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Mung bean currency needs reform

By Michael Vatikiotis, Far East Economic Review, 16 February 1995

(part of FEER cover story 'Catching the Wave')

The chaotic scene at Myanmar Foreign Trade Bank in Rangoon at closing time speaks volumes about Burma's currency system. Customer's wave paper forms to get the attention of the harassed clerks who must hand-process each document because the bank lacks computers. But on the street outside the bank, blackmarket dealers quickly buy and sell kyat.

It's not just the speed of these transactions that frustrates bank customers. At the official rate of 6.2 kyats to the U.S. dollar versus 110-120 kyats on the black market, Burma's failure both to devalue its currency and make it fully convertible into other currencies has become a major obstacle to foreign investment, trade and overall economic growth. The government fears devaluation will raise prices and push up inflation. Finance Minister U Tin Win summarizes how the government sees it: "Adjust the [exchange] rate and risk massive unemployment, runaway inflation and social unrest," he says,"or keep the differentiation and risk slower growth and less foreign investment."

Investors regard the system as unworkable for most major projects. "You can't expect to see serious investment in Burma with two exchange rates," says a Thai businessman in Rangoon.

For example, if a foreign investor wanted to set up a 50:50 joint venture in a $10 million project, the Burmese partner would contribute 62 million kyat at the official exchange rat. At the market rate, however, he would have to contribute 1.1 billion kyat.

What's more, while it's possible to buy anything with dollars, it's illega to convert those dollars into kyat or vice versa at anything other than the official rate. Problem is, the government doesn't have the foreign exchange to convert kyat into dollars. Foreign-exchange reserves were estimated at $137 million in 1992.

Officials contend that the parallel exchange rate isn't a problem. It's not an obstacle to investors because they can do all their business here in dollars," says U Hla Thein, director of the Myanmar Foreign Trade Bank.

That's true if investors are exporting from Burma. But for companies like Pepsi-Co, which earn revenue in kyat, it's become a major headache. Pepsi's solution: it uses its kyat profits to buy agricultural commodities like mung beans and then sell them abroad for hard currency.

Partly as a result of this trade, Burma's exports of beans and pulses rose by 63% to $125 million in the year to March 1994.

Rangoon insists the system will do for now and, indeed, officials quietly encourage investors to exploit the blackmarket. Business travellers, for instance, no longer have to exchange $300 into kyat at the official rate on arrival.

To delay the inevitable devaluation and make its currency convertible, Burma introduced a dual currency system two years ago that uses foreign-exchange certificates pegged to the U.S. dollar. Originally intended for tourists, the certificates now are used for a number of transactions---including wages paid by some foreign enterprises. "What they're doing is turning a blind eye to the use of the U.S. dollar at market rates," says a foreign banker in Rangoon.

U Set Maung, the government's financial adviser, says the system already amounts to a "de facto devaluation." He says the official rate has little impact because Burmese can keep foreign-exchange accounts if they are licensed exporters, buy foreign goods with dollars and use foreign-exchage certificates.

Government officials worry about how devaluation and the elimination of subsidies will affect fixed-salary earners---expecially those on government payrolls--- and state enterprises. If state enterprises were to pay for imports at the market rate, the government would have to raise prices. "We want to avoid speculation and panic-buying," says U Set Maung.

Just how much impact devaluation will have remains unclear. Some local observers says market pricing--- for domestic goods and imports--- is already so prevalent that any impact will be minimal.

But others argue devaluation will hit Burma hard. Imports of $1.2 billion last year represent a significant portion of GNP. (GNP in fiscal 1994 amounted to less than $ 10 billion--- and that's using the overvalued exchange rate.)

Some economists advocate a partial devaluation. Bringing the currency down to 65kyats to the U.S. dollar will restore confidence, they argue. But without the backing of multilateral institutions like the World Bank and the IMF, the government says investors will have to wait for another two years before the private sector is large enough and foreign-exchange reserves strong enough to devalue the currency. In August, Finance Minister U Tin Win estimated $2-3 billion in standby credits will be needed to cushion the impact and help pay for subsidies.

Mya Than, an economist at the Singapore's Institute of Southeast Asian Studies, agrees currency reform won't happen anytime soon. "They will carry on one or two years with the parallel exchange rate," he says, and " at the same time they will speed up the privatization process."