Myanmar is battling a collapsing local currency amid an unprecedented dollar shortage, driving up import costs and exacerbating the economic struggle with the dual challenges of the pandemic and financial isolation after the coup.
The kyat has fallen about 50% since the military took power in February, which has resulted in the freezing of parts of Myanmar’s currency reserves in the United States and the suspension of multilateral aid – both important sources of foreign currency deliveries. Restrictions on cash withdrawals have fueled concerns about the safety of money in banks and led people to look for more common currencies like the US or Singapore dollar or the Thai baht, analysts said.
Efforts by the Central Bank of Myanmar to quell the dollar rush, including increasing foreign currency deliveries and asking exporters to return their revenues within 30 days, failed to halt the kyat’s crash. According to Jason Yek, senior country risk analyst at Fitch Solutions, the currency could drop to 2,400 per dollar by the end of this year and 3,200 by the end of 2022.
The currency sell-off is the latest crisis in the country, which is still grappling with street protests following the overthrow of Aung San Suu Kyi’s civil government. Nationwide Covid restrictions and a movement of civil disobedience by Suu Kyi’s supporters have disrupted normal economic activities and contracted exports from textiles to agricultural commodities, another source of foreign exchange.
“It’s really hard to predict when this financial crisis will end,” said Khine Win, a public policy analyst who focuses on economic governance in Myanmar. “Only the restoration of democracy and a legitimate government will unlock the international aid Myanmar needs to deal with this crisis, but it is really hard to imagine this happening.”
The falling currency is already taking its toll on the Myanmar economy, with some businesses closing as they cannot cope with rising import and raw material costs. According to the ASEAN + 3 Macroeconomic Research Office, the economy contracted by 18.7% in the fiscal year ended September 30th. While the official exchange rate for one dollar was 1,965 kyat last week, local money managers listed 2,200-2,300 kyat, said Yek of Fitch Solutions.
Although the central bank does not disclose its currency reserves, the recent drop in the kyat suggests that “it has likely fallen to precariously low levels” after months of trying to prop up the currency, Yek said.
Currency volatility is expected to ease soon due to recent moves by the authorities and higher export earnings in November and December, Win Thaw, an assistant governor for the Central Bank of Myanmar, said Monday.
Myanmar’s reserves dwindled after days after the coup, the US froze $ 1 billion held in the New York Federal Reserve while the World Bank and International Monetary Fund suspended funding for projects. To preserve foreign currencies on land, authorities suspended passenger car imports last month and changed the foreign exchange law last week.
But more controls will further undermine investor confidence in Myanmar and exporters will find ways to hold hard currencies overseas, said Vicky Bowman, director of the Myanmar Center for Responsible Business.
“The root cause of the foreign exchange crisis is the collapse of investor confidence in Myanmar and the suspension of development aid since February,” said Bowman. “Without a political solution that will resume lending and restore confidence in the country, it will be difficult for the kyat to recover.”
Foreign direct investment in Myanmar had declined as multinational corporations became more cautious about doing business with the military regime and some headed for exit. Reversing this trend will be key to reversing the fate of the kyat.
“We are not seeing any foreign direct investment and the trend towards devaluation of the kyat could continue as long as the military remains in power,” said Khine Win. “This could pull more middle-class people below the poverty line.”