Kyat falls to record low

The kyat hit a record low on June 5 with the official reference rate at 1,105 per US dollar and there is no end in sight given a long list of factors.
On the previous day, the reference rate was 1,097. 
The Friday rate represented a 35 per cent fall from the first reference rate of 818 when the managed float system took effect on April 1, 2012. That was the first blow to importers as under the old system, the official dollar-kyat rate was fixed at 6.4236 to the dollar.
Compared to the 1,025 rate at the beginning of the year, the kyat has weakened by 7.8 per cent so far this year.

The Central Bank of Myanmar recently issued a circular, instructing government agencies to complete their transactions in the kyat, instead of dollars.
The May 28 instruction told government officers to use the kyat in buying and selling goods and services inside the country.
“Using the US dollar in such cases may lead to dollarisation, higher demand for US dollars and the depreciation of the kyat, which are the major causes of an unstable exchange rate that can also harm the nation's financial stability,” said the circular signed by Set Aung, the deputy governor.
The instruction was announced following the recent sharp depreciation against the dollar.
Complaints are rife as the downward trend continues since the currency unification was introduced after decades of multiple fixed exchange rates.
 
Dollar in high demand

The dollar has been in high demand due to its recent appreciation against other currencies, including the kyat.
“The recent kyat depreciation is primarily driven by the global strengthening of the US dollar and a widening external current account deficit,” said Yongzheng Yang, chief of the International Monetary Fund’s mission to Myanmar, as the team completed an economic review in February.

A Reuters poll of foreign exchange strategists suggested that the dollar upswing would gain speed next month, depending on economic data and the timing of a Federal Reserve interest rate hike.
Fed Reserve chair Janet Yellen is expected to set the stage for a hike in the third quarter at the next policy meeting. The Fed has said that a rate rise, which most economists expect will come in September, would be dependent on improving economic data. Its employment report could provide a spark if new jobs created in May exceed the 225,000 market consensus.

The United Overseas Bank expects the dollar to further appreciate against the euro, from 1:1.09 in the second quarter to 1.03 in the fourth quarter.
The dollar has strengthened by over 7 per cent against the euro this year. The greenback has also gained 7.19 per cent against the Indonesian rupiah and over 5 per cent against the Malaysian ringgit. Thanks to recent rate cuts in Thailand which enjoys a huge current account surplus, its gain against the Thai baht has been lower, at 2.4 per cent. It has appreciated by about 1 per cent against the Singapore dollar and less than 0.5 per cent against the Philippine peso.

Myanmar economists have attributed the kyat depreciation mainly to the fast growth of imports which led to a widening current account deficit. World Bank data showed that the deficit has steadily grown, from 1.9 per cent of gross domestic product (GDP) in 2011 to 5.3 per cent in 2014. It is forecast to slowly shrink to 5.1 per cent in 2015, 5 per cent in 2016 and 4.9 per cent in 2017.

The deficit indicates the scarcity of dollars in the country, sparking huge demand just as the export income cannot cover import bills.
While the value of exports has remained under US$10 billion per annum, Myanmar's import bills exceeded US$10 billion for the first time in 2012 when the bills hit US$13.26 billion. The amount swelled to US$15.7 billion in 2013.
The growth of imports has outstripped foreign direct investment (FDI), which has just gained momentum in the past few years. In the 2014-15 fiscal year, ending in March, FDI into Myanmar was US$8.01 billion.

In May, dollar hoarding was mentioned as another cause of the kyat depreciation.
Some traders said that dollars are only available on the black market as domestic banks and official currency exchange counters with licences from the central bank have stopped selling the currency.

Ko Thiha, a trader at Yuzana Plaza and Mingalar market, said: "It's been a month since I bought dollars at the government's official exchange counters. Today, I went to those counters but they did not sell the currency. They said they had nothing to sell. There are many exchange counters near Yuzana Plaza and Mingalar market but I could not buy dollars from them or any banks."
He speculated that big banks are manipulating the market on purpose. Ensuring the scarcity of the US dollar will only drive up demand for the greenback and the exchange rate.

An Asian Development Bank’s report “Reforming Central Bank Functions in Myanmar” said due to limited access to foreign currencies, domestic banks, which were allowed in 2013 to operate foreign exchange business, would tend to prefer accumulating foreign currency to strengthening their foreign exchange position.

The scarcity of the dollar has driven up the exchange rate beyond the official reference rates. At present, licensed dealers can quote exchange rates between 0.8 per cent plus or minus the central bank’s reference rate. The 0.3 per cent spread is applicable for wholesale authorised dealers.
 
On April 28, when the official exchange rate was 1,075 per dollar, dealers quoted the selling rate at 1,090. On the following day when the official rate went up to 1,078, the selling rate accordingly rose to 1,093. As the official rate edged up to 1,080 on May 5, the selling rate went up to 1,105.
 
Impacts on fiscal stance
The stronger the dollar, the higher Myanmar’s fiscal deficits will be.
In the past three years, the country has been seeking foreign loans, international aid and grants to finance massive infrastructural development, as tax revenue stays low. The IMF estimate puts Myanmar’s tax-to-GDP ratio at about 7 per cent and non-tax revenues, including net transfers from state enterprises, at 15-16 per cent. This requires the government to set its budget in accordance with the expected dollar-kyat rate, the action which is branded by the central bank as “budgetary assumption rate”.
In the 2014-15 fiscal year, the rate of Ks950-Ks980 was used as the reference.
For 2015-16, the Ks1,020 rate was applied as the budget bill was drafted during September and October 2014.
It is feared that government agencies will ask for more cash, as budgets in kyat terms dwindle.
“Prioritising spending and increasing tax revenues will be imperative to contain the 2015-16 budget within the authorities’ target of 5 per cent of GDP deficit … The government will need to increase its efforts to broaden the tax base, improve tax compliance and minimise exemptions,” said Yongzheng Yang of the IMF.

Myanmar witnessed a budget deficit of Ks215.9 billion in 2011-12 before it skyrocketed to Ks2.75 trillion in 2014-15. During that year, government agencies also asked for budgetary boosts, sending the deficit to over Ks3.6 trillion.
In 2015-16, government expenses are fixed at Ks20.29 trillion, up from Ks19.44 trillion the previous year. Ministries and agencies faced a combined cut of Ks214 billion, covering the Home Affairs, Agriculture and Irrigation, Livestock, Fisheries and Rural Development, Sports, Education, Finance and Construction ministries and state-owned enterprises under the Ministry of Information.

Despite the cut, the budget deficit will hit Ks3.6 trillion, a record high during President Thein Sein’s term. During his tenure, expenditure has risen every year: by Ks4.1 trillion in 2011-12; Ks5.3 trillion in 2012-13; Ks1.5 trillion in 2013-14; Ks4.5 trillion in 2014-15 and nearly Ks1.2 trillion in 2015-16.