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PART I: The Evolution of Myanmar Exchange Rate System


The Kyat Myanmars national currency, the kyat (pronounced chat and abbreviated K) is divided into the following banknotes: K1, K5, K10, K20, K50, K100, K200, K500 and K1000. Until recently, blackmarket exchange rates have been far more favorable than official rates and considering the economys free-fall, and rising inflation, rates are likely to change. The Exchange Rate System of Myanmar For many years of mismanagement under military government, the country held fast to its wildly unrealistic official 6.2 kyat to the dollar rate, even as the black-market rate soared to over 1,000 kyat to the dollar (900 kyats as of Feb, 2005). When Burma began to emerge from its extreme isolation in the early 1990s and needed to appease foreign investors, the government adopted a complex system of Foreign Exchange Certificates (FECs) to be used in lieu of the currency. The value of FECs, however, was also distorted. In 2008, the U.N. complained that 20% of the aid money it donated to Burma was being lost when dollars were exchanged for FECs. According to many Burma watchers, the money that disappeared in conversions over the years was being pocketed by the ruling elite. Analysts say the generals and their inner circle were notorious for using the confusing currency regimes to turn a profit off business deals, investments and aid. April 2012 Myanmars central bank set a value on the national currency that reflects what its actually worth. Myanmar began a managed float of its currency from April 1, the central bank first moves to reform a multi-layered exchange rate regime seen as one of the biggest barriers to developing the economy. With the new reform, the external value of the kyat would henceforth be determined by supply and demand conditions in the exchange market. This paves way for a unified currency system as the exchange rate of the kyat was initially set near the present black market rate which is already used for most transactions. Myanmar's central bank set an initial reference exchange rate of 800 kyat per dollar in April and expected more exchange rate modifications to come.

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Analysis It is lucid that the past currency regime has caused financial distortions for Myanmars economy. The countrys complex exchange rate system with many restrictions gave birth to multiple exchange rates which increased transactions costs, discouraged foreign direct investment and trade, encouraged informal activity, and has put appreciation pressure on Myanmars currency. This stark feature was wrong with the economy of one of the worlds poorest and least developed countries. The distorted currency value were used as a tool for corruption by the powerful, contributed to the growth of an enormous black economy (which reflected the true value of the currency) and presented unnecessary barriers to foreign investment. Large populations of Burmese people were left involved in illegal activity from the pervasive use of the black-market exchanges and thus vulnerable to extortion and scams. Foreign firms, meanwhile, had to resort to convoluted trades in agricultural or other goods they didnt normally deal in to navigate the dual exchange rates without losing money. The situation also made it impossible to put a true value on Burmas state enterprises. With the new Managed Float System Pros 1. Improve the governments image with foreign firms by providing more certainty and making investment atmosphere more inviting. 2. Allow the Central Bank of Myanmar to influence the market exchange rate when necessary. 3. Allow for unification of various exchange rates and develop interbank money market. 4. Gradual elimination of restrictions on current international payments and transfers abroad 5. Stabilization of the exchange rate hence allows businesses to make adjustments as necessary. 6. Help boosts the overall economy of Myanmar including tourism, fostering privatization growth and improving agricultural productivity. Cons 1. The process of unifying the rates could be lengthy (take two to three years.)

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2. The impact of the new exchange rate regime can hurt firms who have benefited from low import costs through the previous official rates. 3. Potential derails on the reformation due to high demand of currency stemming from the surge of massive inflow of foreign direct investments. (Causes the Kyat to appreciate which can hurt exports) 4. Expose inefficiencies and losses of state firms that should be given subsidies to minimize the impact on the poor as firms raise prices and lay off employees.

PART II: Prospect of single ASEAN currency


Single currency should be a long-term goal for the countries in the ASEAN economic area. A common currency should be preceded by a common or single market. ASEAN has work on this almost two decades now and aims to establish an ASEAN Economic Community on 2015. As economic integration deepens further in East Asia, it would be more beneficial to East Asian countries to adopt an exchange rate regime that collectively floats against the US dollar and the euro while maintaining a stable intra-regional exchange rate. This could initially be achieved through what is known as a currency basket, where an average value of a group of regional currencies is worked out and traded against international currencies such as the dollar or the euro. However whether the ASEAN is ready for a single currency or not depends on many factors such as the volume of trade between country in region, macroeconomic condition and the strength of financial system. ASEAN members have varying GDPs and per capita income levels. Singapore, the freest economy in the region, has a per capita income that is close to 350 times more than Myanmars. Such wide income differentials will make it hard to sustain a common monetary system. A common currency requires deep and robust financial systems and markets, including strong institution support. ASEAN does not yet have region-wide institutions to deal with threats of the financial sector.

