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Alarm Over the Exchange Rate

Exchange rates have risen continuously since early November and on December 16, the rate for one dollar had reached 1440 Kyats in the informal market, exceeding the historical rate record of 1405 Kyats per dollar during the 2007 Saffron uprising. However, no trading occurs during that time as the price was there for only one day and fell back the following days and was now stable at around 1360 Kyats.

Mya Than, the recently retired chair of Myanmar Oriental Bank and former managing director of stateowned Myanmar Investment and Commercial Bank, said on December 18 that throughout his decades in the banking sector he thought the informal market rate had never broken through 1400 Kyats.

“At this time it’s the highest ever,” he said. Several money changers also agreed that the rate had hit record levels.

But some long-time Myanmar watchers say informal exchange rates are not yet at record levels. Sean Turnell, an Associate Professor at Macquarie University’s Economics Department and the author of numerous books and articles on Myanmar, said the kyat has been above 1440 Kyats to the dollar before. In a paper titled: Burma’s Economy 2008: Current Situation and Prospects for Reform, Turnell reported that the unofficial exchange rate was 1450 Kyats in 2006.

In a call-out on Facebook, Turnell explained why it is not necessary to sweat over the current exchange rate. He says, “At the moment, there is some anxious discussion about the exchange rate of the Kyat. I think these anxieties, while natural given Myanmar’s monetary history, are largely unwarranted. Here are my reasons:

  1. Much of the movement in the Kyat exchange rate is against the US dollar. But this movement is not at all unique to Myanmar. Since the election of Trump (even before it) the US dollar has been appreciating against just about all currencies, and especially those of emerging markets. Seen in this light, the decline in the US price of the Kyat is not that dramatic at all. In fact, it’s rather dull.
  2. Properly viewed in real term (that is, inflation adjusted terms) the Kyat is still way, way above historical lows. Indeed, there is a strong case for suggesting that it is still slightly overvalued viewed in this way.
  3.  There is, in any case, much to be said on having a lower exchange rate as part of a broad development story. This was certainly a strategy employed by China, the tigers, Japan etc. Can’t go too far – but having an extra competitive edge this way can be a help rather than a hindrance to becoming a manufacturing centre.
  4. This is all part of a seasonal cycle. The Kyat always tends lower around this time of year. So, it is important not to read too much into movements that are largely just part of a natural cycle.
  5. Finally, flexible prices (including those of a currency) are normal and central to a market economy. Flexible exchange rates indeed can be especially valuable in, depending on circumstances, protecting the interests of farmers and others in the face of commodity price movements. This is not theory. Australia is now on the longest run of economic growth experienced by any economy, ever. Yet, like Myanmar, we are an agricultural and commodity country in significant ways. One explanation to this success has been the flexible Australia, which moves up and down with commodity prices – and thus (once these prices are converted back into Australian dollar) protects our farmers, traders…our entire economy. The flexible Australian Dollar has saved Australia again and again.

Time as always to be vigilant. But let’s not sweat the things we don’t need to.” Despite the reasoning from the professor, local business leaders sounded alarms and requested the government take action in the currency market to slow down the rising US dollar exchange rate. The authorities have shown some signs of action as an answer to their call. Officials from the Central Bank and the Ministry of Planning and Finance sat on a recently established currency volatility committee, tasked with determining what the authorities can do to stabilise the kyat.

The Central Bank recently announced it wants people within the financial services industry to declare foreign currency accounts they hold in overseas banks, and that it is working with the government to investigate foreign currency export earnings either going undeclared or being held outside the formal banking system.

But the Central Bank also announced it will make renewed efforts to narrow the gap between its own rate and that of the wider market. Starting next year, it plans to let exchange rates in the interbank market inform the daily reference rate, and free banks from the trading band around the rate