To float or not to float
The tight control of the kyat is another case of catching the cat in a trap set for monkeys. Prior to the opening of the economy, the government fixed the exchange rate between the dollar and the kyat. The nominal rate may differ significantly from with the real rate, but it does not matter with the limited transactions during those times. Specific government banks were designated to deal with dollar transactions and even issued foreign exchange certificates (FEC) for tourists to use as a medium of exchange during their stay in the country.
The government floated the exchange rate as the economy opened, an effort aimed at aligning with the global economy. This means, the value of the dollar against the kyat will be determined by the foreign exchange market. Foreign companies and investors set up businesses and infused financial resources to the economy, in the process flooded the country with goods and services that has to be paid in dollars. Demand for dollar increased as the number of investors continue to enter the country motivated by perceived potentials. Tourists came in droves opening areas previously closed to foreigners, and with them the use of dollars. Maintaining the scrooge attitude, government banks required crisp new dollar bills will be accepted. Money changers became very choosy with the bills they change, rejecting a bill with even a slight fold or smudge. Some accept but with unusually lower rate. The practice continued and at present some are accepting only certain dollar series, rejecting even if the bill is immaculately freshly printed. For tourists, this is one of the most irritating aspects in visiting Myanmar and nobody has the right answer for this concern. Everything is pointed to the direction of government banks who continue to impose this requirement.
The high demand for dollar spawned the government’s fear of dollarization, thinking that the kyat will be side lined and the economy depend totally on the Dollar. Last year, the kyat slid and the government reacted and imposed measures to stop it.
Appropriate government response? The weakening of the kyat was mainly due to the widening balance of trade between Myanmar and its trading partners. Investors and businesses needed dollars for their operations resulting in the increased demand for it. High demand and the limited supply of dollars cause the weakening of the kyat. The government response is best described as the ‘how-to’ in scaring tourists and obstructing investors.
Salient features of the measures included limiting amount of bank withdrawals up to $5,000 per day and weekly U$ cash withdrawals being allowed up to U$ 10,000 maximum. All cash transactions were also required to be in kyats. This required the revocation of license of tourism-related businesses to accept dollars. Tourists cannot pay dollars to a hotel or a café. It has to change dollars first with a money changer to pay the establishment. International NGOs will have to withdraw in tranches in several days to get their operational funds. Businesses requiring dollars to pay for imported products and raw materials will have to contend with these measures, a hindering rather than a facilitating measure.
The efforts of the government to protect the kyat may seem effective in arresting the slide, but it may not be in the long term. It may even result to another problem it has to contend later. Business operations cannot be hampered by tight control of its lifeblood. Survival will push businesses to find ways to go around the law.
Impacts of a weak kyat
A weak kyat have different impact depending on one’s perspective. It will greatly affect the lives of ordinary people, not so with those who have more in life.
- Higher cost of consumer goods Imported goods are bought using dollar and a weak kyat will mean higher prices of these goods. This will range from the processed foodstuff from Thailand to the cars from Japan. Ordinary people will have to pay more for consumer goods they buy every day. The increase in imported goods will further drive inflation up. Once the price of commodities goes up, it rarely goes down.
- Bonanza for exporters A weak kyat will be favourable to exporters because their products will be cheaper in dollar. However, the country’s exports are mostly agricultural commodities – rice, beans and pulses, rubber to name a few. The country has limited export products that can benefit from a weak kyat. The three special economic zones that will host industries for export are still in various stages of development.
- Higher value of remittance from migrant workers One of the main beneficiaries is migrant workers abroad and their families receiving remittances. Workers coming back with dollars will be able to buy more. As long as dollars are brought inside the country and changed here, it will have more value. Remittances through informal channels like hundy may also benefit from the exchange rate if the fees are not too high to offset the gain from higher rate.
- Low kyat will encourage tourism Foreigners will find it more attractive to visit places with lower exchange rate. A weak kyat will encourage budget-tourists because they can spend more with their dollars.
- Resurgence of the black market Water seeks its own path. The market will always fill whenever there is demand. In this case, the high demand for dollars may cause the resurgence of the black market to address the supply side. Those who need dollars will maximize what they can get from official and formal channels. But it will not limit them to these sources, instead informal sources will fill the needed dollars just so they can continue with their businesses.
More scenarios and questions to be answered
The government has to get its acts together, define its priorities and make sure the policies are aligned. If Myanmar is to pursue leapfrogging with the help of the West, it has to make sure that its policies are aligned with the West. It cannot depend solely on China for its growth. In the first place, moving away from too much dependence on China is one of the main reasons for opening with the West.
The recently concluded elections offer more opportunities for the country to engage the West and continue the momentum of economic development. It may signal the lifting of sanctions that strangled the economy of the country for decades. Will the tight control help in attracting US and European investors to come to Myanmar or will it frighten them?
Myanmar will soon join economic blocks in the region as part of its reintegration. One of the most immediate is the ASEAN Economic Cooperation (AEC) with the neighbouring countries. Myanmar has already expressed that together with Cambodia and Laos, it will catch-up and join the group later. Dilly-dallying in instituting reforms including foreign exchange will not be beneficial to the country. It may further place the country in the tail end of the region, in terms of development.
The foreign exchange issue is now in the hands of the new administration. Expectations are high for the new government to provide clear economic policies that will promote more openness and economic cooperation not only with the West but with the rest of the world. Definitely, there will be no going back to the old isolationist position. The only way is to move forward.
