Central Bank of Myanmar (CBM) will launch a new currency swap facility in efforts to stabilize the value of Myanmar Kyat

21 Aug 2018

The Central Bank of Myanmar (CBM) will this week launch a new currency swap facility in efforts to stabilise the value of the Myanmar kyat, U Bo Bo Nge, deputy governor of CBM, told The Myanmar Times on August 19.

The move follows a 6 percent deprecation in the value of the Myanmar kyat versus the dollar between July 16 and August 15, during which the CBM also held a series of meetings with local banks to discuss the situation. 

Following those meetings, The Myanmar Times last week quoted Azeem Azimuddin, CFO and advisor to the Chair at Ayeyarwady Bank, as saying that the CBM had agreed to finally consider permitting banks to trade derivatives such as forwards and swaps. 

“After careful consideration we have on August 19 decided to launch the first swap facility between the CBM and local banks. We have negotiated with the banks and will commence the swap facility early this week,” U Bo Bo Nge said.

“There are still some minor legal negotiations to be carried out and those will be completed within one or two days,” he said.

Under the CBM’s new swap facility, private banks will deposit local currency at the Central Bank in exchange for the equivalent value in dollars either after 14 days or one month at a pre-agreed interest rate.

The CBM will sell as much dollars as needed to the local banks. “The banks will be able to get as much dollars from us as they need. We will sign an agreement on the interest rate with the banks soon. Using this method, we will be able to better control the exchange rate to prevent sudden volatility in the exchange rate,” he said.

Dollar shortage

One of the reasons for the kyat’s swift and sudden depreciation is a shortage of dollars in the economy at a time when import volumes have surged.

“The CBM currently monitors the amount of foreign exchange held by each local bank on a daily basis. So far, we have not seen a significant decrease in their foreign exchange accounts,” said U Bo Bo Nge.

The way he tells it, although the local banks have ample supply of dollars, they are now hoarding the currency instead of selling to other banks. That is contributing to the rise in value of the dollar against the kyat, he said.

“Private banks buy dollars from other banks when their clients need the currency for imports. In Myanmar, all the banks have already accounted for the amount of dollars they will need,” U Bo Bo Nge said.

“Sometimes, some banks will need more dollars than they have on hand, so they will buy the currency from another bank, which sells it at a higher rate. This is the other reason besides global factors that is driving the value of the dollar up against the kyat,” he added. 

As such, permitting the trading of currency swaps will both help to stabilise exchange rate expectations and add liquidity to the market to reduce volatile currency swings.

CBM intervention

Although the Central Bank has in the past traded forex swaps with international banks, this is the first time it will engage in swap trading with the local private banks. 

“We’ve asked them [the banks] how much they need. We can fulfill that requirement. We can fulfill many times more than the amount currently being sold,” said U Bo Bo Nge.

External money changers have also been considered, albeit indirectly. “Although the CBM will not be directly selling dollars to the money changers, the private and government banks will be selling to them so that they can re-sell; so we will also have indirect control over the dollars sold by licensed money changers,” said U Bo Bo Nge.

The move comes after a series of firsts by the CBM in recent weeks. On August 16, it transferred a record US$4 million from its forex reserves to local private banks in attempt to ground the soaring dollar. The day before, on August 15, it sold $1.6 million to the banks, resulting in a total of $5.6 million pumped into the economy in two days. Those moves came after the CBM failed to anchor the kyat even though it has been selling US$100,000 per day to private banks since July 27.  

Free float

The CBM knows it will need more sustainable option to manage the exchange rate over the longer term though.  On August 13, it removed its 0.8pc trading band above or below the CBM’s reference rate within which banks and money changers are allowed to conduct forex transactions. 

“We decided on a free float of the exchange rate as we deemed the decreasing value of the kyat had exceeded the normal standard during the last week of July. We also had to observe if it was the trend or a temporary condition,” said U Bo Bo Nge.

That decision has been lauded by experts. Sean Turnell, economic advisor to the State Counselor, said recently that “Myanmar does not have sufficient forex reserves to defend the currency. Should it attempt to do so using its dollar reserve pile to buy up the kyat and push up its price, the reserves would be rapidly depleted.”

U San Thein, former central banker and senior adviser for the German development agency GIZ, said “the CBM has taken the right step towards establishing a flexible exchange rate system by removing +/- 0.8pc trading bands and allowing the exchange rate to be determined by the market forces of supply and demand.”

“Since we have a limited forex reserves, CBM intervention in the market – both selling and lending dollars to local banks – should be used as a last resort. If it is used, it should be a temporary measure followed by a long term structural adjustment program in the economy,” he added.

U Than Lwin, an advisor of Kanbawza Bank (KBZ) and former CBM vice governor, told The Myanmar Times, said “there will always be a shortage of dollars to meet domestic needs as Myanmar currently imports more than it exports.” 

In that light, the CBM appears to be on the right track in managing longer term stability. 

 

(The Myanmar Times: https://www.mmtimes.com/news/cbm-permits-trading-dollar-swaps-says-local-banks-reason-kyat-drop.html )