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. For most of 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. There have been several explanations for this. Besides the declining value of the dollar worldwide, other factors include a dramatic increase in foreign investment, especially in the energy sector; 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 real estate, gems and state-owned businesses.

While these factors may have driven up the value of the kyat, however, they have done little to put the country’s finances in order. In August, when budget figures were presented in Parliament for the first time since 1987, Maung Toe, the secretary of the Public Accounts Committee of the country’s Pyitthu Hluttaw, or Lower House of Parliament, said that Burma would run a deficit of about 2.2 trillion kyat (US $2.9 billion) in the 2011-2012 fiscal year.

Responding to a question by an MP, Maung Toe said the government expected to raise 5.78 trillion kyat ($7.7 billion) in revenue, while expenditures were budgeted at 7.983 trillion kyat ($10.6 billion). Although he provided no details about government expenditure, an official document released earlier this year, known as the government gazette, showed that nearly a quarter of this year’s budget would go to the military.

Although the sale of stated-owned property might have helped 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. It is also worth noting that much of this massive debt was used to finance the construction of Naypyidaw, with its imposing public buildings, extensive road network and lavish residences for the retired generals.

Despite its efforts to make all the right noises about poverty alleviation and curbing corruption, the Thein Sein administration continues in the footsteps of its junta predecessor in spending heavily on the military, while doing little in the way of implementing policies to support households and businesses.

Meanwhile, Burma’ central bank remains reluctant to tighten policy aggressively, as it is not operationally independent from the government. Burma’s domestic inflationary pressures remain strong owing to the fact that the central bank—which is operated by the Ministry of Finance and Revenue—is always ready to finance the budget deficit by printing money, with the consequent growth in domestic credit pushing up prices. Combined with pressure from rising global consumer prices, this could send Burma’s inflation rate up to 16.2 percent in 2011, according to the Economist Intelligence Unit.

Of course, it is the very poor, who make up the bulk of Burma’s population, who bear the brunt of this erosion of purchasing power. But the country’s much smaller middle class also struggles with the distortions inherent in an economic system heavily weighted to favor a tiny handful at the top.

Ironically, despite the rising value of the kyat, most middle-class Burmese consider their national currency essentially worthless. Those who somehow manage to rise above mere subsistence aspire to send their children to school in Singapore, Malaysia or Thailand, or to move to these countries themselves, to escape being squeezed by ludicrously high duties on the sort of goods that most people of moderate means take for granted.

On the Road to Reform?

While most of Burma’s economic problems are seen as an endemic feature of life under an entrenched authoritarian regime, there appears to be at least a nascent recognition among the country’s rebranded rulers that the status quo is simply unsustainable. How far they are prepared to go in reforming a system of their own creation is, however, an open question.

If Thein Sein was hoping that a few cosmetic changes would suffice to bring Burma into the international mainstream, the renewed focus on the kyat has served to highlight just how bizarrely out of step with the rest of the world the country remains. In addition to setting an official exchange rate that would cripple the economy if it were actually enforced, the government continues to print its own US dollars, in the form of dollar-denominated Foreign Exchange Certificates (FECs).

At least on this front, the government seems to be getting a grip on reality. Government officials have reportedly told Burmese business leaders that the FEC is on its way out. There are also growing expectations that the exchange rate will be readjusted to better reflect the country’s economic needs.

Dumping an unrealistic and grossly inefficient system that has long distorted Burma’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. To provide this advice, the IMF will first of all ask Naypyidaw to provide key macroeconomic data, such as foreign exchange reserves, balance of payments, national budget, money supply, GDP (including its sectoral composition and growth rate), household income and expenditures surveys, foreign direct investment inflows and foreign trade statistics.

IMF spokeswoman Gita Bhatt recently confirmed that the Washington-based financial institution had received a request from the Burmese authorities to help them "prepare to modernize their exchange-rate system and lift restrictions on the making of payments and transfers for current international transactions." She said the IMF planned to send a technical team to Burma in late October to begin the process, but other details about contemplated reforms weren’t available.

The government seems convinced that it is on the right track. The "problem of exchange rate gap, the main barrier to international trade, will be solved along with the proper evolution of market economy," Finance Minister Hla Tun was as quoted saying in The New Light of Myanmar, which also reported that the authorities had reached out to the IMF and sent trainees overseas as part of its efforts to reform the exchange rate.

Beyond providing some much-needed advice, however, the IMF is unlikely to play a major role in bringing these plans to fruition. Because Burma hasn’t paid back its debts to multilateral financial institutions—and because the US wields effective veto power over the IMF—the country is barred from receiving any new financial aid.

That shouldn’t matter, however, because Burma is believed to have abundant foreign exchange reserves (thanks to its sales of gas, gems and other natural resources), which it would need if it decided to discard the fixed exchange rate completely and simply float the kyat.

While this might seem like a radical departure for a country that has spent nearly 50 years under a succession of authoritarian regimes notorious for maintaining a stranglehold over every major sector of the economy, floating the kyat could very well be the best way forward. Best of all, it "would require quite literally little more than the stroke of a pen," according to Macquarie University’s Sean Turnell.

In fact, introducing a floating currency would only be a matter of making official the informal system that has long been in place in Burma, where for decades most international transactions have been based on an unofficial exchange rate determined by market forces.

Floating the kyat would reduce bureaucracy, increase economic freedom and hinder those elements that use the current exchange-rate arrangements as a vehicle for corruption, said Turnell, who added that the dual exchange rate allows government officials and state-owned enterprises to in essence maintain two sets of books, enabling them to hide revenues that could be diverted to other needs.

The only danger, however, is that bringing a degree of common sense to Burma’s exchange rate system could create the false impression that the country’s economic problems can be solved without other, more fundamental changes.

"The exchange rate issue is important, but it’s far from the most serious of Burma’s economic problems, which have their roots in the lack of property rights, reasonable policy making, a voracious state apparatus, etc," said Turnell.

According to a 2008 paper by Dr. Tin Soe, a former professor and department head at the Rangoon Institute of Economics, Burma’s economy since the early 1960s, when the country first came under military control, has been characterized by "inconsistency, instability, interruption and discontinuation, rigidity and limited scope and vision, lack of transparency, unpredictability and uncertainty, quantitative physical targets-orientation, inefficient and ineffective implementation and use and abuse of consultancy and advisory services."

In other words, if Thein Sein really wants to make a difference, his government will have to break half a century of bad habits. Floating the kyat would be a start, but it will take much more than this to clean out the Augean stables of Burma’s economy.


This article appears in The Irrawaddy’s latest e-magazine. http://issuu.com/irrawaddy/docs/irr_vol.19no.3_sep2011_issuu/34?viewMode=magazine&mode=embed