Myanmar Central Bank Monetary Policy

Abstract It can say that the new beginning of the banking sector in Myanmar is started on November 25, 2011. Before this time, Private Banks don’t have any license for foreign currency exchange services. Central Bank is the sole bank who can control the foreign currency exchange, and foreign exchange rate against US dollar was traditionally designated as around 6 Kyats per dollar since 1975 while the market exchange rate fluctuated between 780 and 1,000 per dollar for the past several years.

However, since the government transform into Democracy System, the banking policy is also became to start change for the stability of financial and exchange rate with the advice of IMF, World Bank and Asia Development Bank. Myanmar knows that they cannot attract the investors unless they can control the stability of financial status and exchange rate. On April 2, 2012, Central Bank started Myanmar’s boldest economic reform which is ending a fixed rate currency system that has stifled investment and fuelled a black market. After this biggest reform, the developments of the banking sectors are increasing in high speed within one year.

In this shot paper, the endeavorment of Central Bank on restructuring traditional monetary policy and its effect on the real economy during the current reform process as a main object of this short paper will be explained. I. Central Bank’s effort on Current Reforming Monetary Policy Traditionally, Central Bank of Myanmar (CBM) is not the totally independent organization and the CBM exists as a department within the Ministry of Finance and Revenue and lacks the operational autonomy required to manage monetary policy in a modern market economy.

The CBM relied heavily on direct monetary policy instruments, mainly in the form of reserve requirements and prudential limits on the structure of commercial bank balance sheets. Interest rates have been administratively set for all instruments and maturities, and, until recently, rarely changed. There was no formal interbank market and pervasive controls on banks impeded the monetary transmission mechanism. However, with the assistants of international organization, Central Bank start allowed the eleven private banks for authorized dealing license on November 2011.

At the beginning of 2012, Central Bank tried to unify rate of foreign currency as the first time of last 50 years with the aid of IMF, World Bank and Asia Development Bank. It was the initial step to end up the fixed currency system. After using the floating rate policy by Central Bank for two months, the rate of US and FEC (Foreign Equivalent Currency/ Foreign Exchange Certificate) which are earned from export business are keep increasing in the foreign exchange market.

Central Bank’s policy seems success as there becomes less difference among different exchange rates gradually. In the middle of July, 11 private banks got the permit for servicing foreign currency account as a first time of their history. Before, only the 3 Government banks handle for this service. Consequently, LC (Letter of Credit) & TT (Telegraph Transfer) and other related services were also available in Private Banks. As her second step, Central Bank started to cut Bank interest rate. Throughout the reform, Central bank already amended the bank interest rate for two times.

The current interest rates sit at 10 percent for loans and 8 percent for savings and will be reduced to 6 percent and 4 percent respectively, according to the Central Bank of Myanmar. This would be the third time for the government to cut interest rates since it’s forming under President Thein Sein. The higher interest rates have attracted foreign businessmen from the countries like Singapore and Thailand to take advantage of the situation by borrowing money with lower interest rates from banks in their own countries and depositing it in Myanmar’s banks.

Private Banks also cooperated with Central Bank to create Myanmar Union Payment (MPU) card for the efficient payment system and, they intended to use this MPU card as a credit card and smart cart later. Upgrading the ATM machine for the service of money issue and money saving through the machine also started on March 2012. At the same time of above reforms, Central Bank drafted the new Central Bank Law and submitted it for the parliament discussion, and this new law will give the CBM operational independence from the Ministry of Finance and Revenue.

CBM former deputy governor, Maung Maung Win, says the aim to enact the new Central Bank Law is to create a Monetary Policy Committee (MPC) at the central bank for the first time, with this committee able to set interest rates, manage reserves and conduct open market operations without the need to first seek approval from the Ministry of Finance (currently the central bank’s board can only make recommendation that require finance ministry approval before they can be implemented).

Moreover, Central Bank signed MOU with Daiwa Institute of Research to establish stock exchange which is scheduled to be completed by 2015. The nation’s sole securities exchange operator Korea Exchange (KRX) also signed a memorandum of understanding (MOU) with Myanmar’s central bank to help establish the country’s first stock market on June 2013. On the other hand, Myanmar Parliament is working on the Security Exchange Law to support the Central Bank’s policy.

Actually, all the reforming of Myanmar, including the Central Bank’s reform, is still in the process. Throughout this process, however, the real economy in Myanmar has already effected in certain business areas as mentioned below. II. Effect on the Real Economy of Myanmar As mentioned above, Central Bank is trying her best with the help of IMF and World Bank to create sound and safe banking system and payment system, proper interest rate and unify exchange rate, drafting CB law and Stock Exchange Market law through the reform process.

The voices of the investors were arisen in every move of Central Bank and the loudest voices and applauses were occurred in regime of interest rate and exchange rate policy of Central Bank. 1. Effect by exchange rate reform Under the former multi exchange rate system, private sector importers have no allocation of foreign exchange at the official exchange rate. Moreover, the government imposed export tax on their export earnings. Exporters were forced to remit earnings to Myanmar state banks and maintain them in the form of foreign currency deposits (FCDs).

The export tax was collected in foreign currency when export earnings were deposited at state banks. When an exporter withdraws export earnings, he can only accept FEC instead of foreign exchange because the citizens are prohibited to hold foreign currency. This kind of wired transaction and restriction were relaxed and solved after April 2012 reform, abolishing the official exchange rate and implementing float exchange system instead of fixed exchange system. Since the beginning of new exchange rate system, however, the exchange rate is not much stable, especially on May 2013.

