Garment Exporter after Kyat Depreciation
A Myanmar garment exporter contracts to ship 100,000 US dollars of finished shirts. It imports fabric worth 55,000 US dollars and spends 40 million kyat on domestic wages, power, and transport. The exchange rate moves from 2,100 to 2,600 kyat per US dollar. Domestic costs are expected to rise by 12 percent because of imported fuel and materials. The exporter can lock in a forward rate of 2,400 kyat per dollar for the next contract, or wait for the spot rate. A new buyer offers another 100,000-dollar order on the same cost structure, but the exporter would need to borrow 30 million kyat at 2 percent a month for three months to finance domestic costs. The central bank is worried about the trade deficit and is considering selling dollars to slow depreciation.
1. Calculate the exporter’s profit in kyat before the depreciation, at the new spot rate with 12 percent higher domestic costs, and with the forward rate of 2,400. Should the exporter accept the new order financed by borrowing at 2 percent a month for three months? Show your reasoning.
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Before depreciation: Revenue = 100,000 × 2,100 = 210,000,000 kyat. Imported fabric = 55,000 × 2,100 = 115,500,000 kyat. Domestic cost = 40,000,000 kyat. Profit = 210,000,000 − 115,500,000 − 40,000,000 = 54,500,000 kyat.
At the new spot rate with 12 percent higher domestic costs: Revenue = 100,000 × 2,600 = 260,000,000 kyat. Imported fabric = 55,000 × 2,600 = 143,000,000 kyat. Domestic cost = 40,000,000 × 1.12 = 44,800,000 kyat. Profit = 260,000,000 − 143,000,000 − 44,800,000 = 72,200,000 kyat.
Forward rate 2,400: Revenue = 240,000,000 kyat. Imported fabric = 132,000,000 kyat. Domestic cost = 44,800,000 kyat. Profit = 63,200,000 kyat.
The spot rate gives higher profit than the forward rate, but it is uncertain. The forward contract reduces risk at a cost of about 9 million kyat in expected profit compared with the current spot rate.
New order: revenue 260,000,000; imported fabric 143,000,000; domestic cost 44,800,000; interest = 30,000,000 × 0.02 × 3 = 1,800,000 kyat. Profit = 260,000,000 − 143,000,000 − 44,800,000 − 1,800,000 = 70,400,000 kyat. The order is profitable even after borrowing, provided the exporter has capacity and the buyer is creditworthy. If the exporter wants certainty, it can hedge at 2,400; then profit on the new order is 240,000,000 − 132,000,000 − 44,800,000 − 1,800,000 = 61,400,000 kyat, still positive. Recommendation: accept the order, but hedge part of the receipts or arrange a forward contract if the bank requires certainty.
2. The central bank believes depreciation will reduce the trade deficit. Using the exporter’s cost structure and the Marshall-Lerner condition, assess that claim. What should the central bank do?
Read the worked answer
For this exporter, gross export earnings are 100,000 dollars and imported fabric is 55,000 dollars, so domestic value added is 45,000 dollars. Depreciation raises the kyat value of the 45,000 dollars of value added, which is why profit rises from 54.5 million to 72.2 million kyat even after domestic costs increase. But the trade balance is measured in foreign currency, not kyat. The garment sector’s import content is high: a large part of the export receipt is offset by fabric imports, so the net effect on the trade deficit is smaller than the gross export figure suggests.
The Marshall-Lerner condition says depreciation improves the trade balance only if export demand and import demand are sufficiently elastic. If foreign buyers respond strongly to lower dollar prices, export volumes rise; if domestic import demand falls strongly, imports fall. If elasticities are low, depreciation may worsen the trade balance because import costs rise and volumes change little. A J-curve is also possible: the deficit may worsen before it improves.
The central bank should not try to hold a fixed exchange rate by selling dollars indefinitely. That uses reserves and weakens the price signal. A gradual, credible depreciation is preferable, combined with monitoring of imported input costs and inflation. The central bank can support exporters with short-term trade finance and forward-market facilities, and it should watch whether the depreciation is passed through into domestic prices. It should also avoid sharp swings that raise uncertainty. Recommendation: allow gradual adjustment, preserve reserves, and use targeted support rather than defending a specific rate.