Burma's Fast-Rising Currency

When Burma's national currency, the kyat, dramatically rose in value on the black market against the US dollar, there was no expectation either within or outside the country that an official explanation – let alone intervention – would be forthcoming, nor was it.

Nonetheless, the lack of information and data has left even experienced economists grasping at straws – with the result that the economy is undergoing severe dislocations. For the millions in the country who depend on exports of fisheries, beans and pulses and rice, the dollar's sudden fall could spell disaster as exports have been almost rendered unprofitable or worse overnight.

The situation has left exporters in a brutal catch-22: If they export and the kyat strengthens, their shipments, which are paid for in dollars, would suddenly be worth less than when the contracts were signed. But failing to export carries the risk that clients abroad might seek new suppliers.

In addition, the million-plus Burmese migrants who provide a lifeline for their families through inward remittances, particularly in Thailand, are holding back their payments, waiting for the exchange rate to moderate and leaving their kinfolk at home in increasing dire straits.

The kyat, it appears, has taken on a life of its own, rising and falling against the US dollar in a way that one foreign investor described as having no rhyme nor reason. From a trough of about 1450 to the US dollar in mid-2007, the kyat had strengthened to K750 on June 10. The official exchange rate is K6.41 to the US dollar, so far from reality that many economists believe the government at some point must introduce a proper exchange rate system if trade is to grow. There have been rumors that the Chinese are pushing the Burmese to adopt a more realistic official exchange rate, somewhere around K750.

Sean Turnell, an expert in Burma economics at Australia's Macquarie University, told the Associated Press on June 8 that the global devaluation of the US dollar played a large role in the kyat's sudden strengthening. "Since the movement of the US dollar of late has been down, especially against currencies of countries that produce commodities, the rise of the unofficial kyat is not that remarkable," he said.

What appears to be happening is that the gap between the official rate and the free market rate is closing, which thus drives an apparent rise in the free market kyat. This has actually been going on for some time but appears to have accelerated recently, probably because some liberalization has been taking place in import and export licensing which is probably driving exports faster than imports. That has been complicated, businessmen say, by a shortage of currency in circulation.

It appears there has been considerable capital inflow from East Asia, particularly from China, since last year's election, which is widely regarded as having been rigged. U Khin Maung Nyo, an economist and chief editor of the Burmese-language World Economic Journal, in a presentation at the 2011 Myanmar/Burma Update Conference at Australian National University in Canberra on May 16, pointed to the role of foreign direct investment. Since Burma's 1988 opening to the outside world, the economy had attractive only about US$16 billion in FDI, mainly to exploit its natural gas, minerals and labor market.

Foreign interest simply exploded during the 2010-11 fiscal year, with nearly US$20 billion in contracted investment recorded during the year. Unsurprisingly, China emerged as the big spender, signing contracts with the government worth more than US$14 billion.

"From 1988 to 2010 we had only US$16.5 billion, just US$1 billion per year. In 2010-11 we had another US$20 billion. That contrast in quite interesting," U Khin said. "For 20 years we only have US$16.5 billion but perhaps by Harry Potter's magic wand we suddenly got US$20 billion, mostly from Hong Kong, China and Thailand and [South] Korea last year."

While only a fraction of that money will actually be spent in Burma – most will likely go to procuring heavy machinery and construction materials abroad – some must be converted in Burma into kyat.

Another source of dollars – or euros in this case – into the marketplace has been the government's gem and jade sales. Burma is the world's largest producer of jade, most of which is mined from the country's northern Kachin State before being transported to Mandalay, Naypydaw and Rangon for sale, most of it to huge Chinese interests.

At least twice a year the government hosts gem emporiums to auction jade, rubies, pearls and sapphires. The last emporium, held in Naypyidaw from March 10 to 22, generated combined sales worth €2.2 billion (US$3.08 billion at the time), the state-run New Light of Myanmar newspaper reported. The government sells the jades and gems in euros to avoid US economic sanctions.

At the same time, the government has accelerated a long-running privatisation drive, including the sale of hundreds of previously government owned properties to the private sector. In two separate auctions in January and February respectively, the government put 344 properties – mostly in the former capital of Rangoon – up for auction. Of these, 291 were sold, transferring about K800 billion (more than US$1 billion at last week's exchange rate) to government's coffers.

The selloff netted massive amounts of revenue for the government. Big buyers are required to pay for their purchases by selling US dollar savings. The shortage of money in circulation has been complicated by the countrys new tax laws, which come into effect next month, requiring privately-owned companies to buy kyat to pay their taxes.

U Myo Nyunt, the managing director of General Food Technology Industry Company, summed up the choice faced by exporters.

"If we calculate an order using a rate of K825 to the dollar it's almost certain to fall the next day. But if we're too aggressive and try to predict the falling rate … then our price will be too high and we won't get any orders," he said.