Academic journal article Journal of Southeast Asian Economies

Foreign Exchange Market Reform in Myanmar: Achievements and Challenges

Academic journal article Journal of Southeast Asian Economies

Foreign Exchange Market Reform in Myanmar: Achievements and Challenges

Article excerpt

I. Introduction

Among the gamut of political and economic reforms launched by President Thein Sein's government since March 2011, the series of reforms affecting the foreign exchange market has yielded the most visible changes. The official pegging of the Myanmar kyat, the legal tender of Myanmar, to the special drawing right (SDR) of the International Monetary Fund (IMF) was abolished in April 2012. Thereafter, the Central Bank of Myanmar (CBM) initiated a managed floating exchange system comprising daily foreign exchange auctions with authorized dealer banks (IMF 2013b). The official rate in terms of kyat per U.S. dollar was devalued from K5.561 at the end of March 2012 to K818 on 2 April 2012. Apart from that, the reforms include a removal of the so-called "export-first and import-second" policy and the redemption of foreign exchange certificates (FECs). While these changes are highly visible, the substantive effects of the reforms on real economic activities are not so clear.

Myanmar's pre-reform foreign exchange system had at least two features that exerted adverse effects on the economy. First, administrative controls on foreign exchange and trade segmented the foreign exchange market into the public and private sector, and further segmented the latter into several parts. Different exchange rates were applied in different segments, resulting in the inefficient allocation of resources. Secondly, there was no formal channel for exporters and importers in the private sector to convert currencies, which led them to transact in a parallel market, where exchange rates exhibited high volatility.

This paper examines the extent to which market reforms dismantled the above-mentioned features of the foreign exchange market and outlines the challenges that remain. The remainder of this paper is structured as follows: section II offers an overview of Myanmar's foreign exchange market before the reform and discusses two of its principle issues. Section III sheds light on the reform measures and examines how they have alleviated these issues. Section IV identifies the persistence of the parallel market as a remaining challenge and offers countermeasures to curtail it. Section V ends with concluding remarks.

II. Overview of the Foreign Exchange Market before Reforms

This section provides an overview of the administrative controls on foreign exchange and trade in Myanmar and how they shaped the foreign exchange market prior to reforms. These administrative controls are categorized into those affecting the public sector and those affecting the private sector. II. II.

II. 1 Public Sector

Controls on the public sector were largely a legacy of the socialist regime that had lasted until 1988. Before the beginning of the transition to a market-based economy in September 1988, formal foreign trade was monopolized by state economic enterprises (SEEs). In the socialist regime, foreign exchange revenues of exporting SEEs were surrendered to the state budget in principle and they were reallocated only within the public sector. The foreign exchange budget was administered separately from the kyat budget. Even within the public sector, not to mention the private sector, Myanmar kyat was not convertible into foreign exchange, and SEEs could not convert their kyat budget into foreign exchange at the official rate. This official rate was for fiscal accounting of the foreign exchange budget.

Myanmar's transition from a planned to a market-based economy (during the reign of the previous military government in power from 1988 to 2011) was only partial, as it postponed key reforms of SEEs and merely emphasized the creation of new private firms and activities (Kubo 2013b). In addition, the centralized foreign exchange allocation system within the public sector remained intact. As was the case during the socialist regime, the official exchange rate was used for fiscal accounting of foreign exchange transactions in the public sector (Hori and Wong 2013; IMF 2013a). …

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