Aug 10, 2011

Experts call for floating forex rate

The news that the official exchange rate of K5.5 to the US dollar is likely to be reformed after almost four decades has pleased many in the business sector but also raised questions over what should replace it.

The official rate is significantly lower than the market rate, which over the past five years has floated between K750 and K1450, strengthening significantly over the past 12 months.

At a meeting in Nay Pyi Taw last month, the Minister of Finance and Revenue, U Hla Tun, said the government would set a more “reasonable” and “stable” official rate that would be “beneficial to the country” and encourage foreign trade, state media reported on July 23.

However, it is not clear whether the government is considering a floating rate or a figure pegged to the US dollar.

Dr Myo Thet, general secretary of the country’s peak business body, the Union of Myanmar Federation of Chambers of Commerce and Industry, said the federation was gathering data for a report to top policy makers on the challenges different sectors are facing as a result of the appreciation of the kyat, which has risen by about 25 percent in the past year. Last week US$1 was buying about K775.

“Government leaders are taking this issue seriously so we expect a good result in the near future,” he said. “We anticipate the exchange rate will be adjusted to a workable rate that is beneficial to both exporters and importers. Only when exporters benefit will importers also make profit” because of the export-first import-later policy.

A member of the presidential advisory group for economic affairs told The Myanmar Times last week that the government could not resolve the issue in a short period of time and it required the expertise of international financial institutions.

“We are coordinating not only with local economists but also with experts at international financial institutions, such as the IMF,” the economist said. “We have been told to conduct proper research to avoid making mistakes.”

U Kyaw Lin Oo, a political scientist and regular contributor to local weekly The Voice, said the government should allow the official exchange rate to float.

“As an economy gets more integrated into the international system the number of transactions in its domestic market normally increases,” he said. “If the exchange rate is pegged, the government will have to accept the burden of fluctuating currency flows and varying rates in the market, which is not good in the long run.”

“By allowing it to float, policy makers can use the varying rate as an indicator for the economy and then take action where necessary to increase or decrease the currency’s value.”

U Kyaw Lin Oo said Myanmar should take lessons from the experience of Thailand, which practiced a pegged foreign exchange rate policy before the Asian Financial Crisis.

“Thailand’s currency was pegged at 25 baht to the dollar prior to the 1997 Asian Financial Crisis,” he said. “At that time local businessmen thought the economy was growing steadily but it was not real growth, just a bubble.

“In 1997, when the government could no longer support a rate of 25 baht and allowed the currency to float, the economy collapsed,” U Kyaw Lin Oo said. “Based on that example I think we should use a floating exchange rate rather than the government intervening in the market, which is not good in the long run.”

However, another example Myanmar may look to follow is China, which has had more success pegging its currency to the US dollar. Despite its booming economy, Beijing has been reluctant to allow its currency to appreciate as it artificially kept exports cheap, much to the consternation of the United States and other importers of Chinese goods.

U Kyaw Lin Oo said he believed a reasonable rate for all stakeholders would be K800 to K900. If the government decided to peg the rate at this level, he said it should also be on the lookout for the “right time” to float the currency in the future.

Dr Sean Turnell, an associate professor of economics at Australia’s Macquarie University’s, said “ideally” the currency would be allowed to float.

This would “avoid ‘creeping’ problems later as the fixed exchange rate diverged from the market, and likewise the sort of exchange rate crises seen in the Asian Economic Crisis of 1997,” he said. “A floating exchange rate also requires very little in the way of ‘management’ by the monetary authorities.”

If the government decided to use a pegged rate Dr Turnell said it should be “credible” to discourage the formation of a parallel informal exchange market.

“Such credibility requires ample foreign exchange reserves … as well sound policies and properly functioning monetary and banking authorities,” he said. “All of the latter are not currently present in Burma.”

Dr Turnell said exchange rate reform would send a positive message and be “reasonably significant” but at the same time not represent “transformational change” in the economy.

“The biggest benefit would be the signal it would send – that economic policy-making in Burma may be much more rationally based in the future, and much more amenable to business,” he said. “On top of this would come greater certainty. Likewise, a significant avenue for corruption could be removed.

“It would be symbolically important … but it could be the catalyst for other changes too,” he said. “For instance, presumably it would no longer provide such an easy vehicle for the hiding of Burma’s gas earnings in the national accounts. But, less controversially, pricing, contracts etc could be more transparent and predictable.”

U Kyaw Lin Oo said the government needed to ensure it had the financial and human resources to reform the exchange rate system, regardless of whether it opted for a floating or fixed rate.

“The government might lack the capacity and resources at the moment but they must take steps to develop this,” he said, adding: “It’s time to announce a new exchange rate policy.”

He suggested that the Foreign Exchange Certificate (FEC) also be allowed to float for the time being, rather than be abolished.

“If the government decides to abolish the FEC now, it will have to let people change the FECs at the dollar equivalent,” he said. “But we don’t know whether the government has enough dollars in hand to cover all FECs in the market. There is also the question of the government’s responsibility to FEC holders.

“As more dollars flow into the market and the use of the dollar becomes legal,” he said, “more people will use the dollar and the FEC will fade away.”

Source: Myanmar Times