YANGON -- Even as banks take on a growing share of foreign exchange trading in Myanmar, black market dealers remain firmly entrenched, with the short-lived crackdowns by the government when the kyat moves too sharply doing little to root out the problem.
The building that houses the Yangon Stock Exchange was once a branch of the Reserve Bank of India, a relic of the British colonial era. Now it serves as a symbol of the modern economic system adopted by Myanmar with its transition to democracy.
But in an alley behind the bourse, a black market currency exchange sets up shop each day.
"On a busy day, we get $50 million in trades," boasts a man in his 40s involved in the operation. Smartphones in hand, he and other dealers send a stream of buy and sell orders. They often deal with foreign trading firms, and sometimes handle upward of $500,000 in a single transaction.
Cash rarely changes hands directly. Instead, trades are handled via bank transfers. When someone sells dollars, for example, the greenbacks are sent to a foreign bank account held by the buyer, with the Myanmar kyat purchased in exchange going to a different account. When negotiations are complete, dealers direct subordinates waiting at the relevant banks to put the transactions through.
Unlike in advanced economies where exchange rates are set through interbank trades, Myanmar's informal market plays a major role in determining formal rates. Banks and other institutions are believed to refer to the black market rate, and authorities are sensitive to its movements.
Last year, the kyat plunged along with other emerging-market currencies due to factors such as rising U.S. interest rates. It weakened beyond 1,600 to the dollar from 1,330 at the start of 2018, driving up prices for food and gasoline -- for which the country relies heavily on imports -- and hampering the economy.
Police responded by arresting five currency dealers on allegations of market manipulation. The black market behind the stock exchange temporarily shut down. The government sees such arrests as its most effective option for currency intervention, a local journalist said.
Myanmar has made progress, if slowly, toward normalizing its foreign exchange market, thanks partly to a rise in investment by overseas companies. After starting its democratic transition in 2011, the government overhauled foreign exchange controls, ending the coexistence of official and unofficial rates. Private-sector banks were permitted to handle foreign currency.
In the final seven trading days of last month, foreign exchange transactions between banks and customers averaged $49 million per day, nearly triple the figure from three years earlier. With trade-related payments in particular, the share of transactions handled legitimately via banks has grown year by year. The interbank foreign exchange market has surged sixfold in the past three years.
Yet businesses continue to turn to the informal market, lured by convenience and better rates. When the kyat holds relatively steady, the government generally leaves unofficial dealers to their own devices.
If the estimates by the black market operators are accurate, roughly as much currency trading occurs through those informal channels as through formal institutions.
The currency exchange behind the Yangon bourse reopened. "Business isn't any slower," the dealer there said.
A precipitous crackdown on the black market would risk throwing commercial activity in Myanmar into turmoil. But leaving it alone could hinder the development of legitimate markets.
To keep the kyat stable, "it's crucial for [Myanmar] to have banks concentrate on foreign exchange trading, and to give the currency market a shot in the arm with things like futures trading," said Koji Kubo, senior research fellow at Japan's government-backed Institute of Developing Economies.