Myanmar's central bank will exempt foreign entities from a controversial new policy requiring foreign exchange to be converted into local currency, a rule that had triggered panic among business groups and residents.

The exemption, dated April 20, includes companies with approved foreign investments, firms in special economic zones, international non-government organisations, diplomats, United Nations agencies and airlines.

In an effort to exert more control over foreign currency flows in the military-run nation, the central bank had declared that from April 3 that foreign exchange earned locally must be deposited at licensed banks and exchanged for the local kyat currency within one working day.

The rule rattled businesses in Myanmar, which has seen a mass exodus of foreign firms in the past year amid conflict, instability, sanctions and policy uncertainty in the wake of the military's coup in February 2021.

The change will provide some relief for fuel importers, which, according to some industry sources, have been impacted by the exchange requirement.

Fuel shortages have been widely reported among residents in Myanmar this week, which the junta has repeatedly rejected as rumours.

The exemption notice did not provide a reason for the about-face, which came after some industry groups and embassies warned business activity could be severely impacted.

Vicky Bowman, director of the Myanmar Centre for Responsible Business, said the restrictions were a "major headache for all businesses" and "create(s) confusion for joint ventures and companies with Myanmar partners".

"While the exemptions...are a step back in the right direction, the implementation is unclear," she said in an email.

A joint statement from foreign business chambers had warned the new currency rules would create "insurmountable challenges" for some businesses and would disconnect the country from the global financial system.

Myanmar's fragile economy has been in crisis since the coup, which halted a decade of political and economic reforms and sent the kyat into a downward spiral.

(Reporting by Reuters Staff; Writing by Martin Petty; Editing by Kanupriya Kapoor and Bernadette Baum)