Before May 2013, exchange rate was between 850 to 870 Kyats for one US dollar and this strong local currency impacted on export business. According to the secretary of Myanmar fishery and live breeding manufacturing and importing Committee, the number of cold storage factories was decreased from 60 to 40 because of this exchange rate. And also, Importing rice to foreign country was decreased up to two third of usual importation as a consequences of depreciation of dollar in 2011.

During May 2013, Central Bank tried to bring up exchange rate up to 965 Kyats and, exporting business becomes recovered again. On the other side, exporters criticized on the Central Bank’s monetary policy for devaluing the local currency. Ordinary people also worry about that the fundamental goods price will be raised whether the imported price on diesel, petroleum and other imported goods become raise. However, it seems that goods price on retail business doesn’t change during such exchange rate control by CBM.

CB bank’s exchange rate policy seems success and exchange rate stable between 940 to 950 Kyats currently. 2. Effect by interest rate reform Central Bank already cut interest rate for twice during the reform process and Myanmar Government is currently holding talks to further reduce the country’s interest rates to allow local businesses to compete with international rivals, according to sources from Parliament. Local businessmen will be able to compete with their international rivals only if the rates are low.

It’s for the long-term as international interest rates are mostly 2. 5 percent and only a few at 3 percent. The former interest rate cuts benefit local business to some extend and this new cut will also benefit local SME’s (Small and Medium Enterprises) at the time when they are facing unprecedented competition with rival companies from other ASEAN countries. Commodity prices will be cut down along with the rates cut. Upon the former and current interest rate, foreigner used to take advantage by borrowing money from foreign bank and saving at local banks.

Local business enterprises are keep complaining pointing out this different interest rate benefit foreign investors who have long term tax exemptions and strong financial than local business. “Foreign Investors have been taking advantage of the different interest rates between local banks and international banks for 10 or 15 years,” said Than Lwin, an advisor for the Ministry of Finance and Revenue. The public savings in local banks will possibly be going down as a side-effect of the interest rates being cut, affecting the circulation of money in the country.

Before, people only rely on the bank’s interest and new interest rate cut may encourage them to invest in certain business. 3. Effect by other reforms and draft laws To create better monetary policy and strong financial market with the simultaneous development of banking system, CB banks drafted new Central Bank Law and Security Exchange Market Law. At the same time, Central Bank authorized the private banks for foreign banking and encouraged to upgrade the banking system in line with ASEAN standards.

Hoping the very near AEC market on 2015, foreign branch/representative offices are opened in Myanmar and some foreign banks are thinking to set up joint venture with local banks. The Central Bank’s MOUs with Japan DIWA stock exchange and Korea Exchange and drafting Stock Exchange Market by CBM also encourage the private companies to transform into Public Company recently. There already have around 70 public companies in Myanmar according to Myanmar Local News. III. Conclusion Events have moved rapidly in Myanmar.

As one of the latest countries who restep to enter into international community, there are so many challenges to reform bravely and properly. Although the CBM is reforming her policy with the advice of IMF and World Bank, how CB bank’s reform will really work or not is also linking with Government’s other policy reforms, for example FDI policy, microeconomic policy, etc. Central Bank needs to keep her current progress and needs to check and balance with government policy for the sake of people.

One official said, Central Bank will become independent from Ministry of Finance and Revenue but will still need to be under the President of Myanmar. It will be the best position for the time being instead of being totally independent organization, he added. References: 1. Central Bank of Myanmar Law 1990 and Draft Central Bank Law 2. Draft Security Exchange Market Law 3. THE MYANMAR ECONOMY: TOUGH CHOICES by Lex Rieffel 4. Economic Articles of Dr. Khin Mg Nyo 5. IMF Country Report No. 13/13 6. Microfinance in Myanmar Sector Assessment By Eric Duflos, Paul Luchtenburg, Li Ren, and Li Yan Chen January 2013 7.

MACRO-FINANCIAL LINKS AND MONETARY POLICY MANAGEMENT IN MYANMAR By Tin Maung Htike 8. The Myanmar Exchange Rate: A Barrier to National Strength, June 2011 9. Myanmar’s Economic Policy Priorities by Vikram Nehru, November 2012 10. Myanmar Kyat Exchange Rate Issue by U Myint 11. Real Exchange Rate Appreciation, Resource Boom and Policy Reform in Myanmar, prepared by Institute of Developing Economies 12. Timelines of Banking News in Myanmar by Kaung Htet Zaw 13. Weekly Eleven news ——————————————– [ 1 ].

The Central Bank of Myanmar Law (1990) empowers the Central Bank of Myanmar (CBM) to act as the sole issuer of domestic currency, to act as a banker to the Government, to act as an adviser to the Government in respect of economic matters, to inspect and supervise the financial institutions, to manage the international reserves of the State, to perform the transactions resulting from the participation of the State in intergovernmental organizations and to undertake all the responsibilities in the name of the Government in dealing with the aforesaid organizations on behalf of the Government.

[ 2 ]. Foreign Exchange Certificate (FEC) has been abolished on 22 March 2013 by Notification 1/2013 of Central Bank. For the ones who still hold FEC in their hand can still exchange their FEC at authorized exchange counter until 31-3. 2014 according to Central Bank. [ 3 ]. Central Bank of Myanmar (CBM), Myanmar Foreign Trade Bank (MFTB) and Myanmar Investment and Commercial Bank (MICB) [ 4 ].

“Central bank’s crucial role in Myanmar’s new economic reform” by Christopher Jeffery: See also Republic of Union of Myanmar Central Bank Draft Law. [ 5 ]. One FEC is equivalent to 450 kyats while one dollar is equivalent to 100 in the market rate. [ 6 ]. Weekly Eleven News [ 7 ]. Ibid. [ 8 ]. Foreign Banks and branch bank will not be allowed in Myanmar until 2015 according to Central Bank policy.