The official currency reference rate of the Central Bank of Myanmar jumped to Kyat 1,200 to meet the market rate

17 กรกฎาคม 2558

Central Bank of Myanmar amended the reference rate to be in line with the market price on July 13, in order not to have multiple exchange rates for foreign currency,” said a Central Bank statement seen by The Myanmar Times.

Between April 2012, when Myanmar adopted a managed floating exchange rate and October 2014, the The Central Bank reference rate moved to K1200, from July 12’s rate of K1125. On the same day, the unofficial market rate was between K1210 and K1215 at foreign exchange (FX) vendors across Yangon.

“The gap between the reference rate and the market rate was just 0.1 percent, according to the Central Bank note, issued yesterday. “But due to strength in the US dollar and other factors within Myanmar, the average gap between the reference rate and the market rate from January to June 2015 was 3.1pc,” it said.

At certain points, the difference had grown even larger. On June 11, for instance, the midday exchange rate was around K1267, though the official rate was K1105 – a difference of 15pc. Since it is illegal to trade outside a band of plus or minus 0.8pc of the official rate, many businesses were stuck with attempting to obtain FX from the parallel market, as banks were reluctant to openly contravene the law.

The Central Bank rate is officially set each day following an auction of US dollars to domestic banks. The average bidding rate is used as the official reference rate for the market. Bankers say that they were told during yesterday morning’s auction that the market rate was K1200 and that their bids should reflect this.

“Now we have decided to let the FX auction discover the market price so that our reference rate will reflect the market prevailing rate,” said a senior Central Bank official. “Today, we have allowed the banks to bid at the rate around the market rate and have sold the entirety of the amount bidded.”

High level meetings were reportedly held yesterday between the Central Bank and domestic banks, with the Central Bank saying it would supply whatever US dollars were needed, according to bankers.

The Central Bank official confirmed that sufficient US dollars would be provided, at least for essential imports. “The amount of foreign currency bid by the banks is required by importers of all products and for other currency transactions. We will keep on selling the foreign currency required by importers of fuel and palm oil importers to the banks,” he said.

In late June, the Central Bank began to sell US dollars through domestic banks to businesses importing two essential items – fuel and palm oil – after fears escalated that the supply of foreign currency was drying up. Some believed this created an unequal playing field, as giant fuel and palm oil import businesses were able to access US dollars at the official rate, which was stronger than the informal rate.

“We had to buy our imports at K1200 to the US dollar, but now it seems as if it will be equal again for all of us,” said the chair of the Myanmar Automobile Manufacturers and Distributors Association, U Soe Tun.

The next step for the Central Bank is to start tightening monetary policy in order to suck up some of the kyat liquidity from the market, according to the senior Central Bank official. “Furthermore, we will soon come up with instructions for banks to abide by strict prudential Basel requirements to control credit growth, improve credit quality and enhance financial stability,” he said.

Basel requirements are a set of international banking regulations developed by the Bank of International Settlements, which help to promote stability in domestic and international financial markets.

The decision to amend the reference rate in line with the market rate coincided with a celebration of the second anniversary of the Central Bank of Myanmar Law, which was held in Nay Pyi Taw at the weekend, according to sources. They said the decision to amend the reference rate was made in collaboration between the President’s Office and Central Bank officials.

The announcement has been welcomed by businesspeople and bankers alike. U Mya Than, chair of Yangon Foreign Exchange Market Committee, said that an official rate that reflects market demand will help to boost the foreign exchange market, which will no longer have to rely on Central Bank supply.

“Now even exporters and banking customers can become involved again in the official market, and it will help bank-to-bank transactions as well,” he said, adding that a unified rate will also help to deepen the foreign exchange interbank market.

“The important thing is to control speculators who take advantage of policy changes,” he said, adding that the Central Bank could check daily statements filed by banks and monitor bidding activities during the auctions, to prevent undue speculation. Others say the policy decision will help support the kyat.

“We’re likely to see more stability in the kyat and perhaps even a slight strengthening,” said Joe Barker-Bennett, consultant at Tun Foundation Bank. “As people realise that business is back to normal, they will stop hoarding US dollars, which will reduce the downward pressure.” It remains to be seen whether a unified rate will help to ease the recent inflation of basicCOMMODITIES PRICES, he said.

For the past few weeks, pressure has been building for the Central Bank to set a more flexible reference rate that reflects market conditions, he added. The International Monetary Fund (IMF), for example, recommended a more flexible reference rate, in a July 1 statement following its annual Article IV Consultation Mission to Myanmar.

“A more flexible Central Bank reference rate that reflects market conditions and closes the gap between the reference rate and parallel market rates would help contain demand and bring back the supply of foreign exchange to the market,” said the statement. “Central Bank FX sales to importers should occur at competitively determined market rates to reduce risks of excessive drains on international reserves.

U Soe Tun said that most importers welcome the change in policy, except for crony businesspeople. “The rates set previously were ridiculous, as importers were unable to buy at the same value as they could sell,” he said.

U Ko Ko Lay, executive director of Three Friends Company, which imports construction materials, said that companies have been trading at the unofficial rate. “The price of construction materials went up 20pc because of the exchange rate instability and a shortage in US dollar supply, so we hope the government will try to stabilise the currency,” he said.

Source: http://www.mmtimes.com/index.php/business/15487-central-bank-s-kyat-rate-jumps.html