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    Southeast Asia
     Aug 20, 2008
Myanmar exchange scam fleeces UN
By Brian McCartan

CHIANG MAI, Thailand - Myanmar's military junta has in recent months used a dual exchange rate regime to divert funds away from the humanitarian efforts overseen by the United Nations and other international aid agencies for the Cyclone Nargis disaster that struck the country in May.

The system valued the local currency, the kyat, at 20% to 25% less than the prevailing market rate, resulting in currency exchange losses that have ended up in the military regime's coffers.

The UN has suffered losses of at least US$1.56 million to the distorted exchange rate regime, while one senior UN official earlier estimated as much as $10 million had been lost. While the junta on Monday appeared to relax the system after news reports 


spotlighted the diversion of funds meant for victims, the concession will likely fail to overcome donor concerns about the lack of transparency surrounding the humanitarian effort and increases the likelihood they will decline to come up with the $1 billion the UN, Association of Southeast Asian Nations (ASEAN) and the Myanmar government jointly estimated will be needed to rebuild devastated areas.

As the focus of the relief effort shifts from emergency aid to reconstruction, the UN and other aid agencies face the moral dilemma of how long they should continue working with a regime that is reviled in much of the world for its poor human rights record and negligence of the well-being of its own people. Unless the UN plans to source all of its rebuilding materials from abroad, it will soon become necessary for it to work hand-in-hand with government-approved businesses, many of which are known to bankroll the regime and some of which are under US and European economic and financial sanctions.

The UN is renowned for its ability to respond to disasters and coordinate relief efforts. Its agencies have similarly become notorious for their lack of oversight and controls that should ensure integrity of those same operations, blind spots that have already come to light with the dual exchange rate system and that will be a constant concern in working with a government Transparency International ranked last year as tied with Somalia as the world's most corrupt.

The Tripartite Core Group made up of the UN, ASEAN and the Myanmar government issued its post-cyclone needs assessment on July 21 at an ASEAN foreign ministers meeting in Singapore. The report estimated total damage from the cyclone at $4 billion and appealed to foreign donors for $1 billion for relief and reconstruction over a three-year period.

The report followed a second flash appeal to donors by the UN launched in New York on July 10, which called for $481 million for emergency relief and reconstruction. An additional $280 million was requested on top of the original $201 million earmarked to cover the first year of operations, including financial support for 13 UN agencies and 23 international non-governmental organizations involved in the effort.

The ruling generals, on the other hand, have contributed very little to the relief and reconstruction efforts. At the first flash appeal to foreign donors held in Yangon in late May, around three weeks after the disaster first hit, the junta requested $11.7 billion without a proper needs assessment. Critics claim this demand was simply based on the amount of foreign money Indonesia's Aceh received in the wake of the 2004 tsunami.

Since the first days after the May 2 cyclone, locals and analysts have noted an almost complete lack of assistance from the military apart from clearing major roads and, of course, for security. Aid sent from Thailand was shown disingenuously on state-run television relabeled as having come from senior generals themselves.

UN and regional dignitaries were taken on tours of model refugee camps, while thousands of other survivors received little or no relief. After two weeks of official inaction, the junta declared the relief phase over and began a mass relocation of people back to their villages in a cynical attempt to show the world that they had the situation under control.

See no evil
The UN has meanwhile downplayed the difficulties and restrictions its staffers have faced and continues to laud the junta for its collaborative spirit. UN officials have repeatedly announced their hopes the two sides can build on the current goodwill and expand into other future areas of cooperation. John Holmes, the UN's chief humanitarian relief official, estimated after his July trip to the worst-hit Irrawaddy Delta region that the relief effort would continue for another six months and the reconstruction period would likely last until April 2009.

Donors, including the US and United Kingdom, have, however, remained reluctant to pay the UN's bill and UN officials have complained they now face a funding crunch for their cyclone relief operations. An August 14 report by the UN Office for the Coordination of Humanitarian Aid (OCHA) said that only $196.3 million had been received of the $1 billion appeal. That shortfall has resulted in curbs on activities.

The UN's World Food Program (WFP) announced in July that aid flights from Bangkok's Don Muang airport would be discontinued from August 10, citing that its three-month "rapid response" period ended on that date. The relief agency also withdrew two of five helicopters from Myanmar and said the remaining two would be pulled out in mid-November because of the expense. The WFP said restored water and roadways could now be used to move supplies, though some see this as spin-doctoring of the funding crunch that has dictated their scaled-back operations.

Countries with trade and financial sanctions against the junta, including the US and UK, are currently among the major aid providers, but this is expected to change when the relief phase ends and reconstruction begins. Once Myanmar is deemed able to domestically support its own reconstruction, the waivers now in place on transfers of funds and materials to Myanmar will likely be rescinded, especially as questions mount about how foreign funds have been funneled so far.

