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Unification of the Segmented Foreign Exchange Market in Myanmar

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Unification of the Segmented Foreign Exchange Market in Myanmar Unification of the Segmented Foreign Exchange Market 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 Bank 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 Currency Deposits) – Dollar (greenback) – FEC 9 Fragmented foreign exchange market in private sector State Banks Account transfer of FCD Exporters Importers Payment in kyat Illicitly held USD Exporters Importers Kyat 10 earnings and FEC used to fluctuate. to used FEC and earnings kyats per US dollar export greenback, among gaps The 1000 1100 1200 1300 1400 600 700 800 900 070815 070923 071105 080103 080303 080508 080703 080828 081023 081222 090224 090505 090630 090825 091019 091214 100216 100423 USdollar, dealer selling rate 100618 FCD, dealer sellingrate dealer sellingFEC, rate 100816 101012 101207 110208 110405 110610 110809 111004 111205 120209 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 Central Bank 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 Mark-upof export disappeared inMay 2012, but there were some among gaps rates. 2012, butwere there kyat/USD 810 820 830 840 850 860 870 880 890 900 120402 120409 120429 120514 120521 120530 120611 120621 120629 120706 120716 Export Earning Earning Export Rate (Broker USD selling rate) Reference CBM Rate ExchangeCounter (Bank USD selling rate) Rate Parallel (Moneychanger USD selling rate) 120725 120801 120810 120820 120830 120907 120914 120921 120928 121008 121015 121101 121108 121119 121129 121210 121219 130107 130115 130125 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! For inquiries and comments, e-mail to [email protected] 19.
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