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ASEAN was always going to follow a different approach from the EU. ASEAN aims to have a single currency like EU. There are considerable obstacles in the way of developing a single currency for ASEAN. As the euro zone crisis has shown, problems in a weak economy can make trouble for the stronger performers. In addition, Europes experience where economies such as Greece, Ireland and Portugal collapsed under the weight of enormous government debt, has warned other blocs away from seeking a single currency. But the gap between wealthy and risky countries like Greece and Germany is far narrower than which currently separates Cambodia - one of the world's least-developed countries and Singapore, which is one of the wealthiest. So instead of looking towards a single currency, ASEAN first has to focus on its 2015 goal for economic integration. And even that is an extremely ambitious target. A common currency requires deep and robust financial systems and markets, including strong institutional support. ASEAN does not yet have region-wide institutions to deal with threats to the financial sector. Over national monetary and fiscal policies, a common currency would restrict national sovereignty and policy autonomy, which some member states may not readily accept. At present, the economy of each member state is too small for its currency to be 'visible' in the international monetary system. A common ASEAN currency would put the region on the world map - a definite advantage to Singapore, an international business hub. Most importantly, a common regional currency would mean individual states cannot control intra-regional capital movements. In such a 'borderless money movement' situation, Singapore is likely to attract funds from the region, given its political stability and developed financial sector. Pros of an ASEAN common currency 1. Reduction in Cost Transaction Costs of changing money from one currency to another Reduced Uncertainty - from multi (flexible) currencies. Companies may insure against this happening, but this is still an expense. 2.Increased Investment With increased certainty both internal and international direct and portfolio investment should increase, hopefully increasing economic and productive efficiency and promoting economic growth. If we had a single currency in ASEAN, this may attract more investment into the area.

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3.Increased Trading As firms will have a greater certainty about future costs and revenues they will be more willing to partake in international trade. This will lead to increased competition, which results in lower prices. Costs for firms may lower as well as they take advantage of economies of scale and strive to lower costs in the face of increased competition. See also other advantages of international trade-absolute and comparative advantage etc.

4. Independence of Monetary and Fiscal Policy No one government will have complete control which will lead to more long-term economic planning. This argument holds for an independent European/ASEAN Bank as they will not alter the rate of interest for political gain e.g., lowering unemployment at the expense of inflation, decreasing interest rates just before an election to increase the feel good factor.

5.Effects on Wages Wages should converge and become more competitive, as workers will realise that they are competing not only with other firms in their own country, but also with international firms, and workers from abroad. However whether this is an advantage or disadvantage depends on who you are. Workers in high wage countries may be worried about wages falling! (Thailand and Singapore)

6.Inflows of Capital to Area Eg: The Euro is a major world currency and it is nearly as important as the Dollar. Many countries have reduced the % of their reserves of Dollars and increased their reserves of Euros. This would certainly happen with a single ASEAN currency which would be far more attractive to investors than say the Vietnamese or Cambodian currencies on their own.

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Cons of a single ASEAN currency 1. Ability to set Interest Rates By joining a single currency, a country may lose control over one of its main economic instruments. No longer will it be able to react to inflation by raising interest rates, as interest rates will have to be set centrally according to what the whole single currency area requires. If the trade cycles of different countries do not converge, some nations will suffer as central policies may amplify any problems they already have. 2. No Devaluations This will mean that domestic countries will have reduced powers to control their economies. Regional policies will have to compensate. 3. Taxes If too high, a nation will experience a brain-drain, therefore countries may be unwilling to tax which can lead to a decline in the provision of services. 4. Level of Currency on Entry to Single currency Arguments will take place on the level of a countrys currency as it has implications on its exports and imports. 5. Spillover effect A financial crisis faced by one member will spread to other members as the countries are entitled to a single currency which can hurt their economies if alterations cannot be made.