the people governing and managing the financial system remains flexible and nimble, this short term pain may actually turn out to be a long term gain for Myanmar.