Unification of the Segmented in Myanmar

February 2013 Koji KUBO Institute of Developing Economies (IDE-JETRO)

1 Research Questions

• Does the move to a managed float exchange rate system in April 2012 signify the unification of the foreign exchange market? • What are remaining challenges for the unification of foreign exchange market?

2 Outline of Presentation

1. Unified foreign exchange market and segmentation: Benchmark case 2. Market structure before the reform 3. Reform and remaining challenges 4. Policy recommendations

3 Section 1 UNIFIED FOREIGN EXCHANGE MARKET AND SEGMENTATION

4 1. Unified foreign exchange market: benchmark case

Central

Interbank Market

Authorized Authorized Authorized Dealer Bank Dealer Bank Dealer Bank

Money Money Changer Changer

Household Household Exporter Importer

5 2. Causes of segmentation

1. Price (exchange rate ) controls – Pegged rate and parallel rate 2. Regulations – Regulations on the uses and sources of foreign exchange • Ban on capital account transaction • ‘export-first, import-second’ policy (export earnings and greenbacks)

6 3. Why is segmentation a problem?

• Implicit tax on exporters and implicit subsidies on importers • Price distortion and inefficient resource allocation • Financial authorities cannot control all segments.

7 Section 2 MARKET STRUCTURE BEFORE THE REFORM

8 Two segmentations in Myanmar

1. Between public and private sectors – Official exchange rate in the public sector – Parallel exchange rates in the private sector

2. Within private sector – Export earnings for import license (Foreign Deposits) – Dollar (greenback) – FEC

9 Fragmented foreign exchange market in private sector

State Account transfer of FCD Exporters Importers

Payment in kyat

Illicitly held USD Exporters Importers

Kyat

10 The gaps among greenback, export earnings and FEC used to fluctuate.

1400 US dollar, dealer selling rate

1300 FEC, dealer selling rate FCD, dealer selling rate 1200

1100

1000

900 kyats per kyats US dollar 800

700

600 100216 100423 100618 100816 101012 101207 110208 110405 110610 110809 111004 111205 120209 070815 070923 071105 080103 080303 080508 080703 080828 081023 081222 090224 090505 090630 090825 091019 091214

11 Section 3 REFORM AND REMAINING CHALLENGES

12 1. Reform under the new government

• October 2011: opening of foreign exchange counter • November 2011: authorized dealer bank license to 11 banks (later 14 banks) • April 2012: move to managed float system – Daily announcement of reference rate – Auction of foreign currency with AD banks • April 2012: abolition of ‘export first’ policy • August 2012: permission of int’l banking services at private AD banks • December 2012 : money changer license to non-banks

13 Mark-up of export earnings disappeared in May 2012, but there were some gaps among rates.

900

890

880

870

860

850 kyat/USD 840 Parallel Rate (Money changer USD selling rate) 830 Exchange Counter (Bank USD selling rate) 820 CBM Reference Rate Export Earning Rate (Broker USD selling rate) 810 120921 120928 121008 121015 121101 121108 121119 121129 121210 121219 130107 130115 130125 120402 120409 120429 120514 120521 120530 120611 120621 120629 120706 120716 120725 120801 120810 120820 120830 120907 120914

14 2. Remaining challenges (1)

• Segmentation between public and private sectors

• Segmentation within private sector – Price gap – Large parallel market: Banking sector is not intermediating the foreign exchange transactions. • AD banks do not buy export earnings from exporters. – CBM purchased USD 435 million in last 10 months. (small market intervention.) – Size of foreign currency deposits is USD 7,384 million. – Total private exports are around USD 3 to 5 billion a year.

15 2. Remaining Challenges (2)

• Can CBM influence the parallel market rate? – As CBM trades only with AD banks, unless AD banks trade with retail customers, CBM can’t influence the exchange rate of retail market. – Domestic account transfer and parallel market for export earnings

16 Section 4 POLICY RECOMMENDATIONS

17 Policy Recommendations for unification of foreign exchange market • Encourage exporters to sell their foreign exchange to banks, and encourage importers to buy foreign exchange from banks 1. Tax on domestic account transfer of export earnings 2. Discount market of L/C 3. CBM’s commitment to convertibility • Larger intervention when necessary 4. People’s expectation on stable exchange rate (when kyat is weakening, people do not release dollar)

18 Thank you for listening!

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