A Kyat in the Dark

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.