Will currency reform bring Burma one step closer to creating a modern,
stable economy?
With its eerily quiet corridors
and lack of activity, the Central Bank of Myanmar building in Rangoon serves as
testament to the haphazard policies of the Burmese government’s past.
Occupying a large compound in the
north of the city, this vast structure has remained under-used since civil
servants in Rangoon started to pack up government offices and leave for the
then half-completed new capital of Naypyidaw in the early hours of November 6,
2005, a moment reportedly chosen by astrologers.
Burma’s post-independence
monetary history is a classic case of fact being stranger than fiction, a
period in which former dictator Ne Win demonetized the local currency twice
without advance warning – in 1985 and 1987 – with predictably disastrous
results for ordinary Burmese: many lost their savings. That was in additional
to the demonetization of the currency in 1964.
But as the nominally military
government which took power in March 2011 proceeds with an ambitious reform
agenda, central bank Deputy Governor Maung Maung Win says the next stage of a
plan to unify multiple exchange rates- including the withdrawal of Foreign
Exchange Certificates (FEC) from next year- will be an altogether more
predictable process.
“If the foreign-exchange trading
business and foreign exchange transactions among the banks are smooth and still
stable … we can withdraw the FEC from the market,” he said.
Those that hold FECs, an exchange
currency whose face value is (officially) equal to the U.S. dollar, would be
given time to swap them for the greenback or Burma’s currency, the kyat, said
Maung Maung Win.
A period of at least six months
would be set, he said, during which people would be able to exchange FEC bills
with the central bank and continue to use the currency. Then it would go out of
circulation but the general public would still be able to exchange FEC with the
central bank, possibly for up to five years, he added.
“If a customer wants to change
[for] Myanmar kyats, we can pay Myanmar kyats at the daily reference rate,” he
said, referring to the managed-float system introduced in April.
This was the first major step in
a lengthy process of Burmese currency reforms planned over the next few years
in consultation with the International Monetary Fund.
If everything goes according to
plan, it would not only represent the first time since independence that Burma
has managed to withdraw significant numbers of bank notes from the money supply
without causing chaos, it would also herald the end of one of the most unusual
currencies in the region.
Introduced in 1993, FECs were
designed to offer a bridge between foreign exchange and the kyat in a country
which officially banned its citizens from holding foreign currency and – as a
pamphlet introducing the currency noted – “for the enhancement of foreign
exchange earnings” as the country faced Western sanctions and the prospect of
dwindling foreign reserves.
It was a masterstroke by a
government running out of ways to generate much-needed foreign exchange.
At first, tourists were required
to change U.S. $200 into FECs and foreign companies doing business in Burma –
so too aid agencies – were forced to deal with this parallel currency, and at a
rate significantly below that of the dollar versus the kyat.
The only ways to change dollars
for kyats was illegally on the street, at hotels offering inferior rates,
through businesspeople seeking dollars to pay for imports or official
money-changers where the kyat was fixed at rates considered massively
overvalued.
As in the few other countries
which have experimented with parallel currencies for foreigners, mostly
socialist states, it also created a host of problems, says Than Lwin, the vice
chairman of Kanbawza Bank, a private lender who helped devise Burma’s FEC
policy.
“We thought the FEC should be
issued only for a short while, say for a few years – or around that period –
just like the Chinese and Pakistanis had done,” he said. “But, as you know, the
FEC became a permanent feature as we dragged our feet, so we did not need to
unify the currency.”
Following a new foreign exchange
law introduced this month, Burmese are now legally permitted to hold foreign
currencies without a permit for the first time since 1947.
For Burma, it’s another key
milestone towards reconnecting to the global financial system less than a year
since the country reintroduced ATMs following a banking crisis in early 2003.
VISA and MasterCard announced recently they will reenter the country in 2013.
Whether the central bank can
withdraw the FEC with minimum disruption will largely depend on its ability to
prevent the currency from sliding in value as the general public learns of its
demise.
Maung Maung Win says the central
bank and the government have for some time discussed how to keep the value of
the FEC close to the dollar given that its value has often fallen well below
the greenback, a disaster for the tens of thousands of people employed by
foreign companies, the United Nations, and aid agencies who are paid in FEC.
“Sometimes we maintain the FEC
price,” he said, without responding on whether the government had already
started to quietly withdraw the currency from the money supply.
Maung Maung Win would not say how
much is in circulation, explaining that he did not want to give potential
speculators the chance to play the market. New FEC bills had not been printed
for several years, he added.
“We have enough FEC at the
central bank,” he said.
Once the currency has been
withdrawn, another key test will be how it affects the value of the kyat
following a slide of more than seven percent since a managed floated on April
1, more than any other currency in the region, according to Bloomberg News.
Saktiandi Supaat, head of FX
research at Maybank in Singapore, says the kyat looks set to continue falling
against the dollar.
“This would be beneficial for
exporters in the country,” he said. “The question is whether $8 billion of
reserves is sufficient to lean against the wind as they allow greater [currency]
flexibility.”
Steve Finch
Steve Finch is a freelance journalist based in Bangkok. His work has
appeared in the Washington Post, Foreign Policy, TIME, The Independent, Toronto
Star and Bangkok Post among others.
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