Minzayar/Reuters
The kyat has lately been struggling with a crisis of legitimacy.
As businesses began to move away en masse from the kyat for the more stable dollar, the Central Bank of Myanmar (CBM) in mid-October made good on earlier threats and revoked the foreign exchange acceptor and holder licences for a variety of businesses, which allowed them to do business in dollars inside Myanmar. However, the lasting implications of this move have so far remained unclear, as a later statement seemed to give a grace period not present in previous documents.
U Win Thaw, deputy director general of Central Bank, said in an emailed statement last Thursday, “Because of the nature of the business for airlines, tourism businesses, and FDI hotels, they need to deal with pre-orders and bookings. So these businesses will need time to change their long-acting business habits. That’s why they still can operate their business as usual, with the exception the abolishment of licences. This abolishment warns and informs that they all have to use kyat alone for local business in the future.”
When asked for clarification, the deputy director told Myanmar Business Today, “All licences will have to come back before October 30, but the time when only kyat will be allowed for use in domestic business will be announced soon. Before that announcement, there is no penalty for using dollars for business inside Myanmar.”
The change in policy was executed first through letters to individual businesses to turn in their licences between October 19 and 30 and affects a wide range of businesses including hotels, supermarkets, airlines, hospitals, restaurants, and even the military-owned Myanmar Economic Holdings Ltd. Further clarification will make clear the extent to which businesses will be forced deal with the kyat exclusively inside the country, but businesses have already braced for further restrictions on the dollar, for better or for worse.
An amputation of Greenbacks
The Central Bank has said that their purpose for revoking the licences to these businesses is to control the “dollarisation” of the economy and prop up a kyat that has been experiencing heavy inflation for the past year. Many goods and services, as well as many pay checks, are priced in dollars, and the fear is that the kyat could lose its relevance, as has happened to several countries including Cambodia.
“All foreign countries use their own currency to do local business,” Dr Maung Maung Lay, vice chairman of Union of Myanmar Federation of Chambers of Commerce and Industry (UMFCCI), told Myanmar Business Today. “The kyat is the official currency of Myanmar and it will not be difficult for Myanmar businesses to use kyat alone.”
Still, the dollar’s place is deeply interwoven into the local economy. In a country where only single-digit percentages of citizens have bank accounts, the dollar’s high, stable value has led it to be a popular method of storing savings.
Dr Sean Turnell, associate professor of economics at Australia’s Macquaire University and an expert on Myanmar’s economy, told Myanmar Business Today, “It’s true that in most stable countries the local currency is more or less all that circulates. However, when there is monetary instability, and a lack of trust in domestic monetary institutions, varying degrees of dollarisation is very common.”
He added, “This is a problem, not least since it impairs the ability of the monetary authorities to influence domestic monetary conditions since a large chunk of the monetary sector is behind their influence. But the solution – the only lasting one – is to build the aforementioned trust through monetary, economic and ultimately political reform. The latter since it is usually that excessive and unfunded state spending is often at the core of the problem.”
Recently, the CBM tried to stem the kyat’s slippery fall by restricting dollar withdrawals and bringing the official rate closer to market rates. This latest restriction therefore comes not as a complete surprise.
“Policies like this can work for a while, but they need to be coupled with those more foundational reforms. In the absence of the latter, all that happens is that foreign exchange dealing is driven underground. The demand for dollars as a safe asset is not going to go away. Indeed, the manner in which this recent move was carried out only adds to uncertainty, and propels people ever deeper into a dollar-driven world,” said Turnell.
A sudden jolt rattles businesses
“Using dollars widely in the local market can weaken the kyat. However, the forex licences have been approved since the era of the military government, and some people might not like the sudden change. Setting up and applying the rules is not easy at first, but it is good for the country in long term,” CB Bank Managing Director U Pe Myint told Myanmar Business Today.
Using dollars only to buy foreign imports and using kyat in local market would be better for the country, said Dr Win Myint, secretary of Myanmar Petroleum Trade Association, adding that hoarding of dollars restricts the flow of money, but an unstable kyat would be more harmful for both exporters and importers.
There are also worries for businesses who have just entered the market that the change will harm their fragile enterprises. “It depends on the situation. If the foreign clients want to pay with international currencies only, many deals would have to be altered in the short and medium term,” said U Ko Lay, chairman of No.2 South Dagon Industrial Zone.
The most pessimistic sector has been the hotel industry. U Kyaw Hoe, treasurer of Myanmar Hoteliers Association, said that these changes would be problematic, as hotels often do not have money changers nearby, especially those in rural areas such as beach resorts.
Still, not all in the travel industry were full of doom and gloom. Former Chairman of Myanmar Travel Association U Aung Myat Kyaw said, “Those businesses that had forex licences had a distinct advantage under the old system, but this month’s decision has levelled the playing field for smaller hotel owners.”
The black market returns?
Turnell said that these moves could reawaken the informal market for dollars.
“It will impact the formal official exchange rate. However, it will drive a wedge I believe between that rate, and that which pertains in the informal or black-market foreign exchange markets. I suspect we will soon see a dollar premium in these markets.
“The one unambiguous winner from this new policy are Myanmar’s venerable informal foreign exchange dealers, whose business model hitherto was slowly dying away.”
Informal money changers, once highly profitable before the normalisation of the exchange rate, have declined greatly due to lack of demand and a government crackdown. Some are still in the business, but have not yet experienced a boon from these latest dollar restrictions.
In the short term, though, the business has not yet taken off. One black market money changer told Myanmar Business Today that he is wary of doing business until this matter settles itself out, and is trying to keep his accounts in a balance of kyat and dollars.
This individual, who spoke on the condition of anonymity due to the nature of his business, explained, “We are worried that the exchange rate will fall in the near future. Previously, we were keeping as many dollars as we could, but now we are afraid to do so.
“Before the Central Bank announcement, we would give a higher rate than in official markets, but now we have lowered our rates because we have less incentive to sell. I will wait at least until the end of the month, because I don’t dare hold a large amount of dollars.”