Myanmar tiger turns economic chameleon
By Mair Dubois
A recent outpouring of common sense from Myanmar's ruling elite, hard on the
heels of a transition to nominally civilian government and release of Nobel
Peace laureate Aung San Suu Kyi, creates the disconcerting impression of a
tiger changing its spots.
Among glimpses of a mutating government unusually acknowledging realities:
President Thein Sein this month met Aung San Suu Kyi, the leader of the
political opposition released late last year after 15 years of house arrest; on
August 27, a general amnesty for political prisoners was proposed in parliament
(one of the key moves required if United States sanctions are to be eased);
Thein Sein earlier urged citizens who had fled abroad
to return home and work for the country's development.
One incentive for folks to return would be signs of a rational economy. A
unified exchange rate would be big step towards that goal - at a practical
level it would reduce the need for honest people to play around in the black
market - and may be the next step. A flurry of announcements this month
suggests some urgency.
An International Monetary Fund (IMF) team is due in the country to discuss the
issue in October, and the government said on August 12 it would abolish Foreign
Exchange Certificates, official bits of paper valued between the official and
the much lower black market exchange rates.
The official exchange rate, used in international dealings, has held at around
6 kyat to the US dollar since 1975. The black market rate better reflects
internal realities. In January 2010, just over 1,000 kyat were required to buy
one dollar on the black market, the currency having weakened over years of
inept government and inflation. That decline has drastically changed direction,
to under 700 kyat this year. The price of a dollar last week tumbled to 680
kyat, the India-based Mizzima web site, which tracks the currency, reported on
August 23.
The currency's u-turn hurts exporters, small businesses that store dollars as a
safe haven, and farmers. Thein Sein, since April the country's first at least
nominally civilian head of government in 50 years, acknowledged on August 17
that the strengthening local currency is hurting the economy. His proposed
solutions include cutting or ending export taxes on commodities including rice
and other grains. Some cuts have already been made. In July, the government
promised loans and price guarantees for farmers, who still dominate the
economy.
Burmese government economic adviser Dr. Myint and Aung San Suu Kyi listen to a
discussion at a three-day economic forum in Naypyitaw. Photo: Mizzima
Culprits for the kyat's strength are varied, from increased illegal drug
production and export, strong demand, notably from China, for natural resources
such as jade, coal and timber - much of it smuggled - and official foreign cash
inflows linked to a swathe of infrastructure and other projects.
Foreign direct investment in the oil and gas sector alone jumped to US$9.81
billion in the five months to August 2010 from $278.6 million in the preceding
financial year, Xinhua reported in January. Last November, Thailand's Ital-Thai
signed an $8.6 billion deal to build a deep-sea port and industrial estate in
the south.
Privatization of state assets since early last year has also sucked up kyat
from the economy, as have to some extent high bank deposit interest rates at
around 17% and government bond sales. Skeptics suggest speculators are also
playing a hand, and when these bow out of the market, the kyat will plummet.
Maintaining official and unofficial rates in the face of domestic inflation in
itself tends to cause an appreciation of the real rate. [1] Inflation is
running at around 16%, according to an Economist Intelligence Unit estimate, on
a par with the savings rate.
Thein Sein said that beyond export tax cuts additional "ways and means" are
being sought "to ease the crises". Unifying the exchange rate appears to be one
of these.
The United States, which imposes severe sanctions on Myanmar over its
human-rights record and is the IMF's biggest funder, said this month that "if
they want IMF help, they're going to have to live by IMF restrictions and
rules". Usefully, Zhu Min, formerly of the People's Bank of China, was
appointed one of the IMF's three deputy managing directors in July and could
have a say in what those conditions might be. Among other functions, his job is
"strengthening the fund's understanding of Asia".
The Myanmar government can, anyway, look to China directly for advice and
assistance. It is Myanmar's largest backer, with investment totaling $12.3
billion last year, according to Xinhua. Thein Sein, during his first state
visit after assuming office, agreed in May with Chinese President Hu Jintao to
upgrade relations to a "strategic partnership" and Hu "called on both sides to
work out a program so economic cooperation between the two countries could be
better planned".
Helping towards that goal, China gave a $780 million line of credit to Myanmar
- on top of a $4.2 billion, 30-year, interest-free loan agreed last September,
with no obviously unpleasant strings attached.
IMF number crunchers have already indicated a possible unified rate - about 450
kyat to the dollar, according to a 2008 working paper. A seafood exporter
quoted this month by the Irrawaddy web site would prefer an adjustment to
900-1,000 kyat to the dollar.
The government's desire to align exchange rates goes beyond appeasing
influential exporters and marginally benefiting the 30% of the population who
live below the poverty line. A change would line its own pocket.
Government revenues would increase if income from gas exports, for example,
were converted at the market rate, according to the most recent country report
from the Asia Development Bank. "Unifying the multiple exchange rates would
create additional fiscal resources, as would broadening the tax base," the bank
says.
