The US Federal Reserve Bank has raised interest rates three times so far this year. The latest increase of a quarter percentage point in the benchmark federal funds rate, lifting it to a range of 2 to 2.25 percent, came in September. Emerging markets are expected to be hardest hit from capital outflows as investors who had been looking overseas for higher returns pull their money back to the US.
Myanmar will be among many countries in the world that feel the effects of a strong dollar, said U Than Lwin, KBZ Bank adviser and former deputy governor at the Central Bank of Myanmar (CBM).
“The US is expected to raise its interest rates at least one more time this year so it’s sure that this will hurt domestic exchange rates to some extent. There is also a concern about whether action will be taken against unlicensed forex dealers as unregulated trading could destabilise the exchange rate,” U Than Lwin explained.
The strengthening dollar versus the kyat since early this year has had a huge impact on Myanmar’s import-dependent economy, with fuel oil topping the list of items the country must buy from overseas.
Compounding the situation, oil prices have been trending upward in international market. The price of Brent crude was US$84 a barrel at the close of October 5, from around $78 a barrel in July. The rise in oil prices is partly attributed to looming sanctions on Iran targeting its oil production. This in turn is expected to decrease global supply of the commodity, causing prices to rise.
Fuel oil is mainly used for transportation and also used in electricity generation for rural towns which don’t have access to national grid. As the US dollar climbs higher, the prices people have to pay in kyat goes up, putting pressure on businesses and consumers.
To be sure, the dollar has lost some of its shine against the kyat this month. On October 5, the CBM set its reference exchange rate at K1510 per dollar compare to a high of K1642 just two weeks ago. “Even though the US dollar weakened slightly last week, the price of crude oil has risen so we have to deal will higher buying and selling prices,” said Myanmar Oil and Gas Services Society member U Sai Whan Hlaing.
Because of oil’s rising prices, import volumes had to be decreased, said Kyaw San Oil Company Deputy General Manager U Tin Aung Kyaw.
More importantly, the country’s inflation rate has now risen to 8.18pc, according to a report published by Myanmar Central Accounting Team.
“As oil and fuel are needed in every sector of the economy, the impact of higher prices will be unavoidable. Myanmar is caught between high oil prices and a stronger US dollar. Businesses will feel the impact of higher inflation even more as the country’s economy is relatively weak,” Dr Zaw Oo, former economics adviser to the government, told The Myanmar Times.
He said Myanmar has to strengthen the local economy to cope with the situation, adding that, apart from the government, the private sector has to cooperate in this.
“The State Counsellor said we all have to cooperate. However, businesses need government guidance and support on what should be done in this difficult economic situation. The private sector dare not take risks in this situation,” said Dr Zaw Oo.
Meanwhile, for local fuel prices to be more stable, the state government needs to allow at least two or more foreign oil businesses to operate within the domestic sector, economist Dr Aung Ko Ko added.
“ Besides local operators, approval should also be permitted for foreign businesses to operate fuel stations here,” he went on.
The problem is not something which Myanmar can solve in the short-term, he said. However, “if all the various government regulations which are causing inefficiencies are relaxed, it will be convenient for businesses. If that happens, then production sector will also improve. From there, production can be increased and [we will get] a step closer to where more foreign revenue will enter. We need to think about doing this first,” Dr Aung Ko Ko said.
For more detail; https://www.mmtimes.com/news/higher-us-interest-rates-oil-prices-crimping-economy.html