Without warning on 3 April 2022 the Central Bank of Myanmar (CBM) issued notification 12/2022 and directive 4/2022 to impose foreign currency controls which will have a profound impact on businesses operating in Myanmar. This was followed up with directive 5/2022 and directive 6/2022 on 5 April 2022, and further announcements are expected as these major policy changes are worked through. The key implications of this volley of regulatory changes can be found in the Annexure of the PDF version of this article.
The aim of notification 12/2022 is to eliminate the domestic holding and use of foreign currency in domestic transactions. In addition, all foreign currency offshore remittances will be more closely scrutinised by the CBM, which will in effect further restrict the use of foreign currency. It achieves this through:
requiring that any foreign currency which is received in Myanmar is immediately converted into Myanmar Kyat (MMK) at a rate fixed by the CBM (initially MMK1850 : USD1 – versus a market rate of around 2050:1 at the time of the announcement). The notification also required all existing foreign currency holdings in Myanmar bank accounts to be converted at the fixed rate, however not all banks have begun implementing this yet and there is some hope that revisions will be made to this element of the policy; and
all offshore remittances will now require the approval of the Foreign Exchange Supervisory Committee (FESC), which is a new body established to supervise foreign exchange in Myanmar.
The changes are significant and will greatly affect all foreign and many Myanmar businesses, as well as having a large impact on the financial sector, making an already challenging operating environment more difficult.
Background
The Myanmar financial sector has been through turmoil in the past 12 months, with banks affected by a severe liquidity crisis resulting in ongoing withdrawal limits, apparent shortages of foreign currency reserves and a major devaluation of the MMK which has been difficult to control.
The CBM has been trying to counter this by ditching the market-based exchange rate mechanism, which has led to the creation of an unofficial exchange rate generally used for currency exchanges outside of the Myanmar banking system. The CBM has also taken steps to try to bolster foreign currency reserves, when in October 2021 it forced exporters to exchange any foreign currency earnings into MMK within 30 days of their receipt.
This can be seen in the broader context of authorities in Myanmar trying to limit imports by banning the import of certain products via border trade and increasing the number of imported goods for which import licences are required. Reducing the depletion of foreign currency reserves is one of the likely goals of these import restrictions (while disrupting trade in the process).
In March 2022, in another attempt to reduce the pressure on the MMK, the CBM tried to limit the domestic demand for foreign currency by instructing banks to ensure that all domestic transactions were made in MMK.
The latest notification 12/2022 takes this policy one step further by requiring all domestic foreign currency holdings to be converted into MMK.
The underlying motives for taking these steps are likely:
to relieve pressures which are devaluing the MMK;
increase Myanmar’s foreign currency reserves; and
prevent the dollarisation of the economy.
Effect on Businesses
In theory, the effect of this new policy on businesses could be manageable. In the best-case scenario, the MMK1,850 peg to the USD will be maintained and businesses are able to easily buy USD at that rate from the banks in order to make all their required foreign currency payments, including paying for imports and offshore services, repaying offshore loans and distributing dividends. It could be beneficial if this meant that businesses are able to buy USD at the official CBM reference rate, rather than having to use the unofficial market exchange rates to buy their USD in an environment of low foreign currency liquidity.
There is however concern of the impacts of this policy within the wider business community because of the uncertainty it creates. This mainly relates to the potential of increased bureaucracy (and unpredictability) in carrying out any foreign currency transactions potentially instituting new capital controls and the uncertainty of how the new policy will be implemented. It is also the case that many routine domestic contracts and payments are denominated in USD, so a major adjustment will be required.
Based on the information made available by the CBM so far, and subject to exemptions yet to be announced, effects on businesses include:
all domestic payments will need to be carried out in MMK, even if agreements stipulate settlement in foreign currency. This includes payments under service contracts, supplier payments and salaries;
all foreign currency receipts into Myanmar bank accounts will be converted into MMK at the CBM reference rate;
all foreign currency payments out of Myanmar will need to be for an approved purpose contemplated by the foreign exchange laws, properly documented and approved by the FESC, which could pose substantial red tape and delay;
businesses currently purchasing foreign currency in Myanmar from exporters and other third parties will no longer be able to do so, but will only be able to make such purchases from Authorised Dealer banks (i.e. banks which are licenced to engage in foreign currency and cross border transactions) at the CBM reference rate;
the inability to hedge against the volatility of the MMK by keeping funds in foreign currency. This would not be an issue if the CBM reference rate remains unchanged at MMK1850 to the USD, but it will not be possible to hedge against any further devaluation. It should be noted that the CBM retains the discretion of changing the CBM reference rate;
a reduction in foreign investment, at least in the short to medium term, as foreign investors assess the impact of the policy and how it affects the ability of businesses to remit funds back out of the country (eg to pay dividends, interest on loans and repayment of loan principal and returns of capital);
the ability to obtain offshore financing if lenders are concerned of the risk that repayments will be held up by the newly implemented approval process and borrowers are unable to manage repayment obligations due to unhedged devaluations in the MMK;
in an attempt to minimise the impact of the changes, businesses may shift part of their operations which are not country specific offshore. This could include the provision of services and certain back office functions and relocation of senior staff; and
constraints on businesses operating within the country to import the necessary equipment and raw materials with the process of obtaining foreign currency and trade financing becoming more burdensome.