The IMF's 2008 paper says the present set-up is likely to underestimate the
country's gross domestic product (GDP). Its recommended rate would increase the
size of nominal GDP by as much as 10-12%. The total efficiency loss caused by
the multiple exchange rates at the time of the study was put at 14-17% of GDP.
U Myint, a government economic adviser, laid out the argument for exchange rate
unification to a workshop held in Myanmar's capital between August 19 and 21
and attended by Aung San Suu Kyi. [2] After noting that the paper had already
been presented in late June "to the high authorities of Myanmar", he underlined
that accepting IMF technical assistance "does not mean the country is under any
obligation to abide by what the IMF recommends".
However, news that Myanmar is cooperating with the IMF in resolving the kyat
exchange rate issue "will add credibility to the efforts currently underway to
deal with this problem".
Similar cynicism peppered the report. Once normalcy is restored in the exchange
market, U Myint said, (i) tax reforms can be carried out; (ii) demand for
dollars can be increased by liberalizing the export and import licensing
requirements and bring down the kyat dollar exchange rate; (iii) the government
could also buy dollars in the domestic market to build up its exchange reserves
- and also request [sic] some "key players" in the country to do the same.
U Myint's recipe for progress included a hint at how "key players" could be
encouraged to toe the line: "With large foreign exchange inflows causing rate
appreciation, it may be prudent to reduce the frequency of holding gem and jade
emporiums," his paper advised "the high authorities".
Two of this year's sales, the most recent in July, pulled in almost $5 billion
between them. That would upset the likes of Tay Za, sometimes named as
Myanmar's richest man and a keen jade miner, and similarly wealthy Ne Win Tun,
head of Ruby Dragon Jade & Gems.
Myint described how the government could profit by buying dollars at 800 kyat
to the dollar, and watch it decline thanks to its intervention to 900 kyat.
"The government stands to benefit 100 kyat per dollar. ... Suppose it feels a
rate between 900 kyat and 1,000 kyat is a good rate to stabilize the exchange
rate, it can then use its exchange reserve to intervene (buy and sell dollars)
in the market to hold the exchange rate steady at this rate within a narrow
band of a few percentage points."
So pundits anticipating a free-floating exchange rate and end to the need for a
black market rate may be disappointed. A tightly controlled rate, but more
flexible than the present set-up, appears the more likely possibility - and
along the lines of China's crawling appreciation of the yuan. At the heart of
it, market manipulation that benefits the government.
But some change is necessary if the government (military-backed or otherwise)
is to keep its share of the pie. A fixed official rate benefits an isolationist
government (not necessarily the country as a whole) that wants to keep control
of the economy, even if a declining black market rate indicates growing social
poverty - which was clearly not a concern of the military that ruled Myanmar
for the past five decades.
The arguments for an out-of-kilter fixed rate falter when government changes
from an inflexible military to a placating civilian outfit, and the economy
becomes more open to private business. The direct economic and opportunity
costs to the elite of an unrealistic fixed rate become too high.
Even so, some generals doubtless see power slipping from their grasp. Others
recognize the impact on their own troops of the country's growing wealth gap.
Since February, a string of top officers have been sacked, allegedly for
corruption offenses, and more may follow, with investigations focusing "on
certain military officers because they had been outspoken in calling for better
conditions for soldier," the Irrawaddy web site reported on August 9.
Among those getting their marching orders, inspector and auditor-general
Major-General Kyaw Phyo and Major-General Khin Zaw Oo, chairman of the
military's Union of Myanmar Economic Holdings.
Military pay levels are certainly dismal and encourage corruption. A brigadier
general's is 300,000 kyat a month, or around $300, according to the Mizzima web
site. At the bottom end of the scale, foot soldiers rely on a pittance, and
have to plunder villages for their daily rations or reportedly grub for bamboo
shoots (they can make a tolerable soup) when on jungle patrols.
In contrast, the likes of Tay Za, head of Htoo Group of companies, is reckoned
to be a billionaire - in dollar terms. Tun Myint Naing (aka Steven Law) - who
was among those who accompanied Thein Sein to China in May - may now be even
richer.
Some commentators say the arrests indicate a tussle between reformists and
revanchists - with return of a military government one possible end point. But
the military has already let the genie out of the bottle - it will not be easy
to put it back in. Nor would a coup please Myanmar's most influential trade
partner and political supporter, China.
Besides, as the IMF paper pointed out, a unified exchange rate makes for a
bigger cake that will necessitate no reduction in the military budget. It will
mean more cash is available for more and better armament and supplies - whether
that be proper food rations for the troops bumping off border rebels or the big
stuff, like atom bombs and fancy missiles.
Both the army and the new government have clearly been advised accordingly.
Myanmar is not a tiger changing its spots - perhaps just a chameleon changing
its colors in line with a more profitable economic environment.
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