A Kyat in the Dark
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NEWS ANALYSIS

A Kyat in the Dark


By YENI Thursday, October 6, 2011


In this photo taken on July 21, 2011, cashiers are seen behind piles of kyat banknotes as they count it in a private bank in Rangoon. (Photo: Reuters)
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A s Burma’s new, ostensibly civilian government finally begins to acknowledge the multiple economic challenges facing the country, one issue has come to the fore: a foreign-exchange regime that has for decades played a major role in keeping Burma in the global economic wilderness.

The reason for this sudden interest in the value of the national currency, the kyat, has little to do with the supposed reformist tendencies of Thein Sein, the ex-general who now serves as Burma’s "civilian" president. Rather, the kyat has thrust itself upon the new regime’s attention because it threatens to eviscerate one of the few growth sectors of the Burmese economy: food and other commodity exports.

Since the beginning of this year, the kyat has appreciated by more than 20 percent, putting severe pressure on exports and threatening efforts to restart the economy after decades of stagnation under direct military rule.

Now sitting at around 800 kyat to the dollar, compared to more than 1,000 kyat to the US unit a year ago, the exchange rate has become such a serious concern that in August, Thein Sein was forced to acknowledge before an audience of economists, businessmen and local aid organizations that the currency’s strength was hurting the economy.

"In consequence, local demand for goods is falling, and it has affected producers, especially farmers, who depend on exporting agricultural produce. So ways and means are being sought to ease the crises those farmers are facing," the president was quoted as saying in the state-run New Light of Myanmar newspaper.

To reduce the burden on exporters, the government has cut export revenue tax on seven items—rice, beans and pulses, sesame, rubber, corn, marine products, and animals and animal products—from 7 to 2 percent, and exempted them from commercial tax for a period of six months, from Aug 15 to Feb 14, 2012. Burma’s Central Bank has also announced that it will reduce the interest rate on loans from 17 to 15 percent, in the expectation that easier financing will help boost private sector investment.

But temporary relief measures may not be enough. The danger now, say experts, is that the exchange rate could reach a point where repatriated earnings from exports are no longer sufficient to cover the costs of production, inflicting huge losses that could bring entire industries to their knees.

The rising kyat is also affecting the economy in other ways. Already, it is taking a sizable bite out of the value of overseas remittances. Money from expatriates supports hundreds of thousands, or even millions, of poor relatives back home. According to Sean Turnell, a specialist on the Burmese economy at Macquarie University in Australia, the average worker in Thailand, where there are an estimated two million Burmese migrant workers, sends back around US $300 a year. Most of this is spent on daily living expenses, or on housing, education and health.

In the longer term, the kyat’s continuing climb could also hit locally manufactured goods, as domestic consumers turn to cheaper imports to offset declining income—something that would have highly disruptive effects on an economy that has long been geared to self-sufficiency.

"The economic, social and political consequences of this chain of events could be serious," wrote U Myint, a leading Burmese economist and the top economic adviser to Thein Sein, in a recent paper addressing the exchange rate issue.

No Relation to Reality

With all the talk of how the kyat’s recent surge is impacting on the economy, it’s easy to forget that the currency’s current value is actually less than one percent of its official worth.

At the official exchange rate, one dollar fetches just 6 kyat—a figure that has never borne any relation to reality, and which is rarely used except when recording government revenue from the sale of offshore natural gas and other resources (thereby enabling Burma’s generals to vastly underreport the wealth the country should have accumulated under their rule).

In practice, of course, it is the market, or "black market," that determines the real value of the kyat. Outside of Burma, it is worth nothing at all, being non-convertible. Even inside the country, it is not the only currency in circulation. The US dollar is widely used for a range of transactions, from paying for imported goods to dealing with foreign tourists. The Thai baht and Chinese yuan are also often accepted, particularly in border areas. Other convertible currencies like the euro, the Japanese yen and the Australian dollar are not as popular, but the euro has begun to gain ground as a hard currency of choice.

Despite all this competition, however, the Burmese currency has steadily increased in value since 2009.



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COMMENTS (6)
 
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suzy Wrote:
16/10/2011
Some foreign companies in Myanmar are guaranteeing their foreign employees 950 kyat to $1. This is common in so-called 'international' schools.

Moe Aung Wrote:
08/10/2011
I agree with Jimmy. The exchange rate can be set at say K 850-900 to the dollar, only there are a couple of hurdles like trust and then so many personal and intrusive questions asked, forms to fill.

Instead, even if the rate is a bit lower, people will definitely go to those who will change money for them and no questions asked. I'd be surprised if the new bureaux de change are doing a roaring trade. What is the rate offered anyway, still K6.50?! That'd be unbelievable, completely and utterly moronic.

malaysian Wrote:
07/10/2011
hello...
i have so many note 5k kyat...
get from myanmar member's at malaysia...
i also see rate at Bank of Negara Malaysia...
100 kyat = rm50+-
but cannot exchange, huhuhu...
lol...

Jimmy Wrote:
07/10/2011
Burmese government is in need of foreign exchange especially American dollars. Because of the enormous difference between the official $1 to 6 kyats and the black market rate of 800 to 1000 a dollar, most Burmese people rely on and use the black market to send the money back home from abroad. It will be a great source of revenue or income for Burmese government if they can collect it but who will exchange the money officially in the old system? The solution is simple. If the Burmese government give a little bit more in kyats than the black market rate, than people will exchange their dollars at the government sponsored exchange sites. For example, the black market rate is $1 to 800 and the government pays 850 kyats, then people will go to the place where they can get more. There is no concern for the government to run out of kyats since more kyats can be printed as necessary. In the short run it will work but in the long run people will keep the dollars and use themselves without involving the middleman government and thus save money.

Moe Aung Wrote:
07/10/2011
It most certainly is a big ask "to break half a century of bad habits", and Dr Tin Soe summarized them perfectly.

Notwithstanding the IMF, whose advice on removing the petrol price subsidy sparked the August protests and September Saffron Revolution in 2007, will we see the leopard change its spots, basically putting public interest above their own?

confused Wrote:
07/10/2011
why should the kyat be floated? why fixed or partial fixed exchange won't work?


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