The extent to which these impacts will materialise will come down to how the new policy and procedures are implemented. This is still a work in progress. One key point to watch relates to whether exemptions are going to be granted from needing to comply with the requirement to convert foreign currency holdings into MMK. The FESC is authorised to issue such exemptions and several embassies have already approached the government requesting that investors and organisations from their respective countries are issued such an exemption. Wide ranging exemptions may soften the impacts of this policy, but run the risk of leading to a discriminatory investment environment, inconsistent application of regulations and more red tape.
Regulator
Cross border foreign currency transactions are principally regulated by the Foreign Exchange Management Law 12/2012 (FEML) and the Foreign Exchange Management Regulations 7/2014 (FEMR). Under the FEML it is the CBM which has the authority to regulate cross border foreign currency transactions. The administration of the law, particularly in relation to the monitoring and approving of foreign currency transactions, is the responsibility of the Foreign Exchange Management Department of the CBM.
The new regulatory regime introduced by notification 12/2022 empowers the new FESC to issue approvals for offshore remittances, issuing exemptions and monitoring compliance with notification 12/2022.
It is understood that the members of the FESC will include Minister level appointees and be chaired by a member of the State Administration Council (SAC – the peak authority formed by the Military following its re-assumption of political power in February 2021). It is expected that the FESC will report directly to the SAC and not sit under the CBM. As the FEML currently grants authority to the CBM to regulate cross border and foreign currency transactions, it is not yet clear how the FESC will exercise the legal authority to regulate foreign exchange and foreign currency matters.
Further clarification is also required on how the FESC will process the necessary approvals to allow cross border foreign currency transactions permitted by the FEML. It would be a momentous task for it to approve every single application to make offshore transfers. It may instead prescribe the approval criteria and delegate the task of issuing individual approvals to another authority, such as the Foreign Exchange Management Department under the CBM. This has yet to be seen, and a number of other legal and practical matters will need to be addressed for the new exchange restrictions to operate systematically.
Consistency with other laws
Businesses operating in Myanmar have certain rights in relation to foreign currency transactions under existing laws. These are principally contained in the FEML and the Myanmar Investment Law 40/2016 (MIL) and the Rules made under them.
Under the MIL foreign investors have the right to transfer abroad:
proceeds, profits from asset, dividends, royalties, patent fees, license fees, technical assistance and management fees, shares and other current income relating to the investment;
proceeds from the total or partial sale or liquidation of an investment or property owned by an investor;
payments made under a contract, including a loan agreement;
payments resulting from any settlement of investment disputes;
compensation received by an investor, including for expropriation; and
salaries and other remuneration of foreign experts employed in Myanmar.
The circumstances in which these transfers may be prevented or delayed are limited to where the business has some outstanding obligations or is not operating compliantly - meaning that businesses should not otherwise be restricted from making these transfers (although the MIL does contain a proviso allowing restricted measures to be introduced in exceptional circumstances).
The MIL – which applies to both domestic and foreign investors - also contains a guarantee that investments will not be “expropriated” without due process and compensation being paid. Expropriation is defined broadly to include “indirect” expropriations, which could potentially include a loss of business or investment brought about by a change in law. Similar investment guarantees are found in investment treaties between Myanmar and other states, and it may be that some businesses who have had their domestic foreign currency holdings converted and their ongoing operations severely impacted examine these provisions to see if they provide any relief.
Under the FEML cross border transactions are divided into current account transactions and capital account transactions. Current account transactions are defined as transfers and payments made for trade, services, short term bank loans, interest on loans, income from investments and overseas family living expenses. Capital account transfers are defined as payments or transfers made for any other purpose.
The FEML requires that current account transfers should be able to be made without any direct or indirect restrictions. The process for making these payments is contained in the FEMR which include providing satisfactory evidence on the purpose of the transfer, if the documentation is satisfactory then the Authorised Dealer bank may execute the transfer.
Capital account transactions can generally also be approved by the Authorised Dealer bank however come under a heavier level of scrutiny and may require some prior approvals to be obtained.
The implementation of the policy and requirements under notification 12/2022 will ultimately determine whether these are inconsistent with the rights of investors under the MIL and FEML. Much will depend on the future direction of this policy to see if the issues raised so far can be resolved.
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Note: This publication has been prepared for general information purposes and should not be considered as legal advice. SCM Legal accepts no liability for actions taken based on this publication. Please contact us if you require advice based on your specific circumstances.