Myanmar's central bank plans to set the country's new exchange rate at around 820 kyat per U.S. dollar, close to its black market level, as the nation pushes ahead with economic reforms, two officials with private Myanmar banks said on Tuesday.

The change would be a shock for government institutions and state-owned enterprises that have been using the official exchange rate of 6.4, the central bank has said. But broader economic waves are unlikely since an exchange rate around 800 is widely in use.

The bank officials told Reuters on the sidelines of an industry event in Kuala Lumpur, where they were speaking, that the new managed float system would have a trading band of plus or minus 2 percent.

We are currently in the auction process, and there is a plan to manage the float of the currency at 820 kyat, plus or minus 2 percent, to one U.S. dollar, said Aung Kyaw Myo, an official of Kanbawza Bank Ltd.

The central bank had been expected to set the currency around that level as it moves to unify the country's dual exchange rate in the coming weeks - Myanmar's boldest economic reform yet as it emerges from decades of isolation.

The government is calculating its national budget for the year from April 1 using an exchange rate of 800 kyat per dollar, a central bank official said last week.

The currency reform is a major step in ending market distortions caused by the dual system and improving transparency as foreign investors pour into the Southeast Asian country following bold economic and political reforms in recent months.

But it could also cause some disruptions and anxiety in a country where memories of economic mismanagement are fresh. The sudden cancellation of certain banknote denominations by late dictator General Ne Win in 1987 wiped out many people's savings and helped trigger a pro-democracy uprising the following year.

The kyat's unofficial rate, used in most transactions, has jumped from more than 1,000 per dollar in 2009 as foreign money has flowed into the timber, energy and gem sectors. That has hurt many Burmese, from farmers and manufacturers to traders and employees of foreign firms paid in dollars.

GROWING PAINS

This market-driven reform will boost foreign investment interest, said Douglas Clayton, chief executive of Leopard Capital, a private equity fund focused on emerging Asian markets. In terms of growing pains, there could be some imbalances in supply and demand but that will not be unusual in such a transition.

Since government institutions have been using the official rate, state revenue is underestimated. Some critics say it is likely that vast sums of that money have been kept off the books and quietly smuggled out of the country into offshore bank accounts held by cronies of the former junta.

A central bank official said last week that the government plans to hold trial foreign exchange auctions in March before floating the currency from April 1, the start of the 2012/13 fiscal year.

Central bank documents obtained by Reuters this month set out plans to begin a managed float of the currency in the fiscal year from April and develop an interbank money market. From 2013/14 onwards, Myanmar would aim to entirely eliminate the informal currency market, the documents said.

The float coincides with political reforms that are ending half a century of isolation in the former British colony also known as Burma.

The country's nominally civilian government has freed hundreds of political prisoners, loosened media controls, engaged with pro-democracy leader Aung San Suu Kyi, and implemented a slew of economic liberalisation steps.

Rona Rakhit, head of Business Development and Strategic Initiatives of the Co-operative Bank Ltd, the second-largest private bank in Myanmar, said at the Kuala Lumpur event that 11 out of the 19 private banks in the country are participating in the auction process. The country hopes to unify its dual exchange rates by the end of April, he said.

Co-operative Bank Ltd was one of four Myanmar banks that signed remittance agreements with Malaysia's largest lender Maybank on Tuesday to help over 140,000 Myanmar migrant workers in Malaysia send money home.

Today there are tremendous opportunities for business and investments, and foreign exchange is much needed to funds its economic growth, Maybank Chief Executive Abdul Wahid Omar said in a speech at the event.

K K Hlaing, a businessman in Myanmar's commercial capital Yangon, said he expected little disruption from the new exchange rate as it was already widely used in business transactions.

The government is simply formalising the unofficial exchange rates in anticipation for investment, he said.

There is not going to be any sudden shock in the economy about this because the people have been going around their business using the 800-820 kyat range.

(Additional reporting by Niluksi Koswanage:; Writing by Stuart Grudgings)