On Monday, July 13, 2015, the Central Bank of Myanmar made a
favourable decision to narrow the gap between the reference exchange
rate and market rate. It is a good occasion for us to reconsider whether
or not we should worry about the weakening of Myanmar kyat against US
dollar.
In less than three months, since April 2015, the Myanmar kyat weakened against the US dollar by 13 percent, from K1082 per US dollar on April 2 to K1225 on June 10. Such changes in exchange rate are a vital sign of the economy like a fever of a human body, indicating changes in economic conditions of the country. Before worrying about the weakening kyat itself, we should consider the causes of the weakening kyat, and if necessary, address the causes rather than hold down the exchange rate by force.
There are several suspects of the cause of a weakening kyat. The usual suspects are inflation and state budget deficits. We were familiar with these in the past; budget deficits were financed by printing kyat notes, which caused high inflation, and the kyat became weaker along with it. As people anticipated inflation, those who could afford maintained dollar assets, aggravating exchange rate instability. However, budget deficits are under control now, and inflation is not so high anymore. We can dismiss these usual suspects.
Another set of suspects are the expanding imports and trade deficits. Since the alleviation of controls on car imports and the abolition of the “export-first and import-second” policy in April 2012, the growth in private imports by far exceeded the growth in private exports, resulting in widening trade deficits. So far Myanmar mostly relies on own funds to finance imports, not on borrowings from foreign countries. Furthermore, the weakening kyat would discourage people from buying import goods as it would raise prices of imports.
As long as the weakening kyat is due to the expanding imports, it is a healthy development, conducive to inclusive growth. The weakening kyat signifies that Myanmar goods are getting cheaper for foreigners. It thus improves the competitiveness of Myanmar’s non-resource exports including rice, pulses and beans, marine products, and garments, which generate employment and income for ordinary Myanmar people. To maintain competitiveness of their exports, many developing countries including China fear strengthening of their currencies rather than weakening. At the same time, resource-rich countries often suffer from too much strengthening of their currencies, which hamper growth in their non-resource exports. In conclusion, the weakening of kyat in the reform period is not a worrisome problem.
Koji Kubo is senior research fellow at the Institute of Developing Economies, Japan External Trade Organization (IDE-JETRO), currently assigned to JETRO Bangkok.
In less than three months, since April 2015, the Myanmar kyat weakened against the US dollar by 13 percent, from K1082 per US dollar on April 2 to K1225 on June 10. Such changes in exchange rate are a vital sign of the economy like a fever of a human body, indicating changes in economic conditions of the country. Before worrying about the weakening kyat itself, we should consider the causes of the weakening kyat, and if necessary, address the causes rather than hold down the exchange rate by force.
There are several suspects of the cause of a weakening kyat. The usual suspects are inflation and state budget deficits. We were familiar with these in the past; budget deficits were financed by printing kyat notes, which caused high inflation, and the kyat became weaker along with it. As people anticipated inflation, those who could afford maintained dollar assets, aggravating exchange rate instability. However, budget deficits are under control now, and inflation is not so high anymore. We can dismiss these usual suspects.
Another set of suspects are the expanding imports and trade deficits. Since the alleviation of controls on car imports and the abolition of the “export-first and import-second” policy in April 2012, the growth in private imports by far exceeded the growth in private exports, resulting in widening trade deficits. So far Myanmar mostly relies on own funds to finance imports, not on borrowings from foreign countries. Furthermore, the weakening kyat would discourage people from buying import goods as it would raise prices of imports.
As long as the weakening kyat is due to the expanding imports, it is a healthy development, conducive to inclusive growth. The weakening kyat signifies that Myanmar goods are getting cheaper for foreigners. It thus improves the competitiveness of Myanmar’s non-resource exports including rice, pulses and beans, marine products, and garments, which generate employment and income for ordinary Myanmar people. To maintain competitiveness of their exports, many developing countries including China fear strengthening of their currencies rather than weakening. At the same time, resource-rich countries often suffer from too much strengthening of their currencies, which hamper growth in their non-resource exports. In conclusion, the weakening of kyat in the reform period is not a worrisome problem.
Koji Kubo is senior research fellow at the Institute of Developing Economies, Japan External Trade Organization (IDE-JETRO), currently assigned to JETRO Bangkok.
Myanmar Kyat Exchange Rate
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