MYANMAR’S government has been urged to rein in the rise of the kyat and ease the impact of a decline in export competitiveness on the country’s manufacturing and agricultural sectors.
The economy could be in deep trouble, if the exchange rate continues to appreciate against the US dollar, said U Myint, who served as the chief presidential economic adviser in the previous government.
On Tuesday, the market rate set one US dollar at 1,468 kyats, 126 kyats higher than that of July.
“When earnings from exports in local currency are no longer able to cover the costs of production, huge losses are incurred and enterprises have to close down,” U Myint told a public forum.
“When enterprises close down, workers lose jobs, farmers and fishermen cannot sell their products. When they cannot sell their products this year, they will not produce them next year. The economic, social and political consequences of this chain of events can be serious.”
He foresees a decline in the manufacturing and agricultural sectors if the government cannot exert some control over the volatility in foreign exchange.
“Import-substituting industries will suffer because they have to compete with cheaper imports coming into the domestic market,” he said.
According to the economist, a sharp rise in the exchange rate reduces the competitiveness of manufactured and agricultural exports as well as export earnings. As production costs of local manufacturers, including wages and raw materials, have to be met in local currency, Kyat appreciation will lead to a large fall in the earnings of the enterprises.
He considers that the rise in the exchange rate is associated with the so-called Dutch disease, which can turn agriculture and manufacturing into lagging sectors
“With exports in decline and with resources moving away from us, it can cause serious harm to a developing country. There are indications that Myanmar may be suffering from this [Dutch] disease,” he said.
U Myint called for timely action to address the problem by utilising more effective tax collection systems.
“With no proper accounting system for business firms and rampant corruption, the normal way to collect commercial and income tax was impractical,” he said.
“Once normalcy is restored in the exchange market, tax reforms can be carried out so that businesses are appropriately taxed through the normal tax system.”
He wants the authorities to increase transaction demand for dollars by liberalising licensing requirements in trade to bring down the exchange rate. He urges the government to build up its exchange reserves by buying dollars in the domestic market.
He also suggests reducing high interest rates “slowly and cautiously” because an abrupt, big change may lead to large cash withdrawals from banks, resulting in a banking crisis.
He also advises that the government seek technical assistance from the International Monetary Fund (IMF), which is experienced in addressing complex technical issues caused by exchange rate volatility. He urges the government’s cooperation with the IMF to resolve the problem of the kyat’s appreciation against many foreign currencies.
“With large foreign exchange inflows causing exchange rate appreciation, it may be prudent to reduce the frequency of holding gem and jade emporiums,” he said.
In currency and financial crises, rumours, lack of information and deliberate dissemination of misinformation create an atmosphere of confusion and uncertainty in which speculators thrive. It will therefore be helpful if some key macroeconomic data are officially released and published regularly, he added.
These include data relating to inflation, foreign exchange reserves, the balance of payments, the national budget, money supply, growth rate, results of household income and expenditures surveys, foreign direct investment inflows, and foreign trade statistics.
At the event, U Myint stressed the importance of two things essential to reform Myanmar’s exchange rate system: multiple exchange rates should be unified and restrictions removed on the current account transactions of the country’s balance of payments.
He said the central bank should set its reference dollar exchange rate closer to the market rate, by allowing it to have access to 57 per cent of export earnings of the public sector.
“Setting the reference rate, say, at 1,200 kyat per dollar may be a good start to achieve this objective,” U Myint said.