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In early 2003 Myanmar experienced a. severe banking crisis. Triggered by a collapse amongst a cohort of informal finance companies, the resultant panic quickly sparked a crisis of confidence in the country's nascent private banking sector. Prompt and credible liquidity support to the banks could have limited the damage, but Myanmar's monetary authorities proved unequal to the task. This paper examines the course taken by Myanmar's latest financial crisis, presents a critique of the policy responses to it and concludes with some thoughts on how the damage it wrought on the real economy could have been avoided.
I. Introduction
In January 2003, Myanmar began to experience what has become a prolonged financial crisis. Triggered by the collapse of a series of informal finance companies (the so-called A-kyoe-saung lou-ngan), the crisis quickly extended into the country's emerging private banking sector. Subsequent "runs" on the banks denuded them of reserves and prompted the adoption of measures to restrict withdrawals. In the panic, a flight to cash led to a shortage of Myanmar's currency, the kyat, and a liquidity crisis. Liquidity support, had it been rapidly and appropriately supplied by the Central Bank of Myanmar (CBM), should have limited the contagion. Such liquidity support from the CBM, however, never arrived. To exacerbate matters, its orders endorsing restrictions upon withdrawals and the recalling of loans from borrowers greatly impaired trust, the indispensable ingredient of financial stability. Myanmar's private banks, which superficially had appeared to be performing strongly before the crisis, have been irreparably damaged.
Of course, financial crises are not new to Myanmar. What distinguishes this latest drama, however, was that its genesis lay in the private sector. This meant that while its immediate impact upon the greater populace was perhaps not as great as the government-inspired disasters of yore, its longer term effects, not least in sowing distrust in the market economy, could be great indeed.
The purpose of this paper is to examine this latest financial crisis in Myanmar and to provide an analysis of the policy responses to it. The time period examined is limited to that of the "crisis" phase, the "runs" on the banks and the immediate official reaction. The broader effects of the crisis are yet to be played out, and the...