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Burma today began a managed flotation of its currency, overhauling its complex exchange rate system in the new government’s most radical economic reform yet.
The central bank set a reference rate of 818 kyat to the dollar, according to an announcement on its website. The move brings the official currency rate in line with its value on the black market of about 800 to the greenback.
The move is part of burgeoning reforms to modernise an economy left in disarray by decades of military rule and isolation.
Announcing the move last week, the central bank said the managed floating exchange rate would allow market forces to determine the value of the kyat while leaving room for it to influence the unit’s value.
Analysts said the simplified currency regime would help facilitate trade and investment as Burma gradually opens up.
“Establishing a transparent and unified exchange rate is a first, but vital step in building confidence in the kyat, and hence the economy,” Vishnu Varathan, an analyst at Mizuho Corporate Bank in Singapore, said in a report.
“This helps provide comfort on the stability of returns on investments as well as offer some degree of principle protection.”
Following the end of almost half a century of junta rule last year, the country now has a nominally civilian government whose ranks are filled with ex-generals.
The new regime has surprised even its critics with a series of reforms, and the currency revamp is its first major move to modernise an economy weakened by decades of mismanagement and international sanctions.
Experts saw the previous multiple-rate system as a way for the regime to funnel revenues from natural gas sales into secret accounts by recording payments at the previous official rate of just six kyat per dollar and then exchanging them at the much higher informal rate.
“A consistent and market-based kyat will help boost governance as public finances will be more transparent,” said Varathan.
“This will also go a long way in bolstering the country’s balance sheet thereby shoring up credit standing, and consequently boost investor confidence.”
At the invitation of the new government, a team of experts from the International Monetary Fund visited Burma in October to offer advice on reforming the forex market and unifying its multiple rates.
The unusual request by a regime that regards international institutions with suspicion was seen an indication of the gravity of the currency market disarray and a tentative sign it is warming to modern economic reforms.
IMF deputy managing director Naoyuki Shinohara told reporters in Bangkok last week that the Washington-based institution was helping Burma to build a strong financial system.