As the economy deteriorates, Myanmar faces currency devaluation and dollar tightening | Business and Economic News

In the context of an unprecedented dollar shortage, Myanmar is struggling with the collapse of its local currency, which has pushed up the cost of imports and worsened the economy’s struggle with the dual challenges of pandemic and post-coup financial isolation.

Since the military seized power in February, the kyat has fallen by about 50%, which triggered the freezing of part of Myanmar’s US foreign exchange reserves and the suspension of multilateral aid-both of which are the main sources of foreign exchange supplies. Analysts said that withdrawal restrictions exacerbated concerns about the safety of bank funds, prompting people to seek more widely used currencies such as the U.S. dollar, Singapore dollar or Thai baht.

The Central Bank of Myanmar’s efforts to quell the dollar boom, including increasing foreign exchange supplies and ordering exporters to repatriate income within 30 days, failed to prevent the Kyat’s decline. Jason Yeke, senior Asian country risk analyst at Fitch Solutions, said that by the end of this year, the yuan may fall to US$2,400 against the US dollar, and to US$3,200 by the end of 2022.

After the civilian government led by Aung San Suu Kyi stepped down, the country is still struggling to deal with street protests, and the currency sell-off is the latest crisis to hit the country. The nationwide Covid restriction and the civil disobedience movement of Aung San Suu Kyi’s followers have hit normal economic activities, and exports of everything from textiles to agricultural products (another source of foreign exchange) are shrinking.

“It is difficult to predict when this financial crisis will end,” said Khine Win, a public policy analyst who focuses on Myanmar’s economic governance. “Only the restoration of democracy and a legitimate government can release the international assistance Myanmar needs to deal with this crisis, but it is difficult to see this happen.”

The devaluation of the currency has already had an impact on Myanmar’s economy, and some companies have closed down because they are unable to cope with the rising cost of imports and raw materials. According to the ASEAN+3 Macroeconomic Research Office, the economy is expected to shrink by 18.7% in the fiscal year ending September 30. Yek of Fitch Solutions said that although the official exchange rate of the U.S. dollar was 1,965 kyats last week, the local fund manager’s offer was 2,200-2,300 kyats.

Yek said that although the central bank did not disclose the level of its foreign exchange reserves, the recent decline in the kyat indicates that after months of trying to support the currency, “it may have fallen to an unstable low level.”

Win Thaw, deputy governor of the Central Bank of Myanmar, said on Monday that due to the recent measures taken by the authorities and the increase in export revenue in November and December, currency fluctuations are expected to ease soon.

A few days after the coup, the United States froze the $1 billion held by the Federal Reserve Bank of New York, while the World Bank and the International Monetary Fund suspended funding for the project, and Myanmar’s reserves decreased accordingly. In order to protect domestic foreign currency, the authorities suspended passenger car imports last month and revised the foreign exchange law last week.

But Vicky Bowman, director of the Myanmar Center for Responsible Business, said that implementing more control will further weaken investor confidence in Myanmar, and exporters will find ways to keep hard currency overseas.

“The root cause of the foreign exchange tightening is the collapse of investor confidence in Myanmar and the suspension of development assistance since February,” Bowman said. “If there is no political solution that leads to the restoration of loans and restoration of confidence in the country, it will be difficult for the kyat to recover.”

As multinational companies are increasingly worried about doing business with the military government and some companies are preparing to exit, foreign direct investment in Myanmar has decreased. Reversing this trend will be the key to reversing the fate of the kyat.

“We haven’t seen any foreign direct investment coming in. As long as the military continues to be in power, the trend of the devaluation of the kyat may continue,” Khine Win said. “This may drag more middle class below the poverty line.”

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