Mountain of Burmese Kyats. |
According to the banking
experts current inflation rate is much less than 3% and Burma desperately needs
to reduce the high interest rates. Dr. Khin San Yee, the deputy union minister
for the National Planning and Economic Development Ministry, said on November 5
that the inflation rate on 2011-2012 financial year was only 2.82%.
At present the benchmark
interest rate by the Union Bank of Burma is 10% and the rates used by the
commercial banks are 8% deposit rate and 13% lending rate.
Foreign Investment &
Exploding Carry Trades
Since foreign investment law
was passed by the Burma’s Parliament recently many foreign investors are
preparing to enter Burma and the local businesses need more capitals at lower
interest rate so that they can effectively compete with the foreign investors.
Carry Trade Explained? |
They borrow huge amount of money from their home banks at lower rates and deposit into Burmese banks at higher rates. And they have been pocketing the interest rate differential from these money shifting trades widely known as the Carry Trade.
“The
businessmen coming here from the countries with lower interest rates are
massively profiting from their carry trades without lifting a finger. They
borrow money from their banks and deposit that money at our banks and make
money from the rate differential between two countries.
And
it has been going on for ten - fifteen years since well before we have
democracy. Our interest rate has been always higher than the neighbouring
nations. We really need to bravely cut our rates. Why are we still giving free
money to the foreigners?” said frustrated U Than Lwin the advisor
for the Finance and Revenue Ministry.
Exploding carry trades due to near-zero US interest rates. |
Retired professor Dr. Yee
Yee Myint from the Institute of Economics also concluded that despite the good
economic transformations going on in Burma because of the economic reforms
carried out by the present government there still are weaknesses in exchange
rate stability and economic development management.
She also added that it is extremely
important to give the central bank, the Union Bank of Myanmar, a fundamental
independence so that it can effectively manage the nation’s monetary policy which
primarily constitutes managing interest rates, selling bonds, managing total
public debts, and managing foreign exchange rates.
Present government did cut
interest rate twice on September 1, 2011 and January 1, 2012. Basically
interest rates are cut during the time of lower inflation and economic
downturns, and raised during higher inflation and economic upturns.
And the interest rate plays
by the governments or the central banks always have beneficial effects on the direct
investment, employment, and national income (GDP).
“In last
2010-2011 financial year the inflation was more than 8%, but the inflation this
year is only around 3% and the rates should be reduced. Interest rate should
not be too much more then the inflation rate. There is enough room to cut the
rates drastically. In my opinion the deposit rate should be 6% and the lending
rate should be 10%,” said clearly a banking-expert member of the Advisory Council for
National Economic and Social Welfare.
A Carry Trade involving selling US$ and buying AU$. |
But Maung Maung Win, then the vice-chairman of Burma’s central bank and now the director-general of the National Budget Department, said at the Financial Services Workshop held in last September that the inflation was still around 5% and the interest rate should not be lowered.
According to Aye Aye Win, an
assistant-director from the Small and Medium-sized Industrial Development
Department of Industry Ministry, they were preparing to lower the lending rate
from current 13% down to 8.5% so that the domestic producers could be
competitive among the ASEAN nations in the export markets.
Followings are the
comparative rates (central bank’s benchmark rate – deposit rate – lending rate)
of Burma and other countries.
Malaysia: 3%, 2.97%, 4.77%
Singapore: 0.17%, 0.14%, 5.38%
Philippines: 4%. 3.07%. 5.95%
Thailand: 3%, 2.63%, 7.13%
Indonesia: 5.75%, 5.89%, 11.78%
Vietnam: 13%, 12%, 14.7%
Cambodia: 5.25%, 6.1%, 17%
Laos: 5%, 3%, 22%
Korea: 1.5%, 4.01%, 5.71%
China: 6%, 3%, 6%
Japan: 0.3%, 0.49%, 1.42%
Bangladesh: 5%, 10.03%, 13%
India: 9%, 8%, 10%
USA: 0.125%, 0.0%, 3.25%
UK: 0.5%, 0.0%, 0.5%
EU: 0.75%, 0.00%, 1.5%
Russia: 8%, 5.2%, 8.9%
Burma: 10%, 8%, 13%
Following is the historical timeline
for Burma’s interest rate changes.
1-9-1989: 11%, 8%, 17%
1-1-1995: 12.5%, 10%, 16.5%
1-4-1996: 15%, 12%, 21%
1-4-1999: 12%, 12%, 17%
1-4-2000: 10%, 10%, 15%
1-4-2006: 12%, 12%, 17%
1-9-2011: 12%, 10%, 15%
1-1-2012: 10%, 8%, 13%
(Source:
Union Bank of Myanmar)