I had spoken aloud about the potential private property development sector downturn at both day and evening MBA classes I conducted at Yangon University of Economics since the end of last year. I have also warned about potential Myanmar Kyats depreciation against USD through a short article on social media in March 2015.
Now that both have happened, I would explore possible ways to address these, starting, in this article, with the more urgent rapid appreciation of USD. So far CBM (Central Bank of Myanmar) has done some sterilization, such as increasing sales of USD, restricting drawing of USD from own accounts, etc., yet, the result of the strategy is at best doubtful.
First and foremost, currency depreciation per se is not necessarily bad. In fact, it can be good for exporters as they earn more income in domestic currency. It also encourages domestic businesses to seek export markets. At the same time, rapid depreciation of domestic currency can be sometimes devastating and may destabilize an up and coming economy like ours. The impacts include sudden higher import costs, cost pushed inflation and fiscal slippage.
What caused Myanmar Kyats to depreciate? Well, it’s a combination of factors:
– Overall strengthening of US dollar: USD has strengthened against all Southeast Asian currencies over the past 6 months to a year, mainly due to the recovery of the US economy. There- fore, strengthening against Myanmar Kyats is also to be expected.
– Myanmar domestic inflation; Inflationary currency depreciating against stable currencies is a well-known economic truth. Recent unjustifiable (not backed by economic growth) salary increases of Members of Parliament and pay increases for civil servants at higher percentages than GDP growth rate not only increases the actual inflation, but also create an expectation of inflationary environment in the minds of general public. This is not good news for a depreciating currency.
– Stalling FDIs; due to the upcoming election season, most of the potential FDIs are on hold by the investors looking ahead for political stability and USD capital fund transfers are likely to be pushed back until after the election. This behavior of the investors is not limited to Myanmar only. It is even evidenced in developed market like Singapore.
– Speculators and institutions hoarding USD; We may be nationalists when it comes to footfall and illegal immigrants, but when it comes to money, short termism and brokerage mentality sets in and we tend to hoard valuable things speculating that their values will go up in the future. USD, unfortunately, falls into that category and prices tend to go up when things are scarce. So, what can we do as the administrators and economists of the nation? USD is just another commodity that people buy and sell. We use Myanmar Kyats to get that commodity. Just like any other product, prices are determined by supply and demand. Prices will increase (i.e., USD appreciate/Myanmar Kyat depreciate) if demand for USD increases and/or the supply of USD drops.
We, therefore, have to control the demand for USD and manage the supply of USD to have a chance of stemming the tide against rapid depreciation of Myanmar Kyat.
Demand Management
– Specific checks and balances on Institutions – banks and money changers, to ensure that they do farm out the USD that they purchased from government, to satisfy the demand on the street. Just like mobile teams being put into action at checkpoints and ports, such teams should perform surprise audit checks on these institutions to ensure no hoarding takes place.
– Public messages and financial education to general public, to discourage speculation activities, hoarding of USD and to make them understand the im- pact on the nation of such activities.
– Control of inflation; Lawmakers should understand simple basic economic concepts e.g., pay increases of civil servants cannot be greater than a country economic growth, else the country will bear the brunt of inflation. A neat analogy would be can a company survive if the rate of pay increase for its employees is more than the growth in profits? It may be a bit too late now; still some form of financial education for law makers would be good.
– Encourage domestic production as a mean to import substitution. We need to make something or provide some service that people are willing to pay
for. China economy does not grow leaps and bounds based on being a broker. It really is the world’s production house. Domestic producers can be given more incentives such as tax breaks, rebates with import substitutes being given higher benefits. Reduction in im- ports will bring down the pressure on USD demand.
– Import controls: May be now is the best time to weed out subpar and unwanted products from overseas through technical standards and specifications. The selection of the products here have to be handled with care, as we certainly do not want a restraint of trade, which would be like a step backwards for Myanmar certainly.
– Understand that wars costs money and strikes creates a seemingly political instability. In such cases, people run to the safe heavens for USD and gold, thus creating further demand. I am all for the National Ceasefire Agreement.
Supply Side Economics
– Obviously CBM selling/ supplying
more dollars to institutions does help. It just needs to ensure the dollars are subsequently passed on from these institutions.
– Encouraging the FDI (Foreign Direct Investments): FDI bring much-needed USD into Myanmar. They also help in import substitution. MIC (Myanmar Investment Commission) must also follow up on agreements to ensure cap- ital is invested on time.
– Export encouragement; FDI law already has clauses to encourage exports, yet we can still promote exports further through updated policies, giving currently restricted exports limited release, or, providing further subsidies such as tax breaks, rebates to exporters.
– At this very time that we need USD, we are yet to make remittance from overseas easier into Myanmar banks, be it from Myanmar citizens abroad or foreigners. Current controls and document requirements by the CBM on incoming funds discourage fund transfers from overseas.
As we always say in Economics, there is no such thing as ‘one pill cures all’ solution for national problems. But with a combination of treatments described above, I believe we can stem the rapid tide against Myanmar Kyat depreciation and restore the confidence that we all have in Myanmar Economy and reforms for a better future.
U Aye Chan of IMA Group is a graduate in Economics from University of London -London School of Economics and also holds a Master of Business Administration from Nanyang Technological University (Singapore). He is also a Certified Public Accountant. (This article first appeared in the Global New Light of Myanmar on 14th June 2015.)
