The Central Bank of Myanmar has miscalculated badly in inadvertently creating the conditions for a more unstable economy with its latest announcements.
With a notification issued on 3 April 2022, the Central Bank of Myanmar (CBM) sent alarm bells ringing throughout the country’s business community and put its economy on pause. The CBM demanded that banks and other holders of foreign currency convert their deposits into Myanmar kyat within one working day at the institution’s official rate of 1,850 kyat to one US dollar. International experts and Myanmar’s business community regard the CBM’s move as a clear attempt to establish control over the remaining foreign currency deposits while ensuring the country’s continued ability to purchase vital imports. Two months on, it is worth putting that move in context and assessing its consequences.
Myanmar’s military leaders seldom consult with stakeholders on policies that affect millions of citizens. This attempt to avoid the foreign currency crunch and eventual dollarisation of Myanmar’s financial system is no different. With authorities forcing foreign currency holders to sell at a below-market rate, local people and businesses feel as if the State Administration Council (SAC) regime is stealing foreign currency from them. The measure also creates practical barriers for local businesses and traders by reducing the value of their cash holdings and reducing their access to vital foreign currency. Thus, the SAC’s de-dollarisation attempt undermines popular faith in the country’s economy and in the junta’s capacity to revitalise it.
The initial economic impact of Myanmar’s February 2021 coup did not stem from the banking crisis and logistical disruptions alone, but also from a loss of faith in the SAC and the increased risk of investing in Myanmar. Political instability led households and businesses to cut spending. Therefore, since it has seized power, the SAC has been trying to use both monetary and fiscal tools to revive economic activities while trying to stabilise the kyat.
If the SAC is using extraordinary measures to tackle everyday economic governance issues, its economic policies look more like they are driven by panic rather than rational choice.
The policy announced on 3 April was only the latest in a sequence of measures. In the aftermath of the SAC’s seizure of power, restrictions on cash withdrawals from banks left citizens worrying about the security of their kyat deposits. The CBM also switched to a tightly managed exchange rate system in August 2021 and recognised the Thai baht, the Indian rupee and the Chinese yuan as legal tender for the facilitation of border trade to reduce reliance on the US dollar. In October 2021, the CBM issued a notification that forced exporters to exchange foreign currency earnings for kyat within 30 days of receipt. Although other central banks may occasionally take similar measures, these are extraordinary measures usually taken in response to extreme conditions such as war or hyperinflation. If the SAC is using extraordinary measures to tackle everyday economic governance issues, its economic policies look more like they are driven by panic rather than rational choice.
Following the 3 April announcement, faced with uncertainties around foreign-currency transactions, firms either froze or started limiting their business activities involving foreign transactions such as the sale of fuel. Even the gold market remained closed. The SAC’s response was to force open the markets, displaying its lack of understanding of the market economy.
Given the outcry from foreign business entities, the SAC has provided exemptions to international organisations, UN agencies, diplomats and firms in special economic zones. In contrast, households and local businesses have borne the full brunt of the CBM’s de-dollarisation move. The CBM’s decision of forceful conversion has harmed the competitiveness of Myanmar’s rice exports at a time when domestic prices are rising due to lower production and higher shipping costs. Production is also down because the sharp decline in the kyat’s value since the coup has made importing agricultural inputs, including fertiliser, whose global price has been rising due to the Russian invasion of Ukraine, even more expensive.
Fuel shortages are another serious blow to Myanmar’s economy. Fuel importers are struggling to make payments because of the new foreign currency restrictions. Some petrol stations have had to limit sales, while others are making a loss on the sales of fuel due to the artificial exchange rate. It has been reported that the SAC regime provides US dollars to major fuel importers, but these companies do not receive sufficient dollars to meet the retail demand for fuel. Myanmar companies have already lost access to credit from international financial markets because of the political uncertainty in Myanmar. Therefore, Myanmar companies end up paying in full with their already scarce cash for all import commodities.
The CBM issued a new notification on 25 May 2022, requiring private and public entities including local governments and ministries to use kyat for domestic payments. Local businesses have already posted on social media platforms that business activities will be severely impacted by this added requirement.
The CBM’s attempt to avoid the dollarisation of the country’s economy is symptomatic of the SAC’s broader mismanagement of the economy which, contrary to its intent, is undermining confidence. Unfortunately, this mirrors the general lack of public trust in the ability of the junta, which has lost all vestige of political legitimacy, to govern the country. Rather than reducing the country’s reliance on foreign currency, the SAC has ironically ended up creating a dual currency system with the black market rate being significantly higher than the official exchange rate as of the end of May 2022. Official businesses which need to abide by the existing regulations will end up suffering deeper losses, while small and medium-sized businesses will move closer to an informal economy. None of this bodes well for the future of Myanmar’s beleaguered economy.
Ye Khaung Oo is a Research Officer at the ISEAS - Yusof Ishak Institute.