Burma’s multiple exchange rate regime has long been the most noticeable of the maladies that have characterized the country’s economy. Of particular prominence, and of significant impact as the channel that allowed the expropriation of Burma’s foreign exchange earnings in years past, has been the yawning gap between the market exchange rate of the kyat and the otherwise moribund official rate in place for decades. The latter has been locked more or less at 6 kyat to the US dollar, while the former has reached lows of 1,400 kyat to the dollar, but has lately traded in the 700-800 kyat range.
Given all of this, the recent announcement that Burma is to move to a “managed float” from April 1 has attracted much attention. Rightly so. The decision has the potential to transform economic policy making in Burma. Whether this potential becomes an actual transformation, however, turns upon a number of matters that might get in the way.
Caveat one on being overly confident that this move is a certain game changer is that, if the reports turn out to be accurate, what is being proposed for the kyat seems to place more stress on the “managed” than the “float” part of the equation. The rate selected to kick the system off, 820 kyat to the dollar (with a two percent allowable margin either side), looks very certain and specific. The trouble is, we don’t really know what a rate for the kyat that is consistent with the country’s economic “fundamentals” should be.
Current market rates have hovered around 820 kyat, but such rates are regarded as punishingly high by Burma’s private sector exporters. Once official government receipts and payments are transacted through a freer market, these may or may not have a material effect on the kyat’s price. In short, before settling on any particular point around which to manage the exchange rate, a bit of truly free floating might be in order.
Caveat two on declaring “transformation accomplished” is a necessary “wait and see” with respect to what happens with the accounting of the foreign exchange earnings of Burma’s state-owned enterprises. Should these be recorded at the new floating rate, then Burma’s budgetary position will be transformed. Accompanied by reasonable cuts to military spending, and Burma should have the financial resources it needs to lift spending on health, education, and all the other areas of desperate need. Public announcements with respect to Burma’s budget for 2012/13 suggest a rate similar to the new floating target is indeed being employed. However, as yet we lack details of this budget. Burma’s fiscal deficits have been the most intractable of its economic problems, and the budget is the medium through which the biggest impact of exchange rate change will be felt. In short, upon this depends just about everything.
A final caveat concerns the question of what to do if 820 kyat to the dollar persists in damaging the reasonable prospects of Burma’s private sector exporters, and/or if market pressure pushes the rate even higher. The latter may be a likely consequence of Burma’s rising exports of energy which, from 2013, will be significantly boosted when the gas from the Shwe fields start flowing to China. As a consequence of all of this Burma faces what is often called “Dutch disease” (so named after the experience of the Netherlands after the discovery of North Sea oil), where an energy exports-generated surge in the exchange rate makes other exports uncompetitive. In other countries the phenomenon has hollowed out entire industries. In Burma the risk is that some industries, dependent upon the country’s location as a low-cost production site, may not even see the light of day.
Combating Dutch disease and keeping the kyat “down” could be achieved in a number of ways. The first and most important method of doing so (both in terms of ensuring that the country has greater access to the goods and services necessary for a modern economy, while simultaneously advancing economic liberty) would be to liberalize Burma’s formal import arrangements. At present, these are wrapped up in a licensing system that is as inefficient as it is inviting of corruption. Ending import licensing is a good policy regardless. If it brings with it the additional benefit of relieving upward pressure on the kyat, so much the better.
A second way Burma could hold down a rising market price of the kyat would be for the monetary authorities to “sell it” for foreign exchange. Such market intervention is relatively easy to undertake in the case of an exchange rate over-shooting on the upside, though it does bring about an increase in kyats on issue, raising possible inflation concerns. These excess kyats could then be “mopped up,” however, by sales of kyat-denominated treasury bonds, enhancing in turn the role of such instruments in financing budget deficits as and when they emerge. Of course, along the way Burma also accumulates foreign reserves (useful as a cushion against a volatile external sector, and necessary perhaps to eventually clear the country’s foreign debt arrears).
Moving to a managed float for Burma’s currency does not constitute anything like a magic bullet for its economic ills. These require yet more profound change, but especially in the transparency required in the spending and revenues of government. It is, however, a step in the right direction.
Sean Turnell is an economist at Australia's Macquarie University and editor of Burma Economic Watch.
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