Donor concerns intensified with revelations in late July about the large windfall the junta had received through its grossly distorted dual exchange rate mechanism, where the official fixed exchange rate is around 6.4 kyat to the US dollar while the black market rate hovers around 1,100 kyat. Under Myanmar's foreign exchange rules, US dollars that enter the country must first be deposited in the state-owned Myanmar Foreign Trade Bank. Funds may then be withdrawn as Foreign Exchange Certificates (FECs), which are calculated at yet another rate of around 880 kyat to the dollar, and must be exchanged for kyat before they may be used.

The Myanmar Foreign Trade Bank is used by the UN, international NGOs and Burmese overseas remitting money back home. On his return from Myanmar in July, the UN's Holmes admitted that the relief effort was losing millions of dollars as a result of the regime's foreign exchange controls. "This is an extraordinary exchange loss, and where the gain goes, I'm not sure," he told reporters.

He went on to say that the issue had been raised in meetings on July 24 with the generals as a "significant problem". Prior to the May 2 cyclone, the kyat-to-FEC rate hovered between 960 or 980, but by late July that rate rose to 880 kyat while the kyat-US dollar black market rate was around 1,180. The FEC-dollar rate is stipulated by the government, and by forcing the UN and other aid agencies to exchange dollars for FECs before they may buy kyat the generals collect 220 kyat per dollar exchanged. That market distortion translated to a loss of 20%-25% on the FEC to kyat rate.

Passing mention
The issue was raised obliquely by the Tripartite Core Group in its July 18 assessment report, where it devoted a special box on page 23 to describe the dual exchange rate policy as it applied to the assessment of damages. The report noted that the official rate of 6.4 kyat to the dollar was used by the government and state-owned enterprises "primarily for accounting purposes" and that a market-determined rate was used for FECs.

It also noted a "parallel market" exists for exchanging US dollars into kyat and that the 1,100 kyat to the US dollar market rate was used to determine the damages accounted for in the report. However the analysis neatly passed over the government-mandated conversion to FECs by which the military regime collects a tidy 20%-25% premium over the market exchange rate. While the revelation is new to the international media and has the potential to upset donors, the system has been in place for over 15 years.

FECs were initially introduced by the government in 1993 to counter the higher rates offered by black market money changers over the government fixed rate used at banks and to take advantage of what the regime hoped would be a foreign currency windfall as more tourists traveled to the country. In the latest UN update on Cyclone Nargis relief efforts, Baker acknowledged that the UN had lost $1.56 million to the foreign exchange conversion system.

Losses incurred by the exchange controls should be qualified, however, since, according to Baker, much of the relief supplies are purchased overseas. He said, "We are not getting the full value of dollars donated for emergency relief, and donors are extremely worried and keen to see that this issue is resolved."

In apparent damage-control mode, an August 13 press release by the Tripartite Core Group announced that "humanitarian agencies are now invited to transfer payments to US dollar accounts of vendors for supplies and services". Myanmar Minister for National Planning and Economic Development U Soe Tha indicated that vendors would be under no obligation to convert dollars into FECs or the local currency. He went on to say that there was no obligation for international organizations to commission particular local vendors.

Despite these missteps and money lost, the UN continues to portray its relationship with the generals as one of increasing cooperation. On his return from Myanmar on July 24, Holmes said he was optimistic about the continuing relief effort. "We hope that the dialogue and cooperation built up in the last couple of months over the Cyclone Nargis response can be continued and improved, and in the future extended to other humanitarian issues as well," he said.

The Tripartite Core Group report significantly made no mention of the junta's slow response to the disaster, which was widely lamented as inadequate and callous by the international community. While the UN and international agencies are undoubtedly providing much needed assistance, reports from the Irrawaddy Delta indicate that there is still much room for improvement. While all cyclone-affected areas have by now received some assistance, the distribution has been highly uneven.

A small donor who returned from the region early last week noted that some remote villages he visited had only just received aid in the past week or two, nearly three months after the storm first hit on May 2. While Myanmar's Ministry of Foreign Affairs has granted 369 visas to foreign aid workers, obstacles remain in the form of time limits placed on visits to the delta and the necessity of seeking government permission to travel. Local Myanmar volunteers continue to be harassed and arrested for their relief activities.

Myanmar is estimated to have $3.5 billion in foreign reserves and receives an estimated $150 million per month from gas export revenues alone, according to a July 23 Human Rights Watch press release. Very little, if any, of this money appears to have gone towards relief and reconstruction. Instead the regime has squirreled away for itself at least $1.56 million through its distorted exchange rate system.

Meanwhile, affected farmers and local volunteers complain that officials now charge far above prevailing market rates for government supplies of seed and petrol. Fertilizers, pesticides and other farming inputs are often sold through businesses with strong ties to local government officials or the military, to which they often pay a concession to operate.

Larger companies with known links to the regime, including several that have been targeted by recent US sanctions, such as the Htoo Company and the Maung Weik Company, have already been contracted for reconstruction activities. Analysts suspect that they have accepted small-scale rehabilitation schemes in order to gain concessions for subsequent big-ticket infrastructure and property development projects the junta still hopes the donor community will finance.

Brian McCartan is a Chiang Mai-based freelance journalist. He may be reached at brianpm@comcast.net

(Copyright 2008 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

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