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Burma’s central bank is poised to win independence to set monetary policy, its deputy governor said, in what would be a major economic reform by a government seeking to attract foreign investors.
President Thein Sein has vowed to put the economy at the centre of his next wave of reforms, following a series of dramatic political changes since decades of military rule ended last year.
In the new government’s boldest economic reform yet, the country in April began a managed flotation of its currency, overhauling a complex foreign exchange system in a bid to facilitate trade and investment.
An independent central bank, seen as a hallmark of a modern free-market economy, could be the next step to burnish its economic credentials.
“If we have monetary stability, investors can be encouraged to enter the country with greater confidence,” Central Bank of Myanmar (CBM) deputy governor Maung Maung Win told AFP in an interview on Wednesday.
The move is not expected to come overnight, however, and the CBM needs to recruit more staff to expand its capacity, he said.
A new draft of the central bank law is now with the Attorney General’s Office waiting to be reviewed, and must pass parliament before the institution can break free from government control over monetary policy.
“The CBM law would be amended to become more relevant for a system of an independent central bank,” said Maung Maung Win, one of two CBM deputies.
He said the law was unlikely to be put before parliament in the upcoming session, due to start on Wednesday, meaning independence is still months away at least.
Unlike independent central banks such as the US Federal Reserve or the Bank of England, the CBM does not increase or reduce official borrowing costs as a way of preventing the economy overheating or cooling too rapidly.
Its main role, experts say, is to print money to fund the government’s budget deficit. But this has come at the cost of a long period of financial instability and double-digit inflation.
The CBM is “utterly beholden to the government,” said Sean Turnell, a Burmese economic expert at Australia’s Macquarie University.
“The central bank at the moment is just a fiscal arm of the state so it’s unable to run an independent monetary policy. It must keep buying bonds issued by the government, in other words printing money.”
While independence of the CBM would be “a major revolutionary change”, further fiscal reforms will be needed to reduce the government’s dependence on the printing presses to fund its budget deficit, he said.
A lack of technical expertise is another hurdle, and the CBM is seeking overseas help to train its staff. Earlier this month it signed a memorandum of understanding with Thailand’s central bank on capacity building.
In a report published in May, the International Monetary Fund said that the CBM “does not have a monetary policy framework”.
It added: “The CBM should be given full operational autonomy and proper accountability, with the clearly defined primary objective of domestic price stability.”
But the IMF said the government had moved away from simply printing money to fund its deficits, helping to cool price pressures.
Inflation fell from nearly 33 percent in the fiscal year that ended in March 2008 to 4.2 percent in the year to March 2012, the report said.
According to the CBM’s website, the main objective of its monetary policy is “to maintain macroeconomic stability in the economy while promoting domestic savings”, using interest rates as its main instrument.
The Central Bank Rate currently stands at 10 percent.
But Turnell said the rate could not yet be considered a proper policy tool.
“It’s just a rate that puts a cap and a floor on the interest rate that the banks can pay and charge. It’s mainly a vehicle to try and ensure that the government’s financing is at a reasonable level of expense,” he said.
The moves to overhaul the CBM are part of wider reforms that have already led to the introduction of automatic teller machines (ATMs), a major step in a country where people often have to carry around large wads of cash.
Burma is also set to begin testing a new debit card system next month operated by the Myanmar Payment Union, a network of three state-owned banks and 13 private banks, with the support of the CBM.