Searching for Keys as the Kyat Goes Out of Kilter

Myanmar’s currency woes have become more pronounced since the Central Bank of Myanmar’s (CBM) de-dollarisation move in April, to the point that the country’s foreign exchange reserves may reach perilously low levels. The stop-gap interventions by the CBM to moderate demand for greenbacks have proven futile. The State Administration Council (SAC) military regime has evidently not learned from the fallout of similar “knee-jerk reactions” to control dollarisation in October 2015. 

The Myanmar kyat depreciated in the aftermath of the February 2021 coup; by October 2021, its value had plummeted by 47.5 per cent. However, the measures taken since April 2022 have further destabilised currency markets. The debacle stems from three interrelated factors: balance of payments (BOP) pressures due to decreases in both export revenues and financial inflows that deprive the economy of foreign currency, widening fiscal deficits and financial sector instability. 

Myanmar’s currency challenges, exacerbated by weak economic fundamentals and current global turmoil, most acutely the rising price of petroleum, fertilisers and cooking oil, continue to devastate livelihoods.   

The balance of payments of a country – the overall accounting of money inflows and outflows – constantly adjusts while transacting exports and imports and capital flows in the form of investment, loans, and foreign aid. The system is stabilised by exchange rates, interest rates, or controls on currency flows, but overwhelming pressures during crisis times may cause drastic swings in these policy instruments or a collapse of confidence that triggers an outflow of foreign currency.

The SAC’s policymakers appear to have anticipated that the coup would trigger a BOP crisis — nonetheless they still responded with ill-conceived policies. Myanmar would foreseeably have to rely on its foreign reserves to buffer the constriction of foreign exchange inflows resulting from Western-led sanctions. Expectedly, most of the multilateral and bilateral development assistance to Myanmar, and new foreign direct investments, have been suspended indefinitely. The CBM and Ministry of Commerce tried to address the BOP challenge by expanding the list of goods requiring an import license and imposing controls on foreign exchange, including forced conversion of foreign currency earnings into local currency – a drastic move that was later relaxed. 

The CBM’s responses have failed to prevent rapid currency depreciation or alleviate BOP pressures. The import restrictions helped to reduce the current account deficit for 2021, mitigating the net loss of foreign exchange due to income flows from Myanmar and the trade deficit from the decrease in exports. However, the BOP situation has worsened due to increased capital outflows and decreased foreign direct investment. The World Bank’s Myanmar Economic Monitor (MEM) of July 2022 reported that Myanmar’s trade deficit worsened in the first half of 2022 and warned that if the trends of capital outflows and trade deficits continue throughout this year, foreign exchange reserves might have fallen to “insufficient levels” as of mid-2022 (foreign exchange reservers had fallen by close to US$1 billion in the September quarter of 2021).

The stoppage of foreign loans and donations has also compounded Myanmar’s fiscal troubles. The country’s fiscal deficits have widened in distinct ways that put more pressure on currency value. The economy’s 18 per cent contraction in 2021 had already shrunk tax revenue, contributing to Myanmar’s 2021 fiscal deficit of 9.2 per cent of GDP, or 8880 billion kyats (nearly US$ 6 billion). 

The moneyed classes have sought to transfer assets abroad, taking advantage of technology, connections, and the open financial systems in neighbouring countries, particularly Thailand. Global price hikes have aggravated Myanmar’s currency depreciation, making imports doubly expensive.

Since the coup, multilateral and bilateral donors have suspended loans and grants, notably 1.5 trillion kyats (over US$ 1 billion at exchange rate of 1520 kyats to the dollar) in loans from the Japan International Cooperation Agency (JICA), World Bank and Asian Development Bank (ADB) that Myanmar expected to receive for the 2021-22 financial year. To fill the funding gap, the SAC has resorted to the monetisation of deficit financing. The World Bank’s July 2022 MEM also estimated that CBM financed 55 per cent of the fiscal deficit in the six-month mini-budget covering Oct 2021 to March 2022. The injections of money supply stoked inflation, further depreciating the local currency.

Overall, Myanmar’s financial instability has only worsened in recent months. In its policy note on Myanmar financial sector reform in July 2022, the World Bank observes that the CBM’s post-coup ad hoc measures were unable to restore financial stability or public confidence in financial institutions.  

The loss of public trust in commercial banks’ ability to facilitate transactions and retain value has induced many to hedge against rising inflation and preserve their wealth by investing in real estate, gold and foreign currencies. The moneyed classes have sought to transfer assets abroad, taking advantage of technology, connections, and the open financial systems in neighbouring countries, particularly Thailand. Global price hikes have aggravated Myanmar’s currency depreciation, making imports doubly expensive. Food inflation rose to 41 per cent year-on-year in March 2022, as the global prices of agricultural inputs, especially fuel and fertiliser, spiked. Low-income households suffer the hardest consequences and face serious food insecurity challenges. 

Recent measures made matters worse. In July 2022, the CBM reversed a previous directive allowing border trade transactions to be conducted in Thai baht and Chinese yuan. It now requires border trade transactions to be carried out in US dollars at the exchange rate set by the CBM. Additionally, grain exports now require a license. As a result, corn exports to Thailand plummeted in July. The forced conversion of export earnings at the CBM’s artificial rate (below market rate) also hurt rice exporters and export competitiveness.        

Myanmar’s currency woes highlight the importance of sound management of trade, investment and fiscal balances – the macroeconomic fundamentals. The current focus in Myanmar, however, seems to be on the political survival of the regime. The political consideration is salient, as Myanmar, under the SAC, can access very limited multilateral assistance. Sri Lanka’s experience points to the reality that international credibility and public trust are imperative for unlocking much-needed assistance and restoring macroeconomic stability. While the search for those keys continues, the kyat’s downward spiral threatens the livelihood of Myanmar’s citizens. 

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