* Managed float was introduced in April
* Currency has surged as resources investment has come in
* Much more foreign investment coming as sanctions eased
* Foreign banks to be allowed to form joint ventures
By Jason Szep and Aung Hla Tun
NAYPYITAW, Myanmar, May 18 Myanmar's central
bank wants to weaken its newly floated currency and prevent
further rises that could derail reforms to its economy, a deputy
central bank governor said.
Nay Aye, one of two deputy governors, added that foreign
banks will be able to form joint ventures in Myanmar by 2014, a
year earlier than expected, as foreign investors begin to size
up one of Asia's most promising frontier markets following the
suspension of U.S. and European sanctions.
April's floating of the currency, the kyat, was the biggest
economic policy step in a year of dramatic change. Managing the
kyat poses an extraordinary challenge for reformers
struggling to rebuild an economy blighted by decades of
mismanagement and hurt by trade-crippling sanctions.
The International Monetary Fund cautioned in a report this
month that the kyat had been overvalued by as much as 40 percent
this year, and that any further rise could hurt the economy.
Asked if he would like to bring down the currency's value,
Nay Aye said "yes", noting the central bank was developing a
fund for carrying out open-market operations and stabilising the
"In the near future there will be a massive inflow of
foreign direct investment, and as a result Myanmar's kyat is
expected to appreciate. We will do our best to prevent this," he
told Reuters in an interview.
Currency reform is a delicate task in Myanmar. In 1987, the
sudden cancellation of certain banknote denominations by late
dictator General Ne Win wiped out many people's savings and
helped trigger a pro-democracy uprising the following year
crushed by the military, killing thousands.
But much has changed since then, signified by this month's
swearing-in of pro-democracy leader Aung San Suu Kyi in a
parliament stacked with some of the same generals who locked up
the Nobel Peace Prize winner for much of the past two decades.
President Thein Sein, a reformist former general, has urged
parliament and his cabinet to pursue the most breathtaking
reforms in the former British colony since a 1962 military coup
when it was known as Burma.
These include the freeing of hundreds of political
prisoners, an easing in media controls and peace deals with
groups of armed ethnic minorities.
Nay Aye said a new foreign currency management law that
would further lift trading restrictions on the currency had been
approved by parliament and would be enacted soon, making it more
freely traded and further curbing the black market.
The managed float of the kyat was intended to unify a
chaotic array of informal exchange rates that had surged in
value from more than 1,000 per dollar in 2009 as money flowed
into the timber, energy and gem industries, mostly from China.
The central bank now sets a reference rate after a daily
currency auction involving 17 dealer banks, a first step towards
developing a formal interbank market. The reference rate was
835 kyat per dollar on Friday, compared with 818 on April 2, the
first day of the managed float.
Exporters say those levels make their goods uncompetitive.
ACCELERATING BANK REFORM
Speaking at the central bank's headquarters in the capital,
Naypyitaw, Nay Aye added that foreign banks would be allowed to
form joint ventures in Myanmar from 2014, a year before
Southeast Asian countries are expected to formally integrate
Despite a year of wide-ranging political reforms, Myanmar's
government has been slow to revise laws on the growing number of
foreign banks clamouring to tap the country of 60 million
people, whose natural gas, minerals and other resources make it
one of Asia's most tantalising new markets.
As the United States and European Union lift economic
sanctions, foreign banks remain limited to representative
offices that can do little more than conduct research.
Nay Aye said in 2014, banks from countries in the 10-member
Association of Southeast Asian Nations (ASEAN) will be allowed
in, with banks from other countries following afterwards. But
the central bank is seeking to change regulations to allow
foreign banks from elsewhere to form joint ventures in 2014.
"The ASEAN integration process requires allowing qualified
banks from ASEAN to open branches in the country with effect
from 2014. We are doing our best to be able to fulfil this
requirement," Nay Aye said. "Especially we are thinking of
allowing joint-ventures with foreign banks and branches of
"This is something we have to carry out after laying down
firm rules, regulations and procedures," he added. "At the first
stage, ASEAN banks will be allowed under ASEAN financial
integration process and at the second stage banks from other
regions beyond ASEAN."
Myanmar is a member of ASEAN. In 2015, the group is
scheduled to form an EU-style economic bloc to lower barriers to
the flow of people, products and, to some extent, capital across
In its report this month, the IMF said accelerating the
modernisation of the financial sector was essential to prepare
for economic integration in 2015.
But it also noted the authorities' worries about capacity
constraints, in particular a lack of experienced local bankers:
"They preferred a gradual liberalisation, indicating that many
domestic banks are not ready for price competition,
notwithstanding the need to prepare for ASEAN integration."
Dozens of local and foreign banks thrived in the 1950s. But
the industry withered after a 1962 coup introduced a disastrous
"Burmese Way to Socialism" and sweeping nationalisation.
In 1988, the country's former military rulers reintroduced a
market economy. Soon after, in 1992, private banks were allowed
and foreign banks began opening representative offices. There
were over 40 at one point but only 18 are open now.
Decades of dictatorship and the brutal suppression of
pro-democracy activists brought layers of U.S. and European
economic sanctions. Concerns over money laundering from the drug
trade - Myanmar is the world's second-largest opium producer -
eventually quarantined the financial system.
In 2003, shady money-lending practices caught up with the
sector, sparking a crisis exacerbated by inept decision-making
at the central bank. Three banks collapsed.