Will the Kyat Be Floated?
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Will the Kyat Be Floated?


By YENI Friday, August 26, 2011


Burmese and US banknotes are pictured in Rangoon. (Photo: AP)
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As Burma's president, former general Thein Sein, acknowledges that the country's economy is struggling under the weight of multiple challenges, the question that is foremost on many minds right now is how his government will restructure a foreign-exchange regime that is fast becoming his administration's most pressing problem.

Since the beginning of this year, the Burmese currency, the kyat, has appreciated by more than 25 percent, putting severe pressure on the country's export sector and threatening any effort to restart the economy after decades of stagnation under direct military rule.
 
Currently sitting at around 750 kyat to the dollar, compared to more than a 1,000 kyat to the US unit a year ago, the exchange rate received a rare mention by a Burmese ruler last week, when Thein Sein, speaking to an audience of economists, businessmen and local aid organizations, said on Wednesday that the strengthening local currency is hurting the economy.

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 given them an exemption from commercial tax for a period of six months, from Aug 15 to Feb 14, 2012.

“We very much welcome the government's decision to provide a tax cut,” said Hla Maung Shwe, the vice-chairman of the Myanmar Fisheries Federation—adding, however, that with a loss in revenue of around 25 percent, “exporters are still feeling the pinch.”

There are several reasons for the appreciation of the kyat. Besides the declining value of the dollar  worldwide, other factors include high oil and gas prices (Burma's biggest export is natural gas) and a spending spree by cronies of the military elite, who in the run up to this year's transition to ostensibly civilian rule used their massive dollar reserves to buy up property, gems and state assets.

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 on businesses that could force enterprises to shut down.

Another problem that could emerge is that locally manufactured goods could be squeezed out of the domestic market by cheap imports—something that would have far-reaching 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 advisor to Thein Sein, in a recent paper addressing the exchange-rate issue.

If any good has come of this situation, it is that Naypyidaw seems to be taking U Myint's warning to heart. The government recently told Burmese business leaders that it was preparing to change the official exchange rate, currently set at around six kyat to the dollar, and would soon terminate its use of Foreign Exchange Certificates (FECs), which are circulated in place of US dollars domestically.

Dumping an unrealistic and grossly inefficient system that has long distorted the country's economy is definitely a step in the right direction, but it is one that will require a degree of expertise that is completely lacking among the country's key decision makers.

That's why the government has turned to the International Monetary Fund (IMF) for advice. This will first of all involve asking Naypyidaw to provide key macroeconomic data, such as foreign exchange reserves, balance of payments, national budget, money supply, and GDP—including its sectoral composition and growth rate—household income and expenditures surveys, foreign direct investment inflows, and foreign trade statistics.

There is little, however, that the IMF can do in practical terms.



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COMMENTS (19)
 
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Moe Aung Wrote:
09/09/2011
Myanmar Patriots,

I guess U Myint to have enjoyed/enjoy the life style of a playboy prince in the West is out of the question.

Adjust your eye patch. Sure you got it over the right eye?

Myanmar Patriots Wrote:
08/09/2011
Moe Aung Wrote:

03/09/2011
"Myanmar Patriots,

You tell 'em, milord, coz you know it all."

THAT'S OK, thanks for your obedience. We will pass your message to His Majesty. But do have a little imagination about 'key strokes', though.

U Myint wisely cautioned "the economic, social and political consequences of this chain of events could be serious."

WELL, WELL, WELL. What does this statement say? Practically NOTHING! Just tautology.
Anyone idiot, who has no solution, can caution without pointing out explicitly the consequences.

In the West U Myint can get a job as a waiter. In Burma, amongst the blind the one-eyed is king.U Myint can never come up with any success economic strategy. His knowledge is completely out of date. And the theories he had learnt are irrelevant to third world countries like Burma.

Burma sadly lost Professor Hla Myint (at LSE), mentor of our King. Stupid U Nu!

Bubba Wrote:
07/09/2011
All of these articles have saved me a lot of headaches.

Keiwan Wrote:
07/09/2011
Hey, subtle must be your middle name. Great post!

Fred Wrote:
05/09/2011
The Burmese government will be tempted to float its currency. The pricing mechanism is self correcting, and at the same time, it theoretically doesn’t cost the government any money to maintain it. But the reality is that a floating a currency puts that currency at the mercy of speculators.

With a small economy, by global standards, there’s no shortage of investment fund managers who could earn piles of money by gambling on the currency to get cheaper or more expensive. (For example, George Soros gambling with the British pound and Thai baht.) To counteract this, nations that float their currencies maintain large quantities of currency reserves, to buy and sell their currency to stabilize the exchange rate.

It is probably better, for now, for the Burmese government to set the exchange rate, adjusting it regularly. It will know how to make future rate adjustments, by watching the inflow or outflow of currencies. And it’s a much cheaper mechanism for the government to maintain.

Moe Aung Wrote:
03/09/2011
Myanmar Patriots,

You tell 'em, milord, coz you know it all.

So the 'philosopher king' believes in a technological fix, and economists are redundant. The PORDUCTIVITY (sic) curve is wot does it, eh? Which economics book is that one in? The engineer king must enlighten us.

The robber barons and warlords of Burma sure can drive slave labor on subsistence wages to increase productivity.

U Myint wisely cautioned "the economic, social and political consequences of this chain of events could be serious."

And John Maynard Keynes remarked that "even the most practical man of affairs is usually in the thrall of the ideas of some long dead economist".

Whether politics drives the economy or the other way round is a chicken and egg question. Most likely they drive each other.

Myanmar Patriots Wrote:
01/09/2011
IMF itself is in a quandry. Don't ever imagine that IMF researchers have monopoly of knowledge.
They fail to appreciate the 'crisis of paradigm'. This is a philosophical issue. Bankers don't know even the nature of banking. Their paradign has hit a crisis!
Now is the time for philosopher king.
Increasing 'nominal' GDP by altering exchange rate is a hoax.
Ultimately, it is PORDUCTIVITY stupid! Burma must push 'production frontier' outward. As the curve moves outward farther and farther,the standarding of living rises.
Engineers, scientists, artisans, craftsmen, and producers of commercial services create wealth, not economists.

Myanmar Patriots Wrote:
31/08/2011
"The recommendation by U Myint I believe is to peg the kyat at 900-1,000 to the USD."
WHAT kind of economist is U Myint? Frog-in-the-well type. Pegging the kyat to the US dollar? So the kyat will keep losing value in the long run? Does he know the size of US debt? Does he know anything about sovereign debts of PIIGS?

Oh boy!Paper degrees are worthless unless coupled by real life experience of the how the global financial system works starting with Bretton Wood.

Even Western governments don't know what to do with the Frankenstein their bankers had created; all these derivatives, securitisation, credit swap etc etc., all designed to steal wealth from millions of people. Any idea how much a top Western banker can earn? Up to $300,000,000 a year. How can any human being make so much money other than by robbing the masses?

Over to you Mr. Karl Marx.

Minmartar Wrote:
30/08/2011
IMF research paper 2008

http://www.imf.org/external/pubs/ft/wp/2008/wp08199.pdf


Our baseline analyses indicate that the equilibrium exchange rate to clear the unified market could be about K 450 per U.S. dollar, and that using the derived equilibrium exchange rate for accounting increases nominal GDP by about 10–12 percent as compared in the official statistics. Trade openness increases to about 20–23 percent from less than 1 percent in
measured in official statistics.

Nat Ka Lay Wrote:
30/08/2011
See dollar, once have been a saving tool like gold. Having dollar is like a saving account that earns attractive interest rate. Dollar, houses, lands, cars and gold were people's way of saving since country's currency has turned out to be a quantity only. All these are by the stupidity of Junta who only understand the laymen politics and showed progress in terms of substance. Money were printed only for these purposes; no consideration of productivity value. Dollar has slid but what about the other saving items. Are they gone down too? Set up on inflated account, how businesses can go on now?

Oo Maung gyi Wrote:
29/08/2011
What is Myanma Kyats? Equal to NO VALUE in out side world. Why it has happened like this? The answer is very clear that due to dictatorship starting from New win till Than Shwe. No emedy to cure the system. First of all it re quire CHANGE all system. Politically, economacally and socially has to be changed. Require to release all political prisoners, sitting dawn on round table face to face with all ethnic groups and inclusive of ASSK, then the best solution will come out, otherewise the country will go dawn to the depth.

Nat Ka Lay Wrote:
29/08/2011
IMF's a mission impossible. In Myanmar, since Ne Win's era, the value of the money is made out of non-productive value. Then, production values itself are all superficial. Figures at various levels are just to satisfy their bosses who want water but not want of hearing busket's leakage. This article is informative and ultimately right. Currency floating was in place since long time ago. Just down now due to inequality in the possion of forex power; either in notes or exchangeable wealth. There are thousands of basic issues to be sorted out. No overnight solutions.

Phoe Toke Wrote:
29/08/2011
IMF can do nothing unless the government is transparent and willing to address the real causes of increasing Kyat demand that cause USD weaker and weaker. USD is getting weak globally but nowhere is like Myanmar. Because Myanmar economy is controlled by a group of people. The group is exploiting country by buying and selling the lands, dealing illegal business which all cause increase dollar flow in the country and increase Myanmar Kyat demand. Unless they address the real causes, there is no solution.

Jasmine Tan Wrote:
28/08/2011
Floating Kyats alone never can cure Myanmar's ailing economy.

(1)allow Car import permits(importing car is not against the law.But in Myanmar,no one(even Dr.U Myint)dare to mention about that "sensitive Car Permit Issue; as Thura Shwe Mann's family monopolized "Car Import Business in Myanmar"!

(2)revoke outdated "Foreign Exchange Act" as soon as possible(everybody should have the right to use/keep/save any currency;as a very basic human right)

In fact, if Government wants to change things, it can be done overnight.The thing is; how to eliminate Shwe Mann, who is still holding Chairmanship to make sure his family and his sons' father-in-law can make more money than SPDC days!

Salai Wrote:
27/08/2011
I am not economist. However, there is a clear economic system, that, is UP and DOWN, depending on foreign money exchange rate. It is a sign of economic development when the UP, but declining when the DOWN. 1$ = 100 to 750 is a good sign of economic development. Because it is UP. Thanks to new government. Keep it !!!!!!

Kyaw Wrote:
27/08/2011
The value of Kyat will go up to the official exchange rate of 6 kyats to one dollar as the Country is now the member of the democratic Nations (Though still Military Proxy but already changed the name).

Officially cancel out the 6 kyats per one Dollar and apply only one exchange rate at the current market rate and floating the exchange rate will be the only solution. If not, then we will soon see 100 Kyats to one dollar. Good, GDP increase in the USD term and can buy cheap imported stuff.

Kyaw Wrote:
27/08/2011
Applying two exchange rates is merely tarnishing the image of the country and expelling genuine economy and foreign investments, impossible to have genuine banking service either, which benefit nothing to the state but enrich the money illegal transfer services abroad. The worst is, lagging behind others, looked down by the others that Burma is ruled by illiterate tyrants with no economy brain. Learn from Vietnam, Laos and Cambodia who had very much similar systems to Burma in the past and enjoying the economic growth since 1990s.

Nay Lin Maung Wrote:
27/08/2011
The current situation needs a lot of printing shop for the Kyat.

Moe Aung Wrote:
27/08/2011
Definitely a Herculean task. Half a century of bad habits well nigh impossible to break, provided the political will exists.

Greed combined with incompetence on the part of the ruling class is a disastrous formula for any national budget and public accounts.

The recommendation by U Myint I believe is to peg the kyat at 900-1,000 to the USD. As good a time as any to establish a realistic and workable exchange rate, not some Alice in Wonderland delusional fantasy. People sending money home from abroad is an important sector that gets hit by the strong kyat.

Cheaper imports, so long as the priority is capital goods for infrastructure, machine plants for manufacturing, means a good time for a national govt to invest in for future growth. U Myint also recommended a moratorium on the 10% transaction tax on exports which is taken on board.

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