January 10, 2024
Myanmar has experienced significant political and economic changes since the military junta took power in the 2021 coup. The business environment's decline, coupled with foreign sanctions, has resulted in a sluggish growth rate of 3%, well below pre-coup levels. In response to this slowdown, the junta has incurred substantial fiscal deficits, largely financed by the central bank's monetization, causing inflation to soar above 20%. Another blow to the already fragile economy and external balance occurred in October when opposition forces launched a large-scale, coordinated offensive, disrupting a significant portion of land-based cross-border trade.
In an attempt to mitigate the short-term consequences of economic deterioration, the junta implemented a series of restrictions, creating significant distortions in interest and foreign exchange markets. The most notable examples of these FX restrictions include very limited options for citizens to buy FX (requiring an approved reason to travel abroad and a maximum purchase of 500 USD), licensing foreign exchange trade to selected companies with conditions tied to approved conversion rates, mandatory foreign exchange surrender requirements for converting export revenue, and recently, requiring citizens abroad to remit 25% of their foreign exchange income back home.
These complex foreign exchange controls have given rise to a highly unusual system of multiple exchange rates coexisting in the economy. Alongside the existing black market FX, the Central Bank of Myanmar (CBM) began publishing daily “official” parallel FX rates by aggregating transactions reported by commercial banks to the “Online forex trading platform,” established by the CBM in June 2023. The exchange rates on this online platform are preferential and accessible to selected market participants, primarily exporters and importers. The CBM maintains some degree of control over the rates used in these transactions. The volumes traded on the platform are substantial, estimated to be around 50% of the country’s exports, significantly impacting the effective exchange rate faced by economic participants. Additionally, the mandatory foreign exchange income remittance conversions by citizens abroad are also subject to preferential exchange rates, aimed at encouraging workers to declare their income.
We believe that the authorities' introduction of this complicated exchange rate system merely postpones the impact of an overvalued currency on the external balance. Due to sustained mounting pressures, we expect the CBM to be compelled to devalue the official exchange rate from its current level of 2100 MMK per USD, thereby alleviating the adverse effects of the prevailing substantial market distortions.
