By Amy Killian
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.