Myanmar Central Bank Freedom Reinforces Economic Fundamentals

By Amy Killian

Source: World Bank Group's flickr photostream, used under a creative commons license.

President Thein Sein of Myanmar and World Bank President Jim Yong Kim. Source: World Bank Group’s flickr photostream, used under a creative commons license.

President Thein Sein on July 12 signed into law a bill granting the Central Bank of Myanmar autonomy from the Ministry of Finance and Revenue. The announcement came after months of delay and anticipation. The Asian Development Bank, the International Monetary Fund, the World Bank, and the Japanese government have all provided technical expertise and support for the bill.

The decision is significant for several reasons. Autonomy will allow the central bank to independently adjust interest rates, and conduct currency and exchange operations. With the influx of foreign capital and rising consumer demands in major urban areas, the central bank’s ability to control inflation is crucial if Myanmar is to maintain good economic fundamentals. Independent central banks, such as those in Thailand and the Philippines, are often better equipped to maintain stable macroeconomic policies than their non-independent counterparts.

The law will dissolve the bank’s current leadership structure in favor of a nine-member governance board, all of whom will be required to have relevant policy expertise. Board members will be nominated by the president’s office and subject to parliamentary approval. Under the bank’s current structure, only military leaders are allowed to sit on the board. The newly independent central bank also plans to double staff and set up new departments. There will be four committees in charge of financial stability, monetary policy, payment systems, and foreign-exchange management.

Equally important, the move bolsters the credibility of Myanmar’s commitment to financial liberalization. In the past, the Myanmar government thrice demonetized the local currency, the kyat, and the Ministry of Finance frequently printed bills in order to finance government debt. The ministry currently finances around 40 percent of the central government’s total deficit. The new central bank governance structure is expected to significantly reduce the amount of government deficit covered by the Ministry of Finance. Like the liberalization of foreign exchange policy in April 2012, this new law will bolster foreign investors’ confidence in the kyat.

But daunting challenges remain before Myanmar’s financial sector catches up to regional and international standards. There is a dearth of technical economic capacity, both at the central bank and in the financial sector in general. New regulations, which will allow foreign banks to form joint ventures with local partners, are expected to address the capacity issue and pave the way for comprehensive banking sector liberalization by 2015 as planned by the government. More than 20 foreign financial institutions have set up representative offices in the country so far.

President Thein Sein and his government should be applauded for their continued commitment to economic and financial reform. Establishing independence for the central bank is a vital and significant step toward a liberalized economy and good governance. Myanmar’s cooperation with international financial institutions, such as the International Monetary Fund and the Asian Development Bank, is quickly coming to fruition. On July 8, Parliament agreed with Thein Sein’s suggestion to join the World Bank’s Multilateral Investment Guarantee Agency, a program that will help insure and assist international investments in the country. Altogether, these developments signal Myanmar’s ability to work with international partners and willingness to lay the necessary foundation for long-term growth.

Ms. Amy Killian is a Researcher with the Sumitro Chair for Southeast Asia Studies at CSIS.

8 comments for “Myanmar Central Bank Freedom Reinforces Economic Fundamentals

  1. T.D. Lemon
    July 17, 2013 at 01:28

    Interesting analysis.
    However, the devil is in the details and putting the words “independent central bank” in a piece of regulation is not enough. The last draft of the Central Bank law has been kept fairly confidential, but previous ones introduced only formal independency (with the CB’s budget still under the power of the Ministry of Finance).
    Their is little to applaude.
    Myanmar makes it to the news for its “remarkable” reform effort, attracting investments and aid, but the policies enacted often lack coherency (see the Telecom licenses issued before a Telecom Law and Infrastructure framework) or substantial content (see the entire section of the constitution that regulates parliamentary works).
    I think that Myanmar needs to stop pushing reforms before having designed and committed to a coherent development plan, instead of aiming at getting fancy headlines on the newspapers.
    Is liberalization done wrong better than no liberalization at all?
    The next five years will tell

    • cogitASIA Staff
      July 17, 2013 at 10:07

      Thank you for your thoughtful comment. We agree that substantial economic reforms remain for the country. The Union government does at times risk ‘ticking the boxes’ in its rush to pass legislation that will, as you said, win headlines. See our recent Myanmar post, “Myanmar’s Press Freedom Reforms: Why Slower could be Better” on how this is playing out in the country’s media issues. The move to grant independence to the central bank is still a significant one that moves the country in the direction of a liberal open economy. This is a significant step even some of Myanmar’s Southeast Asia neighbors have yet to make.

      - Amy Killian

  2. David Steinberg
    July 18, 2013 at 12:42

    Amy:

    You might mention that the constitution of 2008 specifically prohibits any future demonetizations. The earlier ones were disastrous.

    David

  3. Michael Montesano
    July 19, 2013 at 02:30

    “Equally important, the move bolsters the credibility of Myanmar’s commitment to financial liberalization . . ”

    Well, cogitAsia pretty much lays its cards on the table with this line, doesn’t it? There are still bankers in Yangon who remain sceptical about the benefits of the broad financial liberalization being urged on their country. In large part, their scepticism is rooted in a familiarity with their country’s real economy utterly beyond the grasp of the parties urging that approach. One can only hope that these bankers don’t let themselves be seduced or intimidated by the mindless rush toward the annexation of their country’s financial sector by outsiders.

  4. July 21, 2013 at 01:51

    Amy,

    When addressing the issue of banking, let’s not forget those currently marginalized and excluded from the banking sector.

    With various Myanmar surveys indicating that less that 20% of Myanmar using the existing retail banks in the country, there is a long way to go before; a) confidence is restored in the Myanmar banking system and b) banking access is given to a greater percentage of the Myanmar population.

    It is not just foreign investors who need reassurance that the Central Bank’s independence will benefit them, it is also the local Myanmar population themselves; many who will need to understand the basics of how financial liberalization and banking product development shaped by Central Bank policy will (eventually) benefit them also.

    The concept of “comprehensive banking sector liberalization” cannot afford to neglect addressing the plight of the greater population. Perhaps, much like the tender process for the recent mobile telephone network roll-out, future foreign banking investment in Myanmar could be contingent on ensuring rural Myanmar is served by new branches or affordable mobile-banking technologies.

    Now that would be moving towards “good governance”.

    (NB. Currently the vast majority of Myanmar’s rural population is caught in a cycle of poverty owing to little or no financial literacy, poor rural infrastructure, predatory agricultural commodity brokers and access to only exploitative money lenders.)

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