By M.S. Shah Jahan
April 1, traditionally known as a day to fool or a day of fools for fun making, got a different significance in the international arena of politics and economy in 2012 when Myanmar’s government fooled the entire world by allowing the home-imprisoned, thin and fragile but lion-hearted political leader Aung San Suu Kyi (Kyi is pronounced as chee) to contest and win a land slide victory in the by-election, and also introducing a currency reform to redeem the plagued economy.
Few years ago, if anyone had mentioned that the above two events would become possible one day, he would have been called a fool for trying to deceive others while the authorities would have put him behind bars on charges of treason. What was considered then mission impossible in Myanmar is now mission possible.
Myanmar’s currency has one of the strangest histories in Asia. In the past few years, the government several times imposed surprise demonetisations of the currency, rendering some banknotes worthless and wiping out people’s savings. In the 1980s, under former dictator General Ne Win, new money was printed with odd denominations such as 45 kyat and 90 kyat notes, reflecting the general’s numerological preferences.
On the economic side, the government’s fixed exchange rate for a US dollar in local currency was 6.4 kyat (pronounced as chaat) while the black market rate was 800. Five years ago it went up to 1200. Basically Kyat was unofficially pegged to Thailand’s baht. Strength and weakness of the baht, inflow of dollars through Thai-Burma border, and demand for dollars locally determined the dollar rate in Yangon (former Rangoon).
Experts saw the previous multiple-rate system as a way for the regime to funnel revenues from natural gas sales, foreign projects and foreign aid into secret accounts by recording payments at the previous official rate of just six kyat per dollar and then exchanging them at the much higher informal rate in free market. Such money was shared among military officials and then parked in Singapore, primarily as investments, shopping or safe keeping.
Let’s go into the past. Most of the government transactions like auctioning gemstones and jade, selling timber etc. were transacted in euros rather than the dollar. Apart from kyat, dollar or euro, Myanmar had another form of money called Foreign Exchange Certificate (FEC) that equaled US dollars and was issued by the Central Bank of Myanmar.
The rate for FEC fluctuates according to the US dollar in most cases. It can be spent anywhere in Myanmar. Unlike with US dollars, no special license or permit was necessary for a Myanmar citizen to accept FEC. Officially approved hotel rooms, airlines, and larger souvenir shops require payment either in US dollars or FECs. You can also exchange FECs for kyat – on free market rate – at hotels, shops or from money changers.
The US dollar is the most desired currency and essential to the country’s overall economy. Other currencies usually get a poor rate of exchange on the free market. Legally speaking, dollars can only be accepted by establishments possessing a license to accept the greenback. In reality, all merchants are quite happy to take them. The US dollars can also be used for exchanging kyat from licensed money changers, at hotels, or on the black markets. No private citizen was authorised to have even one dollar bill. If used, it would invite a prison term.
Credit cards get a tough time here in Myanmar. American Express, Diners Club, Visa and JCB are, generally speaking, not accepted in the country. But it is possible to use credit cards to pay for stays in some mid-range hotels and for purchases in up market shops in Yangon and Mandalay, a popular hill station frequented by tourists.
There is usually a fee of 6% to 15% for credit card transactions. All transactions paid for with foreign credit cards in Myanmar are charged in US dollars and converted to your home currency by the card’s bank of origin. Some travel agents offered transactions of credit cards with a fee. No one touched their traveler’s cheques.
Goods and services may be priced either in kyat or in US dollars/FECs. Hotel rooms, some train tickets, air tickets, car rental and guide services are generally priced in US dollars/FECs – for some of these services, US dollars/FECs may be the only currencies accepted. Duty-free items at the airport are also priced in US dollars/FECs. Food, taxis, buses and just about everything else in Myanmar are priced in kyat.
The system of having multiple exchange rates goes back many years, and was imposed at a time when the government wanted to exert more control over the economy amid an unsuccessful bid to introduce socialist policies. Though official rate is settled at about six kyat to the dollar, many businesses continued operating at unofficial rates.
Economists say the government was stuck with the system because it allowed officials to muddle the country’s accounting and effectively keep two sets of books, making it easier to hide revenues that could be diverted to other needs, such as military hardware, and to line the pockets of officials. Myanmar officials deny such practices.
The system has become increasingly untenable over the past few years as Myanmar has embarked on economic reforms aimed at attracting more foreign capital and modernising its economy, which still doesn’t widely use ATMs or credit cards. The three types money systems are so confusing that many foreign companies refused to re-enter the country even if Western leaders eased sanctions against the military junta.
Myanmar on Monday began a managed flotation of its currency. The government announcement simply said that the kyat will “from now on be determined by supply and demand” via a “managed” floatation, and that the government would “gradually eliminate restrictions on current international payments and transfers abroad.”
The Central Bank said the managed floating exchange rate would allow market forces to determine the value of the kyat while leaving room for it to influence the unit’s value and set a reference rate of 818 kyat to the US dollar. The move brings the official currency rate in line with its value on the black market of about 800 to the greenback. Among other risks is that the kyat would keep increasing in value as more foreign dollars rush in to take advantage of business opportunities there, hurting exports.
There are also concerns that businesses or investors could seek to manipulate the currency, though the odds of that, for now, appear low. The country currently has no electronic market for the kyat. According to local businessmen, banks inside the country were only recently permitted to exchange kyat for dollars, but are limited to transactions of less than $2,000.
The lack of a developed financial market has the flipside of making it difficult for the central bank to inject or withdraw kyat liquidity or to intervene in the dollar market, as most of it occurs with back-alley money changers. The small size of the economy means a modest inflow of cash could destabilize the kyat and pose a challenge for the central bank to respond. “Inject $10 million and it would destabilize,” says a Yangon economist who is familiar with the transition to a unified currency.
Another issue is the size and readiness of the central bank’s firepower in managing the currency: its stock of dollars. Economists at the Asian Development Bank and elsewhere estimate that Myanmar has between $2 billion and $7 billion in foreign exchange reserves compared with more than $180 billion in neighboring Thailand, according to the Asian Development Bank (ADB). Nay Zin Latt says the country’s reserves are “in the billions” of dollars, up from “only a few million” in 1988.
Myanmar’s business community remains nervous about the move, especially if the kyat increases in value. The currency’s unofficial rate has already strengthened against the dollar over the past two years as exports of rice, beans and energy have increased, while restrictions on imports prevented the need to send dollars abroad.
“Even now we cannot breathe with the currency set at around the 800 kyat-to-the-dollar level,” says Khine Khine Nwe, deputy managing director of garment makers Best Industrial Co. Ltd. and executive council member of the Myanmar Garment Manufacturers Association. The garment industry is hoping that a potential relaxation of US sanctions will revive factories there, but a surging currency will make it more difficult to compete on cost.
“Establishing a transparent and unified exchange rate is a first, but vital step is building confidence in the kyat, and hence the economy,” Vishnu Varathan, an analyst at Mizuho Corporate Bank in Singapore, said in a report. “This helps provide comfort on the stability of returns on investments as well as offer some degree of principle protection.”
Finally, at the invitation of the new government, a team of experts from the International Monetary Fund IMF visited Myanmar in October to offer advice on reforming the Forex market and unifying its multiple rates. Also, experts from the Malaysian and Thailand central banks are helping with the transition. IMF deputy managing director Naoyuki Shinohara told reporters in Bangkok that the Washington based institution was helping Myanmar to build a strong financial system.
When lions fail to roar economically, it is the IMF that comes as a ring master!
M.S. Shah Jahan is the CEO of Taipan Trading Company, a Gem and Precious Stone Consultancy Company based in Colombo, Sri Lanka.