unification of the segmented foreign exchange market in myanmar february 2013 koji kubo institute of...
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Unification of the Segmented Foreign Exchange Market in Myanmar
February 2013Koji KUBO
Institute of Developing Economies (IDE-JETRO)
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Research Questions
• Does the move to a managed float exchange rate system in April 2012 signify the unification of the foreign exchange market?
• What are remaining challenges to establish the ground for exchange rate policies?1. Transmission channel2. Market instruments
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Outline of Presentation
1. Unified foreign exchange market and segmentation: Benchmark case
2. Market structure before the reform3. Reform and remaining challenges4. Policy recommendations
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UNIFIED FOREIGN EXCHANGE MARKET AND SEGMENTATION
Section 1
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1. Hypothetical benchmark:banks are in the middle. (1/2)
Household Household
Money
Changer
Exporter Importer
Money
Changer
Authorized
Dealer Bank
Authorized
Dealer Bank
Authorized
Dealer Bank
Central
Bank
Interbank Market
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1. 1. Hypothetical benchmark:banks are in the middle. (2/2)
• Foreign exchange dealer banks as main counterparties
• Transmission channel of exchange rate policies
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2. Causes of segmentation
1. Price (exchange rate ) controls– Pegged rate and parallel rate
2. Regulations– Regulations on the uses and sources of foreign
exchange• Ban on portfolio investment• ‘export-first, import-second’ policy (export earnings and
US dollar cash)
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3. Why is segmentation a problem?
• Implicit tax on exporters and implicit subsidies on importers
• Price distortion and inefficient resource allocation
• Block transmission channel: Financial authorities cannot control all segments.
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MARKET STRUCTURE BEFORE THE REFORMSection 2
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Two segmentations in Myanmar
1. Between public and private sectors– Official exchange rate in the public sector– Parallel exchange rates in the private sector
2. Within private sector– Conditionality of import licensing• Export earnings (Foreign Currency Deposits)• Dollar cash• Foreign exchange certificate (FEC)
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The gaps among export earnings, US dollar cash, and FEC
600
700
800
900
1000
1100
1200
1300
1400
0708
1507
0923
0711
0508
0103
0803
0308
0508
0807
0308
0828
0810
2308
1222
0902
2409
0505
0906
3009
0825
0910
1909
1214
1002
1610
0423
1006
1810
0816
1010
1210
1207
1102
0811
0405
1106
1011
0809
1110
0411
1205
1202
09
kyat
s pe
r U
S do
llar
US dollar, dealer selling rate
FEC, dealer selling rate
FCD, dealer selling rate
Cyclone Nargis
Source: Japan External Trade Organization, Yangon Office
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Transactions took place outside the banking system.
State Banks
Formal
Exporters
Formal
Importers
Account transfer of
FCD
Payment in kyat
Informal
Exporters
Informal
Importers
Illicit dollar
kyat
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REFORM AND REMAINING CHALLENGESSection 3
1. Reforms under the new government
• October 2011: opening of money change counter• November 2011: foreign exchange dealer license to 11
banks (later 14 banks)• April 2012: move to a managed float system
– Daily announcement of Central Bank reference rate– Auction of foreign currency with AD banks
• April 2012: abolition of ‘export first’ policy• August 2012: permission of int’l banking services at
private AD banks• December 2012: money changer license to non-banks
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Mark-up of export earnings disappeared in May 2012, but there were some gaps among rates.
800
810
820
830
840
850
860
870
880
890
900
1204
0212
0409
1204
2912
0514
1205
2112
0530
1206
1112
0621
1206
2912
0706
1207
1612
0725
1208
0112
0810
1208
2012
0830
1209
0712
0914
1209
2112
0928
1210
0812
1015
1211
0112
1108
1211
1912
1129
1212
1012
1219
1301
0713
0115
1301
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kyat
/US
dolla
r
Parallel Rate (Money changer USD selling rate)Exchange Counter (Bank USD selling rate)CBM Reference RateFCD Rate (Broker USD selling rate)FEC Rate (Broker selling rate)
Source: Japan External Trade Organization, Yangon Office
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2. Remaining challenges (1)
• Segmentation between public and private sectors
• Segmentation within private sector– Price gaps– Large parallel market: Banking sector is not
intermediating the foreign exchange transactions.• Domestic account transfer and parallel market• Limited transmission channel of exchange rate policies
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2. Remaining Challenges (2)
• Underdeveloped financial market– Limited instruments for sterilization
Sterilization instruments are limited.Kyat cash is predominant in small financial market.
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Source: IMF, International Financial StatisticsNote: CIC stands for Currency in circulation.
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POLICY RECOMMENDATIONSSection 4
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Policy Recommendations (1) Transmission mechanism
• Encourage exporters to sell their foreign exchange to banks1. Stick: Tax on domestic account transfer of export
earnings2. Carrots: Discount market of L/C3. CBM’s commitment to convertibility• Larger intervention when necessary
4. People’s expectation on stable exchange rate (when kyat is weakening, people do not release dollar)
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Policy Recommendations (2) Instruments for sterilization
• Banking sector development1. Foreign currency deposits as a source of kyat
deposits2. Prohibition of foreign currency loans to prevent
dollarization
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TREND OF REAL EFFECTIVE EXCHANGE RATE
Appendix
Real effective exchange rate: appreciation exceeds 100%
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↑ Appreciation