* New reference rate is around recent parallel market level
* Central bank says it is a step to unifying rates
* Kyat has appreciated in recent years, hurting some firms
YANGON, April 2 (Reuters) - Myanmar’s central bank set a reference exchange rate of 818 kyat per dollar on Monday, the first business day under a managed float currency regime that is the most dramatic economic reform yet by a one-year-old civilian government.
For 35 years, the kyat was pegged to the International Monetary Fund’s special drawing rights at 6.4 kyat per dollar. But a parallel market has existed, with a recent rate in a range of 800 to 820 kyat. The parallel rate has been used for most everyday transactions.
The Central Bank of Myanmar (CBM) gave the new rate on its website, along with indicative cross rates for other currencies. ()
“The reference exchange rate of the kyat for account transactions against the U.S. dollar is based on the auctions conducted by the Central Bank of Myanmar and authorised domestic dealer banks,” it said.
The CBM, which has given little information on the new system, held trial auctions with local banks in March and met bankers at the end of last week to finalise procedures, bankers said.
A senior banker with knowledge of the discussions said participating banks could put in up to six different bids and would be committed to its rates if they were accepted by the CBM.
Authorities would allow banks to buy and sell the currency in a trading band of 0.8 percent either side of the reference rate, the senior banker said. A 2 percent band had been planned but that was changed after a meeting last week, the source said.
CBM Deputy Governor Maung Maung Win told Reuters last week that 11 private and three state-run banks would participate initially and another eight private banks might be included later.
Auctions are initially planned for each business day but Maung Maung Win said they might not be needed every day once the system was up and running, without elaborating.
There are no international banks operational in the former Burma, although some, particularly Asian names, have representative offices.
Economic reforms and the expected easing of Western sanctions are expected to stimulate more international currency flows and encourage foreign banks to set up shop in the country.
Much hangs on the West’s response to the conduct of by-elections that were held on Sunday.
Aung San Suu Kyi, who led the fight for democracy under the former military regime, and her National League for Democracy party appear to have won a landslide victory and irregularities during the campaign and vote were on the whole minor.
If the European Union, the United States and other Western countries accept the elections were free and fair, they could start to ease sanctions soon on trade and investment.
Myanmar offers low-cost labour for factories and deposits of energy resources, timber and gemstones. It lies between China and India and itself has a market of perhaps 60 million people that is largely untapped in terms of consumer goods.
Aside from the sanctions, Western businesses have been deterred from doing business with Myanmar by its rudimentary banks and opaque foreign exchange system.
In a brief statement published in state media last week, the CBM put the new currency regime in the context of government efforts to modernise the economy.
“A key part of this programme is to unify the various exchange rates and gradually eliminate restrictions on current international payments and transfers abroad,” it said.
It described the move as a first step towards unifying the exchange rates and said it would “also allow room for the CBM to influence the market exchange rate”.
The old official rate of 6.4 kyat per dollar was used by the government and state companies. These companies will now have to pay far more for their dollar-denominated imports. The CBM’s Maung Maung Win said the government could provide them with subsidies and loans to help them over the transition.
The government used a rate of 800 baht per dollar for the state budget for the fiscal year that began on April 1.
The kyat’s unofficial rate has jumped from more than 1,000 per dollar in 2009 as foreign money has flowed into the energy and resource sectors, causing problems for farmers, exporters and others, including staff at foreign firms paid in dollars.
“Some entrepreneurs in fisheries say they can only continue business above 900 (kyat to a dollar). For other traders in beans and pulses it is 850 to 900,” the bank source said.
“(The new rate) cannot please everyone but higher or lower is not the matter. The only thing is not to have a lot of fluctuation, but to have it stable so businesses can make adjustments as necessary,” he added.