When a Worthless Currency Appreciates

For the first time since 2005, the US dollar has fallen below 800 kyat at the unofficial “street” exchange rate—a far more accurate indicator of the value of the Burmese currency than the government exchange rate of approximately six kyat to the dollar. The kyat’s recent appreciation demands an reexamination of the Burmese currency exchange regime and its impact on the population.

The kyat is non-convertible and non-negotiable outside of the country. Although Burma has no official currency market, the 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.

Yeni is news editor of the Irrawaddy magazine. He can be reached at [email protected].

Burmese currency has steadily increased in value since 2009. In early 2010, one US dollar was equivalent to more than 1,000 kyat, but dropped to less than 900 kyat by the end of the year. Today, the currency is traded on the black market at 782 kyat per dollar.

So the question is: Does this currency appreciation mean that Burma—a country that has suffered for decades from pervasive government controls, inefficient economic policies and corruption—is finally seeing an improvement in its economic performance?

The answer, unfortunately, is no. There are many reasons for the kyat's rise against the dollar—from inflows of foreign aid and an influx of drug money to huge Chinese investments in the energy and mining sectors—but none of them point to a reversal of the Burmese economy's long downward trend. Indeed, another factor in the kyat's recent climb cited by some in the country's business community—a shortage of money in circulation—is actually crimping demand for goods and services, putting further pressure on the economy.

Further complicating the picture is the fact that the appreciation of the kyat follows the Burmese regime's sell-off of state-owned properties and businesses, which netted massive amounts of revenue for the government but has so far done little good for the rest of the country.

Months before last year's sham election, the former military government initiated a major privatization plan. State assets—from gas stations and cinemas to hydropower plants, telecommunications companies, ports and airlines—became the private property of military families and business cronies of the ruling generals. This transfer of wealth to an entrenched elite only served to further widen the gap between Burma's haves and have-nots.

Although the sale of stated-owned property might have helped to to reduce the country's ballooning fiscal deficit, the lack of transparency that characterized the entire process makes it impossible to know how much of the money raised went into public coffers, and how much wound up in the generals' private bank accounts. All we can say for sure is that the state has been saddled with massive debt, much of it to finance the construction of Naypyidaw, with its imposing public buildings, extensive road network and lavish residences for the retired generals.

“While the elites are getting richer and more comfortable, the general population in Burma is continuing to feel the pinch and suffer more and more,” commented one Burmese economist, speaking on condition of anonymity. He pointed to Burma's constantly rising inflation, which last year reached 10 percent, according to the Economist Intelligence Unit, as a particularly onerous hardship on the country's poor.

Inflation is, in fact, caused primarily by the budget deficit in Burma, but the Central Bank is always ready to print more money to fund the government’s excess spending. Sources close to the bank told The Irrawaddy that even now it is sitting on piles of newly printed 10,000-kyat notes and is just waiting for a call from the new government led by President Thein Sein to issue them.

Meanwhile, exporters' concerns are mounting. Exchange rate fluctuations and the weakness of the US dollar in particular could bring rice and agricultural export market instability. This instability could lead to a domestic surplus, which will cause prices to fall, ultimately hurting farmers.