Abstract
Normal trade export receipts—formerly labeled as “export earnings”—are still traded directly between private exporters and importers regardless of their legal uses. By using the original data taken from a survey of private firms, we examine which firm attributes are related to their uses of informal currency deals outside banks. The empirical results of probit regression show that firms’ operational length—a proxy variable for habituation to the unofficial market—is not associated with the use of informal currency deals. On the other hand, larger firms tend to have used official customer dealing at banks, implying that secured and convenient transactions could be a competitive edge for banks to absorb informal currency deals.
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Notes
- 1.
The cap changed from time to time. The cap also applied to the withdrawal of U.S. dollar notes from foreign currency deposit (FCD) accounts. At the time of the sharp depreciation of the Myanmar kyat in June and July 2015, the CBM lowered the cap to USD 5,000 per account and further restricted withdrawals to twice a week per account.
- 2.
U.S. dollar notes are less likely to be used for current international transactions. In late 2015, the Myanma Foreign Trade Bank (MFTB) arbitrarily restricted outward international remittances for its depositors who had sufficient balances in U.S. dollars. As the bank faced a shortage in its nostro account balance in Singapore, it was unable to fully accommodate the orders for international payments. The MFTB treated the private banks that had foreign currency balances at the MFTB in the same way as other non-financial firm depositors and restricted their international payments from these accounts. Consequently, the premium on offshore account balances over U.S. dollar notes increased in the unofficial market. This incident suggests that U.S. dollar notes are not a substitute for offshore account balance for international payments.
- 3.
Technically, it is possible to order Chinese yuan- or Thai baht-denominated international money transfers at Myanmar’s authorized dealer banks through costly double currency exchange from the Myanmar kyat to the U.S. dollar and from the U.S. dollar to the Chinese yuan or Thai baht. However, this is hardly practiced for border trade settlements.
- 4.
The authorities have given official permission for certain money changer counters to exchange kyat for Thai baht since May 2015.
- 5.
“Export earning” FCDs may be held for portfolio investment. However, private banks did not pay interests on FCDs. State banks paid interests on FCDs at 1% per annum. Nonetheless, the bulk of FCDs at state banks were current deposits, implying that “export earning” FCDs were held for transaction purposes (Kubo and Set Aung 2017).
- 6.
Another state bank, the Myanma Economic Bank, also offered international banking services on an irregular basis.
- 7.
Private banks active in international banking services include the Kanbawza Bank, Cooperative Bank, Ayerwaddy Bank, Asian Green Development Bank, Myanmar Apex Bank, and United Amara Bank.
- 8.
The gap between the overvalued official reference rate and the unofficial market rate for U.S. dollar notes reached 10% in June 2015.
- 9.
With regard to garment factories, they used the consignment production scheme wherein their foreign buyers provided intermediate materials on the buyers’ accounts. Even in such a case, the consigned intermediate materials were recorded as the factories’ imports by the Customs valuation.
- 10.
See Turnell (2014) for the background on underdeveloped financial intermediation in Myanmar.
- 11.
There were some firms that had exports in 2014 but ceased exports in 2015. In such a case, we dropped that firm from the sample.
- 12.
Alternatively, some exporters diverted international settlements to Singapore (Chap. 3), where international settlements to/from India were smoother than in Myanmar.
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Appendix: Bid–Ask Spread and Volatility in the Unofficial Forex Market
Appendix: Bid–Ask Spread and Volatility in the Unofficial Forex Market
Informal currency deals may aggravate exchange rate fluctuations. The informal interfirm-based forex market is vulnerable to hoarding. When the Myanmar kyat depreciates against the U.S. dollar, anticipating further depreciation, sellers tend to hoard their foreign exchange, which in turn dries up market liquidity and leads to self-fulfilling kyat depreciation.
Fluctuations of the liquidity in the unofficial market can be inferred from the exchange rate spread. Figure 1 illustrates the bid–ask spread—the gap between the buying and selling rates—of the unofficial quotes for the U.S. dollar notes by leading money changers. The exchange rate quotations for U.S. dollar notes are widely circulated and are considered to be the benchmark for the entire unofficial forex market (IMF 2012). As shown in this figure, the spread is usually narrow, one kyat per U.S. dollar, while the exchange rate was between 950 and 1300 kyat per U.S. dollar.
Source e-trade Myanmar
Exchange rate and spread in the unofficial market, January 2, 2014–December 31, 2015.
Once the kyat depreciates or appreciates abruptly, however, the spread also widens to five kyats per U.S. dollar, which was the case in June and July 2015. A widening spread in turbulent times implies that finding trading counterparties is difficult. The situation would be similar or even worse for the deals of “export earnings” as they are between non-financial firms, whereas other dealing involve at least one money changer, who usually maintain liquidity in foreign assets. Market liquidity changes and exchange rate fluctuations due to hoarding are the concerns in the unofficial market.
Exchange rate fluctuations would be alleviated if currency deals were concentrated in authorized dealer banks. A concentration of currency deals ensures the banks to offer liquidity to the market, which would serve as a cushion against abrupt exchange rate changes. Also, banks are subject to the prudential regulation of their net open position and the supervision by the authorities, which prevents them from excessive hoarding.
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Kubo, K. (2018). Informal Currency Deals and New Official Customer Dealing: Who Chooses Which?. In: Myanmar’s Foreign Exchange Market. Springer, Singapore. https://doi.org/10.1007/978-981-13-1789-7_6
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DOI: https://doi.org/10.1007/978-981-13-1789-7_6
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