Myanmar is feeling the first effects of a sustained US dollar rally. On July 2, the exchange rate of the Myanmar kyat to the US dollar rose to a new all-time high of 1,127.84.
This is the highest (official) exchange rate for the kyat since April 1, 2012, when Myanmar’s government allowed a managed float of the kyat. Should the US Federal Reserve opt to increase rates in the short-term, the economy could end up in a “perfect storm” of a currency crisis.
For the past nine months, the trade deficit, current account deficit and inflation rate have risen more than forecasts anticipated. Imports are growing too fast and capital inflows are not enough to meet demand for dollars.” Subsequently, confidence in the kyat has weakened.
The Central Bank of Myanmar (CBM) has moved away from the managed floating rate system for the kyat which was introduced with IMF support three years ago, which the IMF now argues has caused Myanmar’s economic reforms to be blown off course.
This has forced the IMF to change its positive outlook on Myanmar’s from nine months ago dramatically.
Falling Kyat Inevitable, says IMF
To defend the weakening kyat, the CBM engaged in multiple interventions over the last few months which significantly reduced the foreign exchange reserves at its disposal.
The IMF warned that last month’s decision to offer a preferential supply of dollars to some importers, such as fuel and food oils, “could deplete CBM foreign reserves very quickly” — bank lending to the private sector increase by 36% over the 2014-15 fiscal year.
“If the US raises its interest rates soon, the US dollar will become stronger and the kyat will be under even greater pressure. This could be exacerbated by declines in world commodity prices. Without a flexible CBM reference rate, which likely means CBM keeps losing reserves, this could lead to a crisis,” the analysis says.
According to the IMF, a further depreciation of the kyat is now inevitable. Thus, the Central bank should put a halt to the purposeful depreciation of the kyat and instead allow a “steady” fall in its value to help make exports more competitive and reduce imports.
Sean Turnell, economist at Australia’s Macquarie University, commented the finding of the IMF , that “This IMF [report] caps off a series of events revealing that, behind the veneer of liberal economic reforms lie the old ways, the old mindset, the old irrationality, the old regime.”
The reflex is still toward command and control command, which prevents Myanmar from getting on track to sustainable growth, believes Sean Turnell.
In response to the IMF statement, the Central Bank yesterday allowed the Myanmar kyat to drop by nearly 1% against the dollar.
Besides the concerns for the kyat, the IMF also stated concerns over the rise in the government budget deficit to an underlying estimated rate of 5.5% of gross domestic product. The IMF emphasized that it was essential for the government tighten its monetary and fiscal policies.
To cut the current deficit, the IMF said tax incentives should be reduced and a significant improvement in tax collection should be aimed for. In addition an “expenditure re-prioritisation” was needed, meaning less spending on the military and more on other sectors like health and education.
The analysis is likely to fuel the policy struggle between reformists and conservatives within the CBM